America's Bank: The Epic Struggle to Create the Federal Reserve (19 page)

Wilson also heard from Carter Glass, who wrote that he and his assistant, Parker Willis, had “
formulated, tentatively, a substitute
for what is known as the Aldrich bill.” This considerably overstated their progress, but Glass accurately reflected their purpose. “I think the committee would not like to proceed without some suggestions from you.” Wilson replied—with more warmth than he had to Untermyer—that he would be eager to “commune” with Glass as soon as practicable.

What Wilson described as a “
short vacation
” was in fact a four-week sojourn. Maneuvering by the various parties during Wilson’s absence was intense. The jousting began with
a conference between Willis and Untermyer
, instigated by Untermyer. The ostensible
purpose was that Untermyer wanted Willis, who remained at his day job at the
Journal of Commerce
,
to write favorably about the Money Trust hearings, which were scheduled to resume at the end of November. However, Untermyer also revealed that, despite the agreement to split the Banking Committee functions, he himself “was planning to have the Money Trust Sub-Committee introduce legislation this winter.” In other words, he was intent on usurping Glass.

Willis communicated this alarming news to Glass the following day. As Willis summarized matters, “
Mr. Untermyer contemplates
a general campaign [aimed at] gathering to himself all the functions entrusted to the Banking and Currency Committee.”

Equally disconcerting to Glass, Untermyer appeared to be in league, or at least in agreement, with some of the very financiers whose operations were to be explored in the hearings. Willis reported that the brash attorney was adamant that any banking bill include a “central reserve association,” which sounded far too much like a central bank to Glass. Indeed, Untermyer was explicit that the legislation preserve “
the main ideas of the Aldrich bill
.”

Glass’s personal rivalry with Untermyer now assumed the character of a holy crusade. Furious, and realizing that his ability to lead the reform was at stake, Glass wrote to the committee chairman, Arsène Pujo, denouncing Untermyer’s “
impertinent activity
” and seeking Pujo’s reassurance. Pujo did reaffirm Glass’s authority over currency legislation, but Glass hardly expected Untermyer to back down so easily. Pujo was retiring at the end of the session, and the prospect that Untermyer would influence the selection of the next chair drove Glass nearly to despair.

According to Laughlin, Glass blamed Untermyer’s political machinations on Jewish financiers who were “prompting” him from the shadows. Laughlin himself could not resist sniping at the supposed deviousness of these bankers. He wrote to Willis,
“Moral: Put not your trust
in Hebrews.” The gentile establishment regarded Jews as usurpers, welcome in finance only provisionally and on condition that they
behave with particular discretion. Even though Untermyer undeniably was a slippery character, Laughlin was also being counseled by the industry (in his case, by the leading bankers in Chicago), and he, too, believed in a central reserve. Perhaps more to the point, the threat from Untermyer got the process moving, for it spurred the desultory Willis, as well as Glass, into action. During the fall campaign Willis and Glass had not even been in contact. And while Willis, as he put it, had “
been working on various phases
of the banking question,” he had not done any writing or drafting. Now, Glass and Willis got busy.

In mid-November, Glass hosted Laughlin
at the Raleigh Hotel, his Washington domicile, and asked Laughlin to sketch out a bill as an aid to Willis’s drafting. According to Laughlin, Glass made not a single suggestion with regard to “particular provisions.” His only concern was that the draft not “antagonize” the Democratic platform. Glass, in fact, had a copy of the platform in his pocket, underscoring his fidelity to party doctrine. Laughlin mildly suggested that they
might
be able to go a bit beyond what the platform permitted, to which Glass made no reply. The two agreed the issue could only be resolved by Wilson.

Glass, in fact, was still laboring to understand
the principles of banking. He and Willis freely sought advice—although, as the scholar Robert Craig West pointed out, they were churlish when it came to sharing credit. The congressman was a deliberate pupil, but once he formed an opinion he fought for it tenaciously. Perhaps because he was unsure of his footing, he clung to his beliefs obstinately.

Glass tended to view the world conspiratorially, suspecting people with contrary views of being motivated by nefarious interests. As Glass admitted of himself, he was “
too prone to be suspicious
.” This hurt him in his efforts to cultivate support among the banking industry. Glass knew he needed the industry’s support, but he refused to take bankers into his confidence. Most bankers, therefore, heard only rumors of what Glass and Willis were up to. “Mr. Glass,” recounted a frustrated Warburg, “
allowed little or nothing to become public
.”

Stymied in his efforts to cultivate Glass, Warburg made his influence felt through the circle around the president-elect. Colonel House, Wilson’s intimate friend, was eager to hear Warburg’s views, and Warburg skillfully lobbied House of the virtues of central banking. Morgenthau, another Wilson adviser, asked Warburg to prepare a plan that would bridge the gap between the Democratic platform and “
sound banking” principles
. Wilson also read an article by Victor Morawetz, the railroad lawyer who advocated a network of regional banks. Through these channels. Wilson, upon his return, would be exposed to Wall Street’s ideas, and they generally reaffirmed his own convictions. Although the president-elect had no firm agenda, broadly speaking he was more favorable to some form of centralization, and less hostile to Wall Street, than Bryan and the Democratic rank and file.

Glass got his first inkling of the gulf between House Democrats (who were mostly faithful to Bryan) and the embryonic White House when he was introduced to Colonel House at a Washington dinner. Wilson’s mysterious friend pulled Glass off to the side and, speaking in private, advanced the merits of a central reserve. Glass instantly objected that the party platform “precluded” his committee from proposing such a remedy. House cuttingly replied, “
I fear, Mr. Glass
, you attach too much importance to party platforms.” While this exchange surely unnerved Glass, the encounter boosted his standing, because House recognized that the determined Glass could be a useful partner. He wrote to Wilson, “
I think the quicker you see him
the better it will be. You will find him ready to cooperate with you to the fullest extent.”
*

•   •   •

I
N
D
ECEMBER
, Untermyer turned
the Money Trust spotlight on the captains of Wall Street. The Pujo hearings (though named for the chairman, they were dominated by Untermyer) did not bear directly on reform legislation. Nonetheless, by exposing an unsavory collaboration among Wall Street bankers, they helped to shape a political climate in which banking reform, of one sort or another, was seen as inevitable. In a series of highly charged cross-examinations, Untermyer sought to show that bank credit and corporate underwritings were in the grip of a small, collusive group of Wall Street bankers, at whose center was the seventy-five-year-old J. P. Morgan. Untermyer’s style was prosecutorial and contentious. He elicited the answers he sought by posing barbed—often sarcastic—questions that witnesses found difficult to evade. He refused to allow witness counsels to intervene.

Morgan himself was the marquee witness. He remained America’s most celebrated financier, even though he spent half his time in Europe while Harry Davison managed his bank.
Morgan regarded public testimony
as highly distasteful—a spectacle unbecoming to a private banker. Compelled to testify, Morgan left for Washington “
by special train with half a dozen
of the most distinguished counsel in New York, several of his partners, and various women relatives”—so Vanderlip reported. “The papers tell how he had twenty rooms at the Willard, and generally moved as a crowned potentate would.”

On the stand, Morgan uttered a line that history would remember. Untermyer asked if the disbursal of credit wasn’t primarily based on the borrower’s assets. Morgan said:
“No, sir; the first thing is character.”
This was an endearing description of nineteenth-century banking. The trouble was (
as later witnesses would demonstrate
), it was no longer true. More relevant to the twentieth-century question of monopoly, Untermyer got Morgan to admit that he saw nothing
wrong with rival bankers collaborating with one another. Gentlemen did not compete, or not too savagely.

U
NTERMYER
:
You are an advocate of combination and cooperation
, as against competition, are you not?

M
ORGAN
: Yes; cooperation I should favor.

U
NT
ERMYER
: Combination as against competition?

M
ORGAN
: I do not object to competition, either. I like a little competition.

Untermyer deliberately zeroed in on railroads
, the dominant industry of the era and one that Morgan had helped reshape through numerous mergers and securities offerings. The rails were lucrative Wall Street clients, and Untermyer tartly asked whether railroads that did business exclusively with Morgan’s wouldn’t be better served by a process of competitive underwriting. Implausibly, Morgan denied that they would. In the same vein, Untermyer charged that the bank maintained a too cozy relationship with its putative banking rivals, including George Baker’s First National Bank. Morgan admitted that he and Baker had been close friends and associates “for a great many years . . . since 1873, at least.” And if the First National wanted in on a Morgan deal? Morgan responded candidly, “I always offered them anything I had.”

To the public, Morgan came off as trustworthy but a figure from a bygone world. Vanderlip ruefully observed that his performance
had at times been “blundering
.” It seemed to confirm that Morgan could no longer be counted on for the sort of heroics he exhibited during the 1907 Panic, and that some new type of guardian was needed. The hearings, which were to continue into 1913, received extensive newspaper coverage and made a deep impression on the public.

Perhaps not coincidentally, reform proposals blossomed. In December, Laughlin delivered three successive drafts to Willis. In essence,
Laughlin proposed that monetary policy
be run by district
associations, similar to the regional branches in the Aldrich Plan, and coordinated by a central board composed of a mix of bankers and presidential appointees.
Warburg also dashed off a fourteen-page
prescription, which he conveyed to Morgenthau and ultimately to Wilson. This latest Warburg model sported a central bank in Washington with twenty branches. Each of these plans featured a degree of federalization; the controversy revolved around the extent of control wielded by the center. It was this debate that unsettled Glass. Even though he probably did not see the Warburg plan right away, he was well aware of the bankerly pressure for centralization.
Glass also met with Piatt Andrew
, who made a renewed pitch for the Aldrich bill. In addition, Glass complained, he was “
deluged with letters
from people who have currency schemes.”

Glass’s every instinct was to try
to control this process. He stymied Untermyer’s attempts to poach on his turf, and by year end he had won assurance that he would succeed Pujo as committee chairman.
*
Glass also decided to stage hearings early in the coming year. He may have hoped to draw attention from the still ongoing Untermyer hearings, but Glass’s primary purpose was to solidify the public’s negative opinion of the Aldrich Plan and of central banks in general. Glass and Willis spent many hours reviewing lists of potential witnesses—screening out, when possible, adherents of a central bank. Palpably trying to stack the deck, Willis advised that they invite E. D. Hulbert, vice president of the Merchants Loan and Trust Company of Chicago, noting: “
Mr. Hulbert is a very sharp critic
of the Aldrich plan and has taken an extremely destructive point of view with regard to it.” Glass also began to pull away from Laughlin. The professor, who had worked so closely with Willis, had clearly hoped to join the inner circle of the drafting party—he even asked whether
his name could be included on the legislation!
Glass put off seeing him
. The sensitive Laughlin reacted with shock and self-pity (“
I was considerably taken
aback,” he wrote to Willis).

The only audience Glass wanted was with Wilson
. He wrote again on December 14, apologizing for adding to Wilson’s “burdens” and humbly seeking an appointment for Willis and himself. Two days later, after an Atlantic voyage of forty hours, the president-elect, looking becomingly tanned, docked in New York. Newspapers reported that Wilson cheerfully signed autographs for fellow passengers. Back in Princeton, his most pressing chore was assembling a cabinet. He also tackled legislative priorities, including banking reform, which remained a horse with rival jockeys. Barely home a day, Wilson placed his bet. He invited the congressman from Lynchburg, and his assistant, to the statehouse.

THE PRINCETON DEPOT

The ghost of Andrew Jackson stalked
before my face in the daytime and haunted my couch for nights.

—C
ARTER
G
LASS

I do not care what you call it
, if you centralize the control. It will be a central bank in its final analysis.

—F
ESTUS
J. W
ADE
,
testifying before House Banking Subcommittee

C
ARTER
G
LASS
’
S
date with Woodrow Wilson was set for the governor’s office, in Trenton, at two-thirty on the afternoon of December 26, 1912.
Glass was anxious to meet
Parker Willis in advance; he fretted that this would require his leaving Lynchburg, Virginia, on Christmas Day, but then, Glass’s nature was to fret. He was
intensely agitated by the pressure
from bankers for a centralized scheme and worried that bankers had gotten to Wilson (a suspicion, of course,
that was entirely correct). His anxiety rose when, just before he was to leave home, he received an urgent telegram: “
Confined by attack of cold
. Would you be kind enough to come to Princeton?” The change in plans, redirecting the pair to Wilson’s home, jolted Glass. He had met the president-elect only once or twice and worried whether Wilson, in his sickly state, would truly be attentive. Further upsetting Glass, his train was late—he telegrammed Willis that he would not reach Washington until after midnight.

As he traveled north, Glass wondered how he would gain the confidence of this eminent scholar—this university president. He surely took comfort that Wilson was also a southerner—born barely a year before Glass. The South, with its passion for states’ rights, had overwhelmingly supported Wilson,
*
and the South, Wilson had said, was “
the only place in the world
where nothing has to be explained to me.”

Yet Glass had cause for suspecting that Wilson’s sectional ties were more diluted than his own.
Glass’s family
had been in Virginia since 1648; Wilson’s had been southerners for only a generation. Wilson’s years in New Jersey had scrubbed his diction
free of any southern accent
, and his heart was unburdened by the resentments that had festered in the South since the Civil War. The president-elect loved the South, he had said, but rejoiced in its defeat. Carter Glass, a conquered soldier’s son, knew no such rejoicing. A more fundamental divide marked the two men’s characters. The diminutive Glass tortured himself with worry; Wilson was preternaturally self-confident, convinced by the time he grew into his full five feet eleven inches that he was destined for great things. As one biographer said, “
He did not doubt
.”

Princeton was bitterly cold
and buried in snow that day. Glass and Willis arrived on a train that chugged behind a horse-drawn plow.
From the Princeton depot, they traveled by carriage to the half-timbered house on Cleveland Lane. A butler led them past a blazing fire to Wilson’s bedchamber, where the president-elect, looking gaunt and obviously suffering a severe cold, was propped against pillows.
Glass was painfully aware
of his lack of formal education in the presence of two college professors, but Wilson’s bedraggled condition, the fact that he was attired in a mere robe, had a calming effect on Glass, as though putting him on a more even plane.

Glass had brought with him a few sheets of paper on which he scrawled some notes—
nothing so formal as a draft
. With trepidation, he began to outline his plan, calling on Willis to flesh out the details.

What Glass and Willis proposed
was a series of Reserve Banks—fifteen or twenty spread about the country. Ordinary banks would subscribe to shares in the nearest Reserve Bank; thus, the Reserve Banks would be privately owned.
*

The Reserve Banks would have several duties. They would issue notes—a new form of money, replacing the National Bank Notes based on government bonds. This new money would be issued to banks in return for assets. In other words, a bank that held a loan—say, from a local merchant—could exchange it for the new reserve paper, and turn illiquid assets into currency. Banks would have more access to ready cash to lend; the system would be less vulnerable to panic.

The Reserve Banks would also hold government deposits, including gold, providing a backstop for the currency. Glass also proposed that the Reserve Banks guarantee bank deposits, an idea that bankers—metroplitan bankers especially—detested. Since the Glass plan did not include any feature to bind the regional banks together, it was less
centralized than the Aldrich Plan—which was, of course, his point. Indeed, it was far less centralized than the eventual Federal Reserve.

Glass and Willis laid out many of their items as talking points, testing to see how far Wilson was willing to push the banks. Would Wilson, for instance, be willing to compel the banks to join the new system against their will, or should the system be voluntary, like the ill-fated Aldrich Plan?

The most important feature—and one on which Glass and Willis were unambiguous—was that
the banking system should be organized
along regional lines. Thus, banks would be forced to place their reserves not with big banks in New York (as they did at present), and not in Washington, but in the vaults of the new Reserve Banks. The intent was to furnish, as Willis was to write, a “local field” for local funds. Put differently, they hoped to replace the New York–centric Money Trust with silos of credit dispersed across the length of the country.

What Glass had proposed was close to the laissez-faire ideal: each area represented by a bank that was its own duchy, autonomous, private, its size comfortingly tailored to nineteenth-century proportions.

Wilson listened intently. Something about the plan provoked him.

Bluntly, he inquired, “What have you done
in regard to centralization
?”

Glass stiffened. He replied that his Reserve Banks would report to the comptroller of the currency, the federal banking regulator established in 1863. This cursory check was not enough for Wilson.
The president-elect suggested
that though a central bank was impossible politically, it was desirable economically. Some compromise had to be worked out. Finally, Wilson issued what amounted to a command.

“
You are far on the right track
,” he began, but the plan needed something more—“a capstone.” Wilson explained that he meant a central board in Washington, sitting above the Reserve Banks. Wilson had surely been briefed in advance; his idea of a “capstone” may have been inspired by Paul Warburg (who had recently provided his
plan to Colonel House).
*
In any case, the suggestion for a capstone reflected Wilson’s deepest-held values, for he was telling Glass that he wanted the banking system to mirror the federalist design of the U.S. government itself. It was a masterly stroke.

Glass was horrified. As he left, he tried to reassure himself that Wilson wanted merely a supervisory “capstone,” but he feared that Wilson had in mind an active, operating body that would resemble a central bank.
*

Two days later, on Wilson’s birthday, the president-elect was honored with a parade and a reception, in Staunton, Virginia, his birthplace. Glass attended the festivities, hoping for “
perhaps, an hour with Mr. Wilson
on currency matters.” This was exceedingly myopic of Glass. The president-elect was in no mood for currency questions, and so Glass wrote to him asking for a follow-up meeting. Although Glass intended to sound reassuring, he betrayed his anxiety with a signature note of uncertainty—“
We may ourselves have in readiness
such a ‘capstone’ as I understand you to suggest,” he awkwardly wrote to the president-elect. Glass was more frank when he recorded his thoughts to Willis. “
It is clear to me
,” Glass began, adopting a conspiratorial tone, “that Mr. Wilson has been written to and talked to by those who are seeking to mask the Aldrich plan and give us dangerous centralization; but we shall have to keep quiet on this point for the present.” In the next breath, Glass attempted to downplay the “tentative views expressed by the President-elect”—although Wilson had not been tentative at all—and advised Willis it would be well to prepare a capstone as an “emergency,” in other words, as a feature he
hoped would not be implemented. “Speaking for myself,” the congressman added, “I would cheerfully go with the President-elect for some body of central
supervisory
control, if such a body can be . . . divested of the practical attributes of a central bank. In my judgment,” he went on, “this is the point of danger.” Not the point of
disagreement,
but of “danger.” A few days later, Glass worried that he had already ceded too much ground. “
I am not entirely convinced
that we need any ‘capstone,’” he wrote to Willis, though he acknowledged they should have the “mechanism” ready.

Willis immediately began to revise the plan to include a capstone and to reflect other points discussed at Princeton, and he and Glass mounted a campaign to win the support of bankers. The pair focused not on Wall Street but on the (mostly midwestern) bankers who dominated the councils of the American Bankers Association—and, through it, the small-town bankers who were influential across the country. A prime target was Barton Hepburn, the chairman and retired president of the Chase National Bank. Although presiding over a New York institution, Hepburn, who had been born on a farm and was chairman of the ABA’s currency commission, carried weight with bankers whose support Glass considered vital, such as George Reynolds and James Forgan of Chicago and the St. Louis banker Festus J. Wade.

Chicago bankers had warmed toward the central bank idea, but they remained mistrustful of any plan that smacked of New York dominance. Even though they were open to a regional approach, they had come to appreciate the Warburg argument for centralization. Willis’s talks with Hepburn resembled a minuet, in which Willis probed to see how much decentralization Hepburn and his colleagues would tolerate, and Hepburn delicately pushed back.
Forgan, the leader
of the Chicago faction, was particularly insistent that control be centralized.

Glass used his subcommittee hearings to persuade the industry that its best—probably only—hope for reform was to rally behind
him. Willis later called the hearings an exercise in “testing public opinion,” which is exactly what they were not.
Glass and Willis did not even disclose
they had written a draft, presumably so that witnesses would not be tempted to offer criticisms. Rather, they stage-managed the proceedings to mold public opinion. As early as December 31, 1912, Willis assured Glass that both Hepburn and Warburg were “
in good humor toward the hearings
” and disposed “to assist by giving moderate and reasonable testimony.”

Hepburn led off, and while he admitted a preference for the Aldrich Plan, he generously allowed that “
no one would claim
that the Aldrich bill is the last word of wisdom.” This was the “reasonable” middle ground that Glass aimed to exploit. Bankers had their own reasons for rejecting a European-style central bank—namely, central banks in Europe did business with ordinary customers. American bankers were afraid of the competition from a central bank (when their self-interest was threatened, staid commercial bankers could sound downright populist).

However, the bankers also rejected the Bryan alternatives of government fiat money or federal deposit guarantees. Bryan’s approach represented a contrary philosophy—rather than a strong network of private banks, a strong hand of government. The bankers feared that either of Bryan’s remedies would lead to inflation. Their pushback was useful to Glass, who shied away from either extreme and who needed leverage to resist the committee members loyal to Bryan.

The one witness who did not play along was Warburg. He had come too far to muzzle his convictions now. Warburg testified that a regional system would perpetuate the flaws in the existing order. He vividly recounted to the subcommittee his horror at the money shortages when he first arrived in New York, in 1902. Now emboldened by his status as a U.S. citizen, he accused his adopted country of ignoring what worked in banking elsewhere. The country’s most pressing need, he said, was to centralize reserves—without which the currency would never be truly elastic. “Elastic currency” was a buzzword among
Americans of the day; Warburg used it knowing that it resonated, but went on to define it in vivid terms. America, he noted, was hostage to the “stupid condition” whereby each of the country’s seventy-five hundred national banks had to freeze a quarter of its funds “and put them into a safe-deposit box, where they are of no use.”

Glass attempted to frame Warburg as an absolutist.

T
HE
C
HAIRMAN
:
Would you say that we should do nothing
if we can not at this time get a central reserve association?

Warburg refused to accept Glass’s all-or-nothing formulation, but he pointed out that in a system with multiple reserve banks, those in New York and Chicago would surely dominate—precisely the outcome Glass wanted to avoid. And Warburg doubted that regional banks would cooperate with one another any more than individual clearinghouses had in 1907. Nonetheless, he tried to offer the subcommittee a face-saving compromise by insisting it could achieve a centralization of reserves without establishing, in formal terms, a “central bank.”

T
HE
C
HAIRMAN
: That is what you are trying to arrive at, the centralization of reserves?

W
ARBURG
: It is not that I am trying to arrive at it, Mr. Chairman. It is to my mind—and I have studied this thing very, very carefully for a great many years—the only way, the fundamental way, in which every other country in the world has been treating this.

Victor Morawetz provided a counterweight to Warburg, offering a cogent case for regional reserves. Presumably, regional banks would respond more nimbly to local credit conditions, particularly in an era when distances loomed so large. And as Morawetz pointed out, the individual banks could always be merged later.