America's Bank: The Epic Struggle to Create the Federal Reserve (15 page)

But in the interior of the country, fear of Wall Street domination would not go away. To midwestern progressives it was axiomatic that the Aldrich Plan was a tool of New York bankers. They saw it as a stalking horse for the “Money Trust”—a hazy expression understood by ordinary Americans to mean the Wall Street cabal that, it was said, manipulated the levers of the country’s finances.

And in mid-1911 the Money Trust was catapulted onto the front pages—with disastrous consequences for the Aldrich Plan.
The first inkling of trouble
arose in June, when Vanderlip’s National City Bank divulged a plan for a new affiliated unit, to be known as National City Co. The affiliate would have the same shareholders and officers as the bank but a separate corporate identity. In plain terms, it was an end run around the law. The affiliate was intended, as Vanderlip candidly put it in a circular to the bank’s shareholders, to “make investments and transact other business, which, though often very profitable, may not be within the express corporate powers of a National bank.” One of those purposes was to purchase stocks in other banks. And no
sooner was the affiliate established than it scooped up shares in fifteen of its competitors, including controlling stakes of several small banks in New York.

The disclosure set off a tempest. To casual observers, National City resembled a would-be monopolist. A big bank buying shares in smaller banks seemed akin to a Rockefeller buying a string of oil refiners. New York banking was already a clubby affair, in which Morgan, Baker, and Stillman/Vanderlip tacitly agreed to restrict competition to well-defined lines of business and
openly colluded in others
.

What truly sounded alarm bells was the seeming linkage between the National City affiliate and the Aldrich Plan. It was easy to imagine that if the Aldrich Plan was adopted, a chain of banks, jointly owned by a holding company such as National City, might gain voting control of the National Reserve Association.
The Citizens’ League was alarmed
, for the mere possibility of such a vehicle undermined its strategy of marketing the Aldrich Plan as a democratic reform. As the
Times
put it, “It is a waste of breath to urge upon the people of the country the acceptance of the Aldrich plan so long as one National bank, through a holding company, may control twenty, fifty, or one hundred other National banks.”

In actual fact, there was not much prospect of National City’s controlling the Reserve Association. America had well more than twenty thousand banks of various types—Wall Street’s collusive tendencies notwithstanding, banking remained far more competitive than oil, steel, sugar, or any of the industries dominated by a classic trust. And the Reserve Association, were it to be established, would dwarf the assets even of National City. Warburg tried to placate worried officials of the Citizens’ League, but his sarcasm got the better of him. Writing to the league’s president, he drily remarked that taking over the Reserve Association “
was as remote to the managers
of the National City Bank as the Northpole [
sic
].”

Laughlin was not amused. Even if New York did not appreciate
the damage done by National City, he reproachfully replied to Warburg, the news “
could not have come out
at a more unfortunate time.”

Laughlin was right: National City Co. represented an aggressive thrust by the country’s biggest bank, and the public’s suspicion of its motives was perfectly understandable. In fact, Vanderlip himself had foreseen it. In a letter to Stillman on June 20, just a week before Vanderlip’s circular to the shareholders, Vanderlip raised the alarming possibility that the government might seek to bring antitrust cases against the big banks. The Supreme Court had, in recent weeks, ordered the dissolution of both Standard Oil and the Tobacco Trust, so Vanderlip was paying more than his usual nervous attention to the Justice Department. “
My intuition is
that there is going to be a great deal of talk about banking combinations and concentrated financial power,” he prophesied. “It is going to come from demagogues, but not from them alone.”

Vanderlip’s creation of a new affiliate did much to make his prophecy a true one. Vanderlip had been impatient to expand National City’s charter and to win for national banks some of the freedoms of lesser-regulated state banks. Frustrated with the slow pace of reform, he had committed a colossal blunder.

Washington reacted quickly. Attorney General George Wickersham concluded that National City Co. violated the spirit of the banking law. However, since Treasury Secretary MacVeagh disagreed, Taft ordered the papers sent to him so that he could resolve the issue.
*
Since any decision would anger either progressives or bankers, the President dithered.
In November, Vanderlip wisely defused
the issue by disposing of the affiliate’s investments and, in effect, admitting his error.

However, the political outcry would not be quieted. Even as
Wickersham was launching a government probe, Charles August Lindbergh, a Republican congressman from the Sixth District of Minnesota, a hotbed of prairie populism (later the seat of Tea Party militant Michele Bachmann) called for a congressional investigation of the Money Trust. Lindbergh was the son of a bank embezzler who had fled from Sweden, and the father of the future aviator. He was a serious, scholarly lawyer who also sat on the board of the First National Bank of tiny Little Falls, Minnesota. Like so many midwestern progressives, he feared that East Coast financiers were conspiring to hijack America’s economy, and the revelation of National City’s investment affiliate struck him like a call to Jesus.
Lindbergh saw a parallel plot
at work in the Aldrich Plan, which he said was a device to take away from communities the local funds that, rightly, should stay in those communities. His call for an investigation rocketed across the progressive firmament with, in short order, dramatic consequences. The backers of the Aldrich Plan now faced the impossible burden of disproving that they were agents of the Money Trust.

Among the first to strike was William Jennings Bryan. The Great Commoner privately acknowledged that some reform would be necessary, but was repelled by the two most salient features of the Aldrich Plan—centralization and banker control. Bryan had sketched out a very different idea for dividing the banks into regional associations, with each association being able to borrow, on liberal terms, from the government. In some ways, this was closer than the Aldrich Plan to the eventual Federal Reserve Act. However,
Bryan’s plan was not developed
, nor did he engage the Aldrich plan on the merits. Rather than admit the complexities of an issue, Bryan always preferred to simplify. Typically, he went on the attack, baldly declaring that the Aldrich Plan would lead to nothing less than “
absolute commercial and industrial slavery
.” Despite his three failed presidential campaigns, Bryan remained the most revered of Democrats, and his opposition was a serious matter.

Even more damaging was the antagonism toward the Aldrich
Plan from within the Republican Party, which percolated along with the insurgents’ growing dissatisfaction with Taft. By the middle of 1911, Senator La Follette was openly mulling a challenge to the President the following year. The Wisconsin senator, famous for his pompadour and fighting spirit, had received acclaim when, as a lawyer in Madison in the early 1890s, he claimed he had been offered (and had rejected) a bribe by a party leader. The episode convinced him that the Republicans had betrayed their liberal origins. La Follette then began to champion such popular causes as direct election of senators—which was finally moving through the Congress—voter primaries, a minimum wage, progressive taxation, and corporate regulation. As his state’s governor from 1901 to 1906, he promoted a working relationship between the statehouse and the University of Wisconsin, in the belief that government policies should be founded on competent research. He was sufficiently earnest that
Warburg spent an evening
with the senator’s adviser on banking, laying out the supposed advantages of the Aldrich Plan.

As a progressive, La Follette was in favor of “reforming” the banks, but he feared that any powerful body run by bankers would draw capital, and influence, away from the small communities of the Midwest. In particular, he feared that a national association would come under the sway of metropolitan bankers—not an unreasonable opinion. Although the Aldrich Plan had genuinely democratic safeguards, La Follette’s opinion of it was tainted by his acid view of Aldrich. Finally, La Follette had a political self-interest in distancing himself from the Republican mainstream that Aldrich represented. As with Bryan, he made no attempt to debate the Aldrich Plan on its particulars; rather,
La Follette proclaimed
that it was simply a plot to siphon “the people’s money” to monopolies and trusts. Indeed, he would declare by the end of the year that the Plan was “the greatest menace to competition at the present time.”

Lurking in the shadows of the La Follette
challenge to Taft was the specter of a more potent bid by Theodore Roosevelt to reclaim the
White House from his former friend. Roosevelt agreed not to publicly criticize the Aldrich Plan, as a favor to Laughlin, his old instructor at Harvard. Nonetheless, the Rough Rider represented a powerful threat to Republican solidarity, and that in itself put the Aldrich Plan in serious trouble.

Vanderlip sized up the turbulent politics
of 1911 in a stream of letters to his Paris correspondent, and his reports grew steadily darker. Taft’s chances seemed to have evaporated; the progressive idea was showing remarkable persistence; the fortunes of New Jersey’s Governor Wilson seemed to be on the rise; Aldrich had bungled his chances for a bill. And so on and so on, letter after letter.

The political pot came to a boil late in October, when Taft’s Justice Department brought an antitrust case against U.S. Steel, a Morgan-created trust that had always enjoyed Roosevelt’s favor. Since the suit charged that U.S. Steel’s acquisition of Tennessee Coal, Iron & Railroad—which Roosevelt had approved during the heat of the Panic of 1907—was illegal, and implied that Roosevelt had been duped,
the former president regarded it
as an affront to his honor. His break with Taft was now irreversible.

Morgan, who had been troubled
all year by the gathering pace of investigations, spent a weekend in Vermont huddled with Aldrich, Baker, and Davison to review the ramifications of the U.S. Steel suit. Morgan and Aldrich were both pessimistic—not just about the case but about the drift toward progressive politics in general. Aldrich, Vanderlip reported, “
felt that all the old moorings
were cut loose politically and that the outlook was only that a bad situation might get still worse.”

In November, the Aldrich group reunited
in New Orleans
for the ABA convention. Warburg spoke stirringly. He observed that in Europe credit was actually more useful than cash—a condition he judged that, with the passage of the Aldrich Plan, could be replicated in the United States. But the spotlight belonged to Aldrich. Appealing to southern bankers, he noted that America had exported $650
million of cotton in the previous year—most of it financed in Liverpool, London, Paris, or Berlin. He implored the crowd, was it not worth taking the United States “out of a condition of dependent helplessness”? Once more, Aldrich insisted that his plan was nonpartisan, that it dealt purely with “business questions,” that it envisaged not a bank but a cooperative union of
all
banks. He pleaded to the assembly, “We have a right to expect that the plan presented will be considered fairly on its merits. We do not think it fair that men who admit they have not read the Plan should raise the cry of a central bank or summon the ghost of Andrew Jackson.”

The ABA leadership stifled dissent from country bankers, and the Plan was approved without discussion. As in the original draft, the Reserve Association would be a self-regulatory body of bankers, democratically governed. Wall Street applauded the greater dose of centralization; Chicago approved because the federal government was mostly excluded.
Banks were given greater license
, such as the right to lend on real estate. But a flaw in the Plan was that, since participation was voluntary, scattering reserves among local banks would still be possible.

Aldrich received a five-minute ovation
, but he knew even before he left New Orleans that he faced a brutal resistance.
La Follette was making opposition
to Aldrich a linchpin of his insurgency. In a noonday speech in Hamilton, Ohio—part of an early winter campaign swing through the Midwest—he declared, “The Progressives are prepared to fight because they understand what Aldrich is trying to do for those he represents.”
Newspaper coverage was withering
. In general, critics focused not on the plan but on the man behind it. A devastating observation, probably accurate, in the
Rocky Mountain News
held that “the only thing the country feels sure about the Aldrich currency plan is that it is devised by the author of the present tariff.”

Aldrich and his fellow plotters were partly to blame, for they had ignored a crucial tenet of progressivism—accountability to the public.
Although the Reserve Association, according to its creators, would be
a body with “semi-public” powers
, including acting as chief fiscal agent of the U.S. government, the public was nearly excluded from its deliberations. In this, Aldrich and his comrades badly misjudged the temper of the times.

In December, Representative Lindbergh
formally introduced a resolution to investigate the Money Trust. Meanwhile, the Monetary Commission
met in nearly daily session
, preparing the Aldrich Plan for submission to an increasingly hostile Congress. For appearance’ sake, the commission further weakened the influence of Wall Street. In the finished document,
New York banks, which held 20 percent
of the nation’s banking capital, could elect no more than three of thirty-nine representatives to the board of the Reserve Association—a disproportionately small share.