America's Bank: The Epic Struggle to Create the Federal Reserve (26 page)

After the hearing, O’Gorman and Hitchcock approached Vanderlip with the germ of an idea: Would he consider drawing up a new plan with
a unitary central bank
, owned by the government? The point of such a plan would be to appeal, simultaneously, to two political extremes. Democrats, progressives, and other traditional opponents of a central bank might be able to stomach such a body if control rested in public hands, and bankers might be willing to yield on control if the country were to create a centralized institution, on a par with those in Europe.

Vanderlip’s initial reaction was dubious—he did not think credit decisions should be left to the government. However, he agreed to consider it. After mulling the idea for a couple of days, he heartily embraced it. Like others before him, he seems to have become seduced by the prospect of authoring a banking reform, and let vanity cloud his judgment. In any case, he eagerly wrote to Stillman on October 10, “
If the legislation is perfected
along the lines that I now feel confident it can be, the City Bank will for the first time begin to reap true benefit from its great capital.”

Vanderlip then called Harry Davison, the congenial Morgan banker who had proved so useful on Jekyl Island (Warburg, who was about to board a liner home from Hamburg, was unavailable), and also Ben Strong, one of the more incisive thinkers in the industry. Very quickly, and with a hint of renewed conspiracy, the trio got to work. Vanderlip reported to Stillman:

They came to my rooms
in the Plaza and we deserted all meetings or telephone calls. The result was the creation of a plan that seemed to us of very great value; one that would meet every
economic principle, that could be accepted by bankers, so far as control is concerned, and that still was ingenious enough to have met the tenets of the Democratic Party and the political exigencies of the day.

Vanderlip’s optimism was misplaced
. The Democratic Party platform, of course, proscribed the establishment of a central bank. Also, by eliminating the Reserve Banks, the plan would do away with the one organizational layer that was to have been run by bankers—a change unlikely to appeal to the industry.

Nevertheless, Vanderlip, now intoxicated by his mission, eagerly decamped for Washington, his two confreres in tow. They put up at the Army and Navy Club, where Senator O’Gorman resided. Vanderlip corralled O’Gorman, telling him he had the requested plan. However, the senator denied having asked for a plan. Presumably, he had had second thoughts about confronting the President so publicly.
He suggested that Vanderlip
present the plan as his own.

So, a fortnight after his first appearance, the National City president returned to the committee room.
He now proposed a central bank
with twelve branches, wholly controlled by the federal government and (to appeal to progressives) its stock held by the public. The bait for bankers was that the plan included fewer compulsory features and, of course, it was more centralized. Vanderlip’s most sensible idea was to drop the three cabinet officials from the Reserve Board, which would then be composed of seven members nominated by the president, upon the “advice and consent” of the Senate—and for terms of fourteen years rather than eight. These changes would lessen the president’s control, tending to a less political and more professional body.

Republicans and the three renegade Democrats immediately endorsed his plan. No one on the committee seemed to notice that Vanderlip’s proposal represented a complete about-face from his
previous, fervent denunciations of government control.
*
No matter, the Vanderlip plan suddenly had eight votes on the Banking Committee, versus four for Glass-Owen.

Vanderlip now wrote to Wilson, immodestly suggesting that his plan was “
quite along the lines
of your own thoughts, as I understand them.” He offered to call on the President, along with Davison and Strong, “to more fully explain” it.

Wilson was stunned. There was no chance, he knew, that the House would endorse a central bank. The Democrats remained the party of Jackson. Moreover, the process was too far along to contemplate such a drastic revision. The President had completely lost patience with the big banks, and his reply was curt:

I am at a loss
to understand how you can have come to think of the bank plan which you proposed to the [committee] yesterday as “being along the lines of my own thought.” It is so far from being along the lines of my thought in this matter that it would be quite useless for me to discuss it with you and Mr. Davison and Mr. Strong.

Wilson reaffirmed his support for all the essentials of Glass-Owen and summoned the Senate Democratic leaders to the White House.
His message was succinct
: he would not let bankers dictate policy. Not for the first time, Vanderlip had overplayed his hand.
*

Because the committee was unwilling to report a central bank against the wishes of the President, the members met in daily session, testing proposals to
see if anything stuck
. The Republicans voted in
a block, so the rebellious Democrats acted as swing votes. Owen tried to cobble together a majority, and
Wilson coordinated with Senate leaders
, but they were clearly on the defensive. At the end of October, they suffered a defeat when the committee cut the number of Reserve Banks to only four (specifying New York, Chicago, St. Louis, and San Francisco). This was a fair-sized step toward a central bank, and unacceptable to Wilson or to Democrats in the House, since it would rob the system of its federal character. Similarly, the committee, over Owen and Wilson’s objections,
swung toward the Vanderlip notion
of offering stock in the Reserve Banks to the public rather than to banks.

Wilson agreed to drop
the secretary of agriculture and the comptroller of the currency from the Reserve Board but insisted that the Treasury secretary remain. This reflected the President’s desire to have McAdoo, a trusted confidant (he then was courting Wilson’s youngest daughter, who was a quarter of a century younger), oversee the Fed once it got going.

The President saw the contest as a power struggle from which retreat would be disastrous. In his prior career as an academician, he had admired the way leaders in the British Parliament commanded loyalty from the party; the American chief executive, he believed, was entitled to no less. He tended to react personally to disagreement, and having made up his mind,
he viewed dissension
from Democrats as disloyal.

Outside the halls of Congress
, support for the administration bill continued to grow. Many bankers, fearful that the chaos in the Senate Banking Committee could leave the country with no reform at all, rallied to Glass-Owen. Wade, the St. Louis banker who in September had called the bill “repulsive,” now did a complete flip. He was sure,
he wrote reassuringly
to Wilson, that the American people would not support a central bank. Glass-Owen was the only shot. Soon after, Glass debated Vanderlip at the Hotel Astor in New York, a gala event before eleven hundred people “
gay with fashion and beauty
.” Glass seemed to get the better of it. Vanderlip trashed the bill
and pouted over the President’s refusal to see him; Glass’s defense of a regional system resonated with the high-toned crowd, many of whom were bankers.

Wilson and Glass got a further boost
on election day: Democratic victories in New Jersey, Maryland, and Massachusetts were seen as a ratification of the first-year president. Just as important, New York City’s Democratic slate—handpicked by Tammany—was trounced. This weakened Senator O’Gorman’s base, lessening his inclination to challenge the President. Indeed, O’Gorman immediately began to vote on the administration’s side in the committee. Reed also began to waver. If O’Gorman was intimidated from further opposition, Link suggested, Reed was satisfied with his. Quietly, he abandoned the fight. Just days after the November 4 balloting, the committee (with the help of one Republican) reversed its previous action reducing the number of reserve banks.

Only Hitchcock continued to hold out.
The senator bridled
at Wilson’s efforts to meddle in the committee and refused to be either persuaded or pushed. Hitchcock’s implacable stance left the committee, in mid-November, firmly deadlocked at
6 votes to 6
. The panel ruptured, its two factions now convening separately.

Vanderlip went on a speaking tour
and boldly predicted that no legislation would be enacted until 1914, when he hoped a consensus would favor his plan. While he distanced himself from the Glass-Owen camp, Warburg, having just returned from Europe, avidly engaged the committee. Predictably, his energies were focused on making Glass-Owen more centralized by eliminating some of the Reserve Banks. Warburg’s evolving concern reflected his appreciation of the still vast distances that separated American cities in the era before commercial aviation. He envisioned that a dozen Reserve Banks would be uncoordinated and, in some cases, undercapitalized. (The total capital of all national banks was
only $1 billion
, heavily concentrated in the Northeast.) Moreover, Washington itself was a provincial capital and anything but a commercial center. Warburg
favored establishing pillars of banking in a few major cities rather than entrust the system to, as he put it, “
a set of men
who are out of touch with the daily business of the county, and situated at Washington.”

Unlike Vanderlip, Warburg maintained a supportive stance in public and tried to modify the bill from within.
He and Owen fortuitously
shared a train ride from Washington to New York, affording Warburg the chance to lobby the senator at length. He tried to disabuse Owen of his “pet theories” of banking, which were laden with prairie suspicions. Owen held his ground, but once back in Washington, he began consulting Warburg on changes in the draft. Warburg was also called to mediate between the committee’s warring factions. Although the attempt failed, members of both parties subsequently sought his counsel. Warburg also forwarded to McAdoo, Colonel House, and various senators
a flood of correspondence
from European bankers echoing his prescriptions.

Warburg’s relentless lobbying seemed to bear fruit when, on November 20, the Owen faction
cut the number of Reserve Banks
to eight, the minimum that Wilson would accept. Warburg also persuaded Owen to make
changes in the discounting section
, a technical area of great interest to Warburg. Meanwhile, Hitchcock (with help from Vanderlip and Strong) prepared
a separate bill
, with only four Reserve Banks and public stock subscription. Even the four banks would be controlled by Washington—a very centralized scheme.

Although unwilling to vote for Owen’s bill
(the Senate counterpart of the measure that had passed in the House), Hitchcock at least acquiesced in a legislative maneuver that allowed reform to get out of committee. Since the panel could not endorse a bill, it simply referred
two
bills, recommending neither.
Then, Wilson ordered
the Senate Democrats to meet in caucus, to align the party behind the Owen bill.
While Hitchcock insisted
he would not comply with the caucus, Wilson had signaled that he considered the Owen bill a make-or-break test of loyalty.

Banking reform finally got to the Senate floor in December, at
the start of the regular session. Wilson,
in his annual message
to Congress on December 2, urged the Senate to move with dispatch.
*
He emphasized the plan’s benefit to farmers.
Adding to the pressure
on the upper chamber, the President put his plans for a Christmas vacation on hold, pending enactment. He also directed Democrats in the Senate to table plans for a holiday recess—not a trivial matter in an era when members could hardly fly home for a weekend. With Wilson riding herd, Senate leaders imposed a grueling schedule of day and night sessions lasting until eleven p.m. Even Vanderlip admitted that the President was becoming an exceptionally forceful executive. All pursed lips, the banker exclaimed, “
I have never seen so much power
wielded by any administration as Wilson seems to have.”

The first order of business in the Senate was to choose between the Owen and the Hitchcock measures. As the debate began,
Owen held a slim lead
.
But the Senate became embroiled
in a paramount issue that, up until that point, had remained curiously offstage—inflation. Although all of the rival measures reaffirmed the country’s commitment to the gold standard, there was understandable fear that the creation of a new machinery designed to foster access to credit would end up debasing the money. Senators hotly debated whether reserve notes themselves should be “legal tender”—or merely paper that could be redeemed for gold. The distinction was mostly theoretical, because the vast majority of citizens would choose to carry reserve notes rather than specie. Still, the Senate’s legal tender standard, seeming to endow the Fed with greater license, alarmed monetary purists, since if it prevailed, the new Reserve Banks would be minting not just notes but “money.”

Further stoking inflation fears, the Owen bill, as compared with the House measure, was more conducive to stimulating credit (credit is the basis of money; more of it leads to more dollars in circulation). For instance, at Warburg’s urging,
the Senate cut reserve
requirements
below those in the House, enabling banks to issue more loans and, again, create more money. The most controversial feature in the Senate bill was a provision for a deposit guarantee. The notion of insuring deposits as a means of forestalling bank runs had been on the margins of the debate since 1907 and, of course, was favored by Bryan. It was considered a radical step—one that would encourage imprudent banking.

Nonetheless, Wall Street, which had visions of a muscular Federal Reserve that would pump up credit and arm American banks to do business overseas, preferred the Senate’s version of Glass-Owen to the House’s. The upper chamber not only permitted national banks to open foreign branches but explicitly permitted the new Reserve Banks to trade in securities “
at home or abroad
.” The House bill, more faithful to Glass’s original Princeton blueprint, was more cautious. For instance, the Senate employed forceful language in authorizing the Federal Reserve Board to compel one Reserve Bank to loan money to another. This was important, because it enabled the board to
coax the various parts
of the system into working as a whole. The language in the House was more restrictive.