A History of Money and Banking in the United States: The Colonial Era to World War II (37 page)

THE FINAL PHASE:

COPING WITH THE DEMOCRATIC ASCENDANCY

The final phase of the drive for a central bank began in January 1911. At the previous January’s meeting of the National Board of Trade, Paul Warburg had put through a resolution setting aside January 18, 1911, as a “monetary day” devoted to a “Business Men’s Monetary Conference.” This conference, run by the National Board of Trade, and featuring delegates from metropolitan mercantile organizations from all over the country, had C. Stuart Patterson as its chairman. The New York Chamber of Commerce, the Merchants’ Association of New York, and the New York Produce Exchange, each of which had been pushing for banking reform for the previous five years, introduced a joint resolution to the monetary conference supporting the Aldrich Plan, and proposing the establishment of a new “businessmen’s monetary reform league” to lead the public struggle for a central bank. After a speech in favor of the plan by A. Piatt Andrew, the entire conference adopted the resolution. In response, C. Stuart Patterson appointed none other than Paul M. Warburg to head a committee of seven to establish the reform league.

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The committee of seven shrewdly decided, following the lead of the old Indianapolis convention, to establish the National Citizens’ League for the Creation of a Sound Banking System in Chicago rather than in New York, where the control really resided. The idea was to acquire the bogus patina of a “grassroots” heartland operation and to convince the public that the league was free of dreaded Wall Street control. As a result, the official heads of the league were Chicago businessmen John V.

Farwell and Harry A. Wheeler, president of the U.S. Chamber of Commerce. The director was University of Chicago monetary economist J. Laurence Laughlin, assisted by his former student, Professor H. Parker Willis.

In keeping with its Midwestern aura, most of the directors of the Citizens’ League were Chicago nonbanker industrialists: men such as B.E. Sunny of the Chicago Telephone Company, Cyrus McCormick of International Harvester (both companies in the Morgan ambit), John G. Shedd of Marshall Field and Company, Frederic A. Delano of the Wabash Railroad Company (Rockefeller-controlled), and Julius Rosenwald of Sears, Roebuck. Over a decade later, however, H. Parker Willis frankly conceded that the Citizens’ League had been a propaganda organ of the nation’s bankers.73

The Citizens’ League swung into high gear during the spring and summer of 1911, issuing a periodical,
Banking and Reform,
designed to reach newspaper editors, and subsidizing pamphlets by such pro-reform experts as John Perrin, head of the American National Bank of Indianapolis, and George E. Roberts of the National City Bank of New York. Consultant on the newspaper campaign was H.H. Kohlsaat, former executive committee member of the Indianapolis Monetary Convention. Laughlin 73Henry Parker Willis,
The Federal Reserve System
(New York: Ronald Press, 1923), pp. 149–50. Willis’s account, however, conveniently overlooks the dominating operational role that both he and his mentor Laughlin played in the Citizens’ League. See Robert Craig West,
Banking
Reform and the Federal Reserve, 1863–1923
(Ithaca, N.Y.: Cornell University Press, 1977), p. 82.

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The Colonial Era to World War II

himself worked on a book on the Aldrich Plan, to be similar to his own report of 1898 for the Indianapolis convention.

Meanwhile, a parallel campaign was launched to bring the nation’s bankers into camp. The first step was to convert the banking elite. For that purpose, the Aldrich inner circle organized a closed-door conference of 23 top bankers in Atlantic City in early February, which included several members of the currency commission of the American Bankers Association (ABA), along with bank presidents from nine leading cities of the country. After making a few minor revisions, the conference warmly endorsed the Aldrich Plan.

After this meeting, Chicago banker James B. Forgan, president of the Rockefeller-dominated First National Bank of Chicago, emerged as the most effective banker spokesman for the central bank movement. Not only was his presentation of the Aldrich Plan before the executive council of the ABA in May considered particularly impressive, it was especially effective coming from someone who had been a leading critic (if on relatively minor grounds) of the plan. As a result, the top bankers managed to get the ABA to violate its own bylaws and make Forgan chairman of its executive council.

At the Atlantic City conference, James Forgan had succinctly explained the purpose of the Aldrich Plan and of the conference itself. As Kolko sums up:

the real purpose of the conference was to discuss winning the banking community over to government control directly by the bankers for their own ends. . . . It was generally appreciated that the [Aldrich Plan] would increase the power of the big national banks to compete with the rapidly growing state banks, help bring the state banks under control, and strengthen the position of the national banks in foreign banking activities.74

By November 1911, it was easy pickings to have the full American Bankers Association endorse the Aldrich Plan. The 74Kolko,
Triumph
, p. 186.

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nation’s banking community was now solidly lined up behind the drive for a central bank.

However, 1912 and 1913 were years of some confusion and backing and filling, as the Republican Party split between its insurgents and regulars, and the Democrats won increasing control over the federal government, culminating in Woodrow Wilson’s gaining the presidency in the November 1912 elections.

The Aldrich Plan, introduced into the Senate by Theodore Burton in January 1912, died a quick death, but the reformers saw that what they had to do was to drop the fiercely Republican partisan name of Aldrich from the bill, and with a few minor adjustments, rebaptize it as a Democratic measure. Fortunately for the reformers, this process of transformation was eased greatly in early 1912, when H. Parker Willis was appointed administrative assistant to Carter Glass, the Democrat from Virginia who now headed the House Banking and Currency Committee. In an accident of history, Willis had taught economics to the two sons of Carter Glass at Washington and Lee University, and they recommended him to their father when the Democrats assumed control of the House.

The minutiae of the splits and maneuvers in the banking reform camp during 1912 and 1913, which have long fascinated historians, are fundamentally trivial to the basic story. They largely revolved around the successful efforts by Laughlin, Willis, and the Democrats to jettison the name Aldrich. Moreover, while the bankers had preferred the Federal Reserve Board to be appointed by the bankers themselves, it was clear to most of the reformers that this was politically unpalatable.

They realized that the same result of a government-coordinated cartel could be achieved by having the president and Congress appoint the board, balanced by the bankers electing most of the officials of the regional Federal Reserve Banks, and electing an advisory council to the Fed. However, much would depend on whom the president would appoint to the board.

The reformers did not have to wait long. Control was promptly handed to Morgan men, led by Benjamin Strong of Bankers
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A History of Money and Banking in the United States:
The Colonial Era to World War II

Trust as all-powerful head of the Federal Reserve Bank of New York. The reformers had gotten the point by the end of congressional wrangling over the Glass bill, and by the time the Federal Reserve Act was passed in December 1913, the bill enjoyed overwhelming support from the banking community.

As A. Barton Hepburn of the Chase National Bank persuasively told the American Bankers Association at its annual meeting of August 1913: “The measure recognizes and adopts the principles of a central bank. Indeed . . . it will make all incorporated banks together joint owners of a central dominating power.”75 In fact, there was very little substantive difference between the Aldrich and Glass bills: the goal of the bank reformers had been triumphantly achieved.76, 77

CONCLUSION

The financial elites of this country, notably the Morgan, Rockefeller, and Kuhn, Loeb interests, were responsible for putting through the Federal Reserve System, as a governmentally created and sanctioned cartel device to enable the nation’s banks to inflate the money supply in a coordinated fashion, without suffering quick retribution from depositors or noteholders demanding cash. Recent researchers, however, have also high-lighted the vital supporting role of the growing number of technocratic experts and academics, who were happy to lend the 75Ibid., p. 235.

76On the essential identity of the two plans, see Friedman and Schwartz,
A Monetary History of the United States,
p. 171, n. 59; Kolko,
Triumph
, p. 235; and Paul M. Warburg,
The Federal Reserve System, Its
Origins and Growth
(New York: Macmillan, 1930), 1, chaps. 8 and 9. On the minutiae of the various drafts and bills and the reactions to them, see West,
Banking Reform
, pp. 79–135; Kolko,
Triumph
, pp. 186–89, 217–47; and Livingston,
Origins
, pp. 217–26.

77On the capture of banking control in the new Federal Reserve System by the Morgans and their allies, and on the Morganesque policies of the Fed during the 1920s, see Rothbard, “Federal Reserve,” pp. 103–36.

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patina of their allegedly scientific expertise to the elites’ drive for a central bank. To achieve a regime of big government and government control, power elites cannot achieve their goal of privilege through statism without the vital legitimizing support of the supposedly disinterested experts and the professo-riat. To achieve the Leviathan state, interests seeking special privilege, and intellectuals offering scholarship and ideology, must work hand in hand.

Part 3

FROM HOOVER TO ROOSEVELT:

THE FEDERAL RESERVE

AND THE FINANCIAL ELITES

FROM HOOVER TO ROOSEVELT: THE FEDERAL

RESERVE AND THE FINANCIAL ELITES

This chapter is grounded on the insight that American politics, from the turn of the twentieth century until World War II, can far better be comprehended by studying the interrelationship of major financial groupings than by studying the superficial and often sham struggles between Democrats and Republicans. In particular, American politics in this period was marked by a fierce struggle between two major financial-industrial groupings: the interests clustered around the House of Morgan on the one hand, and an alliance of Rockefeller (oil), Harriman (railroad), and Kuhn, Loeb (investment banking) interests on the other. The Morgans began in investment banking, and moved out into railroads, commercial banking, and then manufacturing; the Rockefeller–Harriman–Kuhn, Loeb alliance began in their three respective original spheres, and moved into commercial banking. In most instances, the two mighty combines clashed: for example, in whether or not Theodore Roosevelt (always closely allied to the Morgans) should use the antitrust weapon to smash Standard Oil, or whether, in his turn, President Taft (allied with the Ohio-based Rockefellers) should try to break up Morgan trusts such as International Harvester or United States Steel. In other areas, the interests of the two mammoths coincided and they were allies: thus, both groups were heavily represented in the drive
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A History of Money and Banking in the United States:
The Colonial Era to World War II

for measures cartelizing industry that were sought and lobbied for by the National Civic Federation during the Progressive Era; and both groups joined to push through the Federal Reserve System.1

THE EARLY FED, 1914–1928: THE MORGAN YEARS

In their joining together to draft, and then to lobby for, the new Federal Reserve System, the House of Morgan was clearly very much the senior partner in the enterprise. The secret meeting of a handful of top bankers at the Jekyll Island Club in November 1910 that framed the prototype of the Federal Reserve Act was held at a resort facility provided by J.P. Morgan himself. The Federal Reserve, in its first two decades, contained two loci of power: the main one was the head, then called the governor, of the Federal Reserve Bank of New York; of lesser importance was the Federal Reserve Board in Washington. The governor of the New York Fed from the beginning until his death in 1928, was Benjamin Strong, who had spent his entire working life in the Morgan ambit. He was a vice president of the Bankers Trust Company, established by the Morgans to engage in the new and lucrative trust business; and his best friends in the world were his mentor and neighbor, the powerful Morgan partner Henry P. Davison, as well as two other Morgan partners, Dwight Morrow and Thomas W. Lamont. So highly trusted was Strong in the Morgan circle that he was brought in to be the personal auditor of J. Pierpont Morgan, Sr., during the panic of 1907. When he was offered the post of governor of the New York Fed in the new Federal Reserve System, the reluctant Strong was convinced by Davison that he could operate the Fed as a “real central bank . . . run from New York.”2

1On the National Civic Federation, see James Weinstein,
The Corporate
Ideal in the Liberal State, 1900–1918
(Boston: Beacon Press, 1968).

2So close were Strong and Davison that, when Strong’s wife committed suicide after childbirth, Davison took the three surviving children into his home. On Strong and the Morgans, see Murray N. Rothbard, “The Federal
From Hoover to Roosevelt:

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The Federal Reserve and the Financial Elites
The Morgans were not nearly as dominant in the then-lesser institution of the Federal Reserve Board in Washington. On the original board, there were seven members, of whom two, the secretary of the Treasury and the comptroller of the currency, were ex officio. The Morgan bloc on the original board was led by Secretary of the Treasury William Gibbs McAdoo, son-in-law of President Wilson, whose Hudson and Manhattan Railroad Company in New York had been bailed out personally by J.P.