America's Bank: The Epic Struggle to Create the Federal Reserve (13 page)

To avoid the suspicion that the association would favor political factions or their friends,
bankers—not government—would be in control
. The President would choose the Reserve Association governor from a list provided by its directors. However, thirty-nine of the forty-five directors were either bankers or industry representatives chosen by bankers; only six were government appointees (and even they were a grudging concession, forced on Aldrich by the politically sensitive Warburg).

Although Aldrich recognized that the public had a vital interest in banking, he was adamant that the Reserve Association avoid the possibility of political influence, which, as he saw it, was the critical weakness of the Second Bank in the time of Jackson. He rationalized the near-exclusion of the public by casting monetary policy as merely a
banking
problem. “
These are business questions
,” he said. “They are not political questions.” To further keep the ghost of Jackson at bay, the association’s powers would be limited. It could buy and sell securities on the open market (much like the eventual Federal Reserve), but it could not be a banker to the community at large, such as by taking deposits. It would serve the banks, not compete with them. It could not even compel individual banks to join (membership would be voluntary, reflecting the drafters’ laissez-faire bias).

Just as the association would be protected against power grabs by politicians, it would also be immune to exploitation by banks, or so the drafters believed. Association dividends paid to member banks were capped at 5 percent, with a portion of the profits directed to the Treasury.
*
Thus, while bankers were in control, they could not expect more than a reasonable return.

It was an inventive and thoughtful plan, honestly wrought. Aldrich, who had been so wedded to the old currency based on government bonds, showed courage in supporting a new currency based on private loans. The chief deficit of the plan was that it looked backward, to the era of private bankers. The drafters could not quite envision that, in the twentieth century, progressivism and like movements around the world would insist on public control of financial institutions.

As they were leaving the island, the collaborators resolved to seek the support of Wall Street’s old guard. Aldrich would talk to J. P.
Morgan and George Baker; Vanderlip would consult with James Stillman. The real work would be persuading bankers away from the Eastern Seaboard.

Warburg suggested they also organize
a league of businessmen to promote reform. Aldrich thought this preposterous. “If you can do that, God bless you!” he said mockingly. The others had a hearty laugh. Once again, Warburg seethed. But despite the tension between them, the week had enhanced his respect for Aldrich—who for all his tendency to dominate was willing to do the hard work of understanding the issues.

The group disbanded quietly
, in agreement over the blueprint despite many points of friction. Vanderlip considered the episode a high point of his life. Writing Stillman the next day—a violation of his secrecy oath—Vanderlip declared, “
I am back from Jekyl Island
, and have had as keenly interesting a time as I can remember ever to have had.”

Given the total makeover of Congress, now tilted toward progressives, Vanderlip was not optimistic on the Plan’s immediate prospects. Nonetheless, he predicted that eventually “something along these general lines will be enacted.” Using Stillman and Vanderlip’s private code for Aldrich, Vanderlip added, “
Zivil was greatly pleased
with the result of the conference, and desires to keep in very constant touch.”

Aside from a couple of vague allusions
, the Jekyl conspirators did not refer to the trip in subsequent correspondence. Although they would continue working together, the trip itself disappeared from view. Six years later, in 1916, the journalist B. C. Forbes (then laying plans for
Forbes
magazine) mentioned the bare fact of the trip in
Leslie’s Weekly.
But his article received scant notice, and the secret was essentially preserved. Even as late as the late 1920s, when Warburg was writing an account of the Federal Reserve’s origins, he said only that he had been “invited to join a small group of men who, at
Senator Aldrich’s request, were to take part in a several days’ conference with him, to discuss the form that the new banking bill should take.” He added in a footnote, “Though eighteen years have since gone by, I do not feel free to give a description of this most interesting conference concerning which Senator Aldrich pledged all participants to secrecy.” However, in 1930, an authorized biography of Aldrich finally revealed a few details.

Thanks to its secrecy and its glittering cast, the cloak-and-dagger retreat would give rise to legions of conspiracy theories. For gold bugs, anti–Federal Reserve zealots, and flat-out cranks, the 1910 escapade would come to assume mythic significance. Over the decades, its suspicious character seemed only to grow larger. In 1952, Eustace Mullins, a Holocaust denier and conspiracy theorist nonpareil, described the “
secret meetings of the international bankers
” as a conclave of the Rothschild family linked backward in time to Hamilton and forward to Winston Churchill, Franklin D. Roosevelt, and Joseph Stalin. Mullins was inspired to probe into the central bank during a hospital visit to the fascist sympathizer Ezra Pound and devoted his career to a lunatic blend of anti-Fed and anti-Semitic diatribes. Some years later, G. Edward Griffin transformed paranoid theories into a lucrative cottage industry. A onetime writer for the John Birch Society and for Alabama governor George Wallace, and the author of a previous book espousing a miracle cancer cure, in 1994 Griffin penned
The Creature from Jekyll Island.
This book, which became a steady seller, argued that the bankers who came to the island in 1910 did so
to establish a cartel
, with the aim of suppressing competition in banking and confiscating the people’s wealth.

For such writers, Jekyl became a metaphor for central banking, supposedly an international plot to bury civilization in debts. Since central bank notes are a form of obligation, each dollar issued by the Federal Reserve, each pound minted by the Bank of England, was, it was alleged, an added enslavement. A leitmotif in such arguments
was that debt itself was pernicious, and in fact a strain of credit-phobia persists in America to this day. In 2010,
the centenary of the Aldrich mission
, Jekyll Island
*
was host to a conference at which a contemporary naysayer claimed that the Federal Reserve was nothing but a confidence game. These arguments against money and credit have gained wide—at times fanatical—adherence, perhaps not surprisingly, since many financial disasters are accompanied by waves of debt failures.

Credit has often been abused or overused, but it is hard to imagine a society advancing beyond the most primitive stage without some means of exchange between those possessing surplus funds and those in deficit. Otherwise, money would sit idly in the vaults of the rich. People could try to borrow from rich people directly, but most people’s personal credit, and even that of most firms, is limited to a relatively small circle of acquaintances. This is the gap filled by banks. As Vanderlip put it to Carter Glass, “
the main business of a bank
is to exchange its credit for the credit of its customers.” The point of a central bank was to be a banker to banks, to use
its
credit to supplement that of each individual institution.

The bankers who journeyed to Jekyl Island had no notion of monopoly.
They wanted a more resilient banking system
. They espoused greater cooperation, but it was for the purpose of collective security as opposed to, say, fixing interest rates. They certainly thought Aldrich’s “Reserve Association” would redound to their institutions’ benefits. Confidence in the credit system could only help their bottom lines. More specifically,
Vanderlip’s correspondence makes emphatically clear
that he was eager for National City to expand overseas, and a central bank would further such efforts. Vanderlip, himself a former Treasury official, envisioned the U.S. government as potentially a helpful partner to international banks just as, say, planters in Central America might hope to call, now and
then, on the U.S. Marines. However, the bankers accompanying Aldrich did not envision, or want, a
government
central bank. They generally held to a laissez-faire view that private credit was more dependable than government debt—and therefore, that “money” should consist of private, rather than government, notes. They were interested in a system of
self-
regulation for banks. They wanted a framework in which banking reserves could be pooled—centralized or at least regionalized—and this, they believed, would indisputably be to the greater society’s good.

While sequestered on the island
, the bankers spoke with bitterness at having to steal about as though they were criminals. In their own minds, and in any fair rendering, they were attempting to achieve a worthy public reform. They were conspirators, but patriotic conspirators.

Once home,
they orchestrated a two-pronged attack
. Aldrich reached out to leading bankers in the West. Meanwhile, Warburg surgically inserted himself into the deliberations of various commercial groups who were debating monetary reform. Coaxing these bodies toward a position consistent with the Aldrich Plan involved a nimble pirouette—because Warburg, of course, could not reveal that he knew what the Plan was going to say. Thus, he was anxious for Aldrich to go public.

Barely had he been home a week than
Warburg bombarded Aldrich
with seven pages of suggestions as the senator prepared a final draft. He also wrote to Andrew, whom Warburg frequently used as an alternate channel to communicate with Aldrich, relaying his impatience. Warburg had been made head of the New York Chamber of Commerce’s monetary committee—an influential group—and he was especially eager for Aldrich to divulge his plan so that Warburg could openly recommend it to the committee. “
Will you please find out from Mr. N
[Aldrich] what he wants me to do and what he intends to do,” Warburg asked Andrew, barely concealing his frustration. “I have not called together my committee up till now, but I
cannot delay that very much longer.” As usual, Warburg supplied a carrot as well as a stick. “Not a day passes,” he exclaimed, “without some new evidence that the Central bank is wanted.”

Aldrich briefed his colleagues on the Monetary Commission without breathing a word of the trip to Jekyl. But a whisper of great tidings was in the air. During December, Warburg was introduced to Taft. “Warburg,” the rotund President said good-naturedly, “
I hear all kinds of things that Senator Aldrich
is doing. What, really, is going on?” At such moments Warburg felt his foreign roots keenly. While replying evasively to the President, he could not help but wonder about the strange workings of the American political system, in which the head of state was forced to inquire of a rank outsider about events within his own party.

Aldrich also appeared at
the American Academy of Political and Social Science
in Philadelphia, where he hinted about the nature of his forthcoming plan and promised the goods “in the near future.” Warburg and the other conspirators awaited publication, but as the holidays approached, Aldrich greeted them with silence. Warburg suspected the delay was owing to the senator’s tendency to procrastinate, but as the calendar turned to 1911 it became clear that Aldrich’s health was deteriorating, physically as well as psychologically.

Although Aldrich’s family tried to hush it up,
press accounts grew steadily
more worrisome. “Senator Aldrich Ill; Friends Worried over Reports That He Has Throat Trouble,” the
Times
reported on January 6, 1911. A week later, the paper retracted the report of throat trouble, divulging now that Aldrich was “quite ill at his home.” It closed menacingly, “He is abed and does not receive even his secretary.”

It seems clear that Aldrich was suffering an aggravated form of the nervous melancholia that he had experienced as a younger man—in short, a breakdown.
His Jekyl confreres tactfully
attributed his illness to the mental strain of his work on monetary reform. Abby’s diary attests to her husband’s “spell of feeling very nervous” and to his recurrent sleeplessness. Presumably, more than hard work was at issue.
Aldrich had finally completed a blueprint embodying three years of intensive study—a document that he fancied incorporated the height of banking wisdom. But his term expired in March, and the incoming Congress was unlikely to show any interest. The realization that his crowning work could conceivably wind up on the scrap heap may have pushed him over the edge to depression. There was little that doctors could offer for his condition other than the advice of rest. The senator’s personal physician counseled that he avoid all “excitement.”

Aldrich’s ill-timed absence
posed a vexing issue for Warburg, who had managed to gain the joint endorsement of three commercial groups for a reform plan very much resembling the still under-wraps Aldrich Plan.
*
An assembly of such groups under the auspices of the National Board of Trade was to convene in Washington on January 18. Warburg felt it was vital for the Aldrich Plan to be surfaced before that date, so the Board of Trade could offer its endorsement.

But Aldrich was confined to his bedchamber, leaving Andrew to try to steer the Plan to the finish line. Andrew spent New Year’s with the Davisons on Long Island, then returned home for a weekend of high-stakes meetings to win over James Forgan, the acknowledged dean of the Chicago bankers. On Friday, January 6, Andrew hosted Forgan and James Laughlin, the University of Chicago economics professor, at lunch. Saturday evening the group dined at the White House, and the following day they met with Treasury Secretary Franklin MacVeagh. Andrew was not immediately persuasive. As Forgan and Laughlin made for the train back to Chicago, Forgan cackled derisively, “
Laughlin, did you ever see
such a mess of a banking bill?”