America's Bank: The Epic Struggle to Create the Federal Reserve (3 page)

Silver-money advocates are often portrayed this way—as emotional and ignorant. But their distress was real. Over the course of three decades—beginning when Carter Glass was a boy—prices in America steadily declined. No American born after the Great Depression has ever experienced even
two
consecutive years of deflation but, astonishingly,
from 1867 to 1897
prices skidded relentlessly lower, and over the whole of that period they tumbled well more than 50 percent. In 1867, when the future congressman was nine years old,
a bushel of winter wheat
fetched $2.84; thirty years later it was selling for a mere 90 cents.

Although the price of goods was falling, it is equally true, and more illuminating, to say that the price of money was rising. This was occurring for the expected reason—money was scarce. Representative Joseph Sibley of Pennsylvania noted that gold was the only commodity whose price was appreciating. “
You do not want an honest dollar
,” he said in rebuke to President Cleveland. “You want a scarce dollar.”

As America industrialized, sectional divisions in the country widened. Corporations listed on the stock exchange were able to tap capital; manufacturing firms were protected by the tariff. The system of high tariffs and a strong dollar served the Northeast reasonably well but it left farmers and debtors impoverished.

Yet the people who might have benefited most from monetary reform were also the most resistant to it. The notion of establishing a bank to regulate the money supply, although common in other countries, aroused deeply held fears of monopoly, especially in the South and West. Farmers agitated for a cruder solution: printing more greenbacks. When that crusade faded, agitators shifted their energies to silver. The point was to mint more money—any kind of money.

Bowing to the pressure, in 1890 Congress committed the Treasury to purchasing the sizable sum of 4.5 million ounces of silver a month (double its prior rate). Since the government also backed its paper in gold, a problem developed. As predicted by Gresham’s Law,
*
miners and others exchanged their inflated silver for gold at par, the latter disappearing from circulation. As gold drained out of the Treasury, foreign investors feared that the United States would be forced to abandon gold and rushed to sell American securities.

The gold stampede bequeathed a banking panic. Depositors withdrew savings, and country banks desperately demanded their reserves from the city banks where they were parked. The system was too brittle to handle the freight. “Actual money,” a commentator noted, “cannot be shipped from New York to Denver in a day, and forty-eight hours’ delay may easily settle
the fate of the Western institution
.”

The Panic of 1893 exposed
, beyond a doubt, the system’s flaws as well as its geographic asymmetry. Of 360 banks that failed, all but 17 were west or south of Pennsylvania. Robert Latham Owen, president of the First National Bank of Muskogee, in Oklahoma Territory, saw half his deposits run out the door in a matter of days. A future legislative partner of Glass, Owen became convinced, then and there, of the need for reform.

Cleveland persuaded Congress to repeal the silver-purchase act, but the silver lobby kept up a steady pressure for resumption, and investors remained in an agitated state. The government repeatedly
borrowed gold only to see it drain away. A. Barton Hepburn, the comptroller of the currency, was to write, “
Fear of a silver basis prevailed
, especially abroad, and every express steamer brought in American securities and took away gold.” With gold supplies dwindling, in 1895, the President was
forced to go hat in hand
to J. P. Morgan, who accepted thirty-year government bonds (which he syndicated to investors) in exchange for gold to bail out the Treasury. This was a highly embarrassing demonstration of Washington’s subservience to Wall Street. The private nature of the negotiations and the fact that, as it turned out,
Morgan turned a profit
on the syndication gave rise to charges of a conspiracy.
Glass believed, on no evidence
, that bankers such as Morgan had fomented the gold shortage to profit from subsequent bond sales. The Morgan deal was probably the best that Cleveland could have managed, but it left his party deeply divided.

Astonishingly, no one—least of all Glass—suggested that the government might want to supplant Morgan: that is, become its own banker. Although a central bank presumably would have provided more circulation, the mere suggestion of it stirred cries against the discredited Second Bank in the time of Jackson. That was enough to damn it. After Cleveland vetoed a measure for coining silver, Glass raged at Wall Street for urging the veto. “
It is just the money power
that the old United States [Second] bank used to exercise over the finances of the government,” he editorialized in the
Lynchburg News,
“and would exercise at this day had not General Jackson in his might crushed out its charter.”

Trying to look forward and not, for once, to General Jackson, bankers and businesspeople met in Baltimore in 1894 and proposed reforms. The phrase “central bank” was studiously avoided. However, to the conference-goers, it was plain that the Civil War banking structure had outlived its useful life. The Panic had devolved into a full-blown depression. Railroads had failed by the dozen. Thousands of factories had shuttered and unemployment had soared. In rural
areas, farmers could not pay their mortgages.
Virginia’s farmers were ruined
by debt; four in ten were forced into tenancy.

Although the depression was America’s worst to date, it did not occur to Cleveland to offer federal relief. The son of a Presbyterian minister, as honest as he was corpulent,
Cleveland held that people should
support the government, not vice versa. This was the Democrats’ laissez-faire credo. But Glass was struggling to reconcile this philosophy with the plight of his state’s farmers.

The moment was highly polarizing. Populists agitated for an income tax, tariff reform, regulation of railroads, and direct election of U.S. senators (who were chosen by the legislatures). Workers erupted in sometimes violent strikes—notably, the Pullman strike of 1894, which halted much of the nation’s rail traffic and led to rioting and acts of sabotage, and was ultimately suppressed by federal troops.

Discontent with the currency was the glue that united these disparate rebellions. In the same year as the Pullman strike, Jacob Coxey, an Ohio businessman, led an army of the unemployed to Washington. Remarkably, they demanded increased circulation—the first popular protest to focus on the monetary system. Meanwhile, over country hill and dale, Americans bent over oil lamps to peruse their copies of William H. Harvey’s fetching parable,
Coin’s Financial School,
published in 1894. Harvey was a failed silver miner turned proselytizer for silver coinage. He sold hundreds of thousands of copies.

In the next presidential election, silver was the overwhelming issue. With America mired in a depression, increasing the money supply was the perceived tonic. William McKinley, the Republican nominee, was wary of alienating the silver forces, but
party bosses insisted that he stand for gold
.

The Democratic convention was held in Chicago. Carter Glass, a member of the platform committee, boarded the overnight train for the Midwest in an emotional state, having buried his father only six
weeks earlier. He must have ruminated on the last convention attended by Major Glass—in 1860, when the Democrats had debated slavery. This convention seemed similarly momentous, and Glass felt ready to play a part in great events. Despite the hard times, Glass enjoyed a rising prominence, having acquired the three newspapers in Lynchburg and obtained the fastest printing press in the state.
His editorials, a daily barrage
for free silver, were read in the highest circles in Virginia. Other social and economic issues were coming to the fore, such as labor reform and monopolies, but neither Glass nor the majority of Democrats were ready to embrace them. Glass was a
conservative
reformer, wary of measures that might divide the party and weaken the solid South. Southern democracy was founded on racial segregation, and he earnestly editorialized in support of this system. To Glass, any sort of federal interference (such as a central bank) also threatened an end to white supremacy, and was out of the question.

The Democrats, therefore, coalesced around silver as an encompassing solution for America’s ills and also as a safe, unifying mantra for the delegates’ lengthy list of grievances. An air of nativism, a Jacksonian Anglophobia, hung over the delegates, for whom gold represented a policy of enslavement by Britain. The platform inveighed against “financial servitude to London” and “trafficking with banking syndicates.” It was a farmers’ convention, steeped in the issues that mattered to farmers, and it turned to the son of an avid Jacksonian, who himself had been raised on a farm, for inspiration.

William Jennings Bryan, only thirty-six years old, had practiced law, worked as an editor, and served two terms in Congress, representing Nebraska. He was a teetotaler and a fundamentalist Christian. Many of his positions were prescient (he favored an income tax and public disclosure of campaign contributions), but his chief qualification for public life was a talent for oratory.
Bryan did not analyze issues
so much as feel them. While easterners judged him a dangerous radical, Bryan was driven by a yearning for the past as much as by a vision for the future. He was animated by a conservative nostalgia
for small towns, religion, and laissez-faire. His early campaigns had been backed by the liquor interests, who were grateful to have found a non-drinker opposed to Prohibition. Now, he was financed by the silver interests.

Addressing the convention on the warm afternoon of July 9, 1896, Bryan recognized that leadership of the silver crusade was up for grabs, and while some of the phrases he employed had been tested in earlier speeches, never before had his rhetoric been so poetic, or so rousing. He spoke to the delegates, and to the country, as fellow farmers and rural inhabitants—as, indeed, more than six of ten Americans were. He serenaded farmers—“those hardy pioneers,” he called them—“who braved all the dangers of the wilderness, who have made the desert to blossom as the rose.” Indeed, Bryan spoke as a representative of “our” farms, not of “your” cities, a dichotomy he associated with silver versus gold, poor against rich, even good against evil. He paid the obligatory homage to Jefferson and Jackson, and he claimed to speak for the “producing masses,” the “commercial interests,” the “laboring interests,” and “all the toiling masses”—only Wall Street was excluded. To bankers and to all defenders of the money system he exuded biblical wrath. “You shall not press down upon the brow of labor this crown of thorns,” he bellowed in climax. “You shall not crucify mankind upon a cross of gold.”

Eyewitnesses reported a momentary silence
followed by a tremendous roar. The delegates erupted in cheers; they stood on chairs, gestured wildly, paraded about the hall—a few with Bryan on their shoulders. Glass felt his passions stir and joined the throng. When the frenzy broke, he dashed off a wire to his paper reporting that Bryan had secured the nomination.

The campaign that fall was bitter. McKinley had no trouble raising a war chest on Wall Street. Even some Democrats were appalled by Bryan’s populism and supported a splinter candidate. Among those who voted for the gold Democrat rather than Bryan was
a noted Princeton professor
, Woodrow Wilson.

Nearly eight of ten eligible adults voted, one of the highest turnouts ever. Bryan lost the popular vote by a margin of only 4 percent—not a bad showing, considering that his financial support came almost exclusively from silver mines. Having polled 6.5 million votes, Bryan was now the uncrowned king of a political movement. Not coincidentally, within a fortnight of the election, businesspeople made arrangements for a conference in Indianapolis to consider reforming the monetary system. The organizers saw that the system was outmoded—just as plainly, they were afraid that the silverites would hijack the public debate. They wanted to reform the system before Bryan beat them to it.

The six-hundred-page report that the Indianapolis Monetary Convention was to issue bore a single, offhand reference to a “central bank.” The delegates were headed in the other direction—they wanted the government
out
of banking, not mixed up with high finance. Morgan’s bullion deal with the Treasury had left a sour aftertaste.

Rather than a currency based on government bonds
, the Indianapolis report proposed that each bank issue its own notes, backed by the loans that it made to farmers, merchants, and factories. In this way, the quantity of currency would expand and contract with ordinary business. Let a bank issue credit on a shipment of cotton and the bank’s note would incrementally add to the money supply. Let the cotton shipper repay the debt and the currency would contract.

Loans to cotton merchants and such were dubbed “real bills,” to distinguish them from speculative credit supplied to stock market traders. According to the real bills theory, such loans were inherently sound because they were backed by a tangible asset—the cotton.

A chief attraction of the real bills theory was that it took decisions regarding the money supply out of human hands. John Carlisle, Treasury secretary under Cleveland, maintained that issuing notes “is
not a proper function of the Treasury Department
, or of any other
department of the Government.” The task was just too difficult. Rather, Carlisle said, currency should be “regulated entirely by the business interests of the people and by the laws of trade.” By the “laws of trade,” Carlisle was invoking a nineteenth-century notion of natural law—of an Edenic order in which the volume of money would self-adjust.

The Indianapolis convention was guided toward this doctrine by James L. Laughlin, head of the economics department at the new University of Chicago, and the author of the Indianapolis report. According to Laughlin, an asset currency (based on each individual bank’s loans) would “
adjust itself automatically and promptly
” as the level of trade, and therefore of bank loans, expanded and contracted to meet demand from business.