America's Bank: The Epic Struggle to Create the Federal Reserve (23 page)

When Glass returned to the Raleigh Hotel, he ran into a fellow Banking Committee member, the Ohio Democrat Robert Bulkley, and kept him up until one a.m. stewing over Wilson’s decision.
Still unable to sleep, Glass
wrote a note, in florid script on Raleigh letterhead, to Willis, advising him that the President had decided to make the board “an entirely government affair.” In the morning, the still despairing Glass sent a missive to Wilson, pleading with him to reconsider what the congressman viewed as a “grave mistake.” Glass
was deluding himself: Wilson had deliberated at length and was not about to change his mind.

As Willis recognized, Wilson’s decision heralded a change “of first rank.” It was, Willis said, “
a yielding of the classical doctrine
of laissez-faire in banking in favor of the idea of public participation and direction.” No single decision of Wilson better indicated the turn toward a larger federal presence in society. Democrats would be the party of small-government Jeffersonians no more.

Wilson promptly recalled Glass to the White House, where he hit him with another brick: Federal Reserve notes were to be “obligations of the United States,” just as Bryan had demanded. This sounded to Glass like heresy—government money. However, Wilson elaborated that the government imprimatur would be mostly window dressing. The new notes would still be issued to member banks by the Federal Reserve Banks in exchange for safe and short-term bank loans, and only on condition that the Reserve Bank had gold in the vault equal to one-third of the notes issued. In other words—and just as Glass had demanded—reserve notes would still be bank money, and backed by specie, but with an added and perhaps redundant layer of government endorsement. “
If we can hold to the substance
of the thing and give the other fellow the shadow,” Wilson said artfully, “why not do it, if thereby we may save our bill?”

Glass, feeling he had won after all, was immediately persuaded. Bryan, now, also agreed to support the bill. This meant that Owen would go along as well. It has been suggested that
Bryan didn’t realize that the notes
would retain much of the character of private bank issues and that, in effect, he had been played. It is also possible that Bryan sensed that once paper currency—even in a superficial sense—was proclaimed to be an obligation of the United States, people would begin to think of money differently. The long march of the twentieth century would be toward government dollars (such as circulate today) unfettered by any link to either bank assets or to specie. Wilson’s
compromise was a step in that direction: a step, that is, toward fiat currency.

On June 20, the text of the bill (with the changes ordered by Wilson) was finally released and published in newspapers across the country. Editorial reaction was harsh. To conservative publishers, the notion of the federal government’s controlling a large, private industry was new and profoundly shocking. Opinion writers said the bill represented a surrender to the philosophy of Bryan. The
New York Sun,
an organ of Wall Street, said the measure was “
covered all over with the slime
of Bryanism.” If so, then the Reichsbank and the Bank of France, whose directors and governors, respectively, were appointed by the state, were covered with the same slime, a point the
Sun
overlooked. The more dispassionate
New York Times
conceded that the Glass bill had much to recommend it. Nonetheless, it termed the measure “radical” and judged it to be the work of bank-hating populists (which hardly described Carter Glass). The
Washington Post,
daunted by the prospect of a banking system run by political appointees, warily predicted that the power to be lodged in the new Federal Reserve Board could be “
greater in some respects
than the power now wielded by the President of the United States.”

Wilson smoothly deflected the criticism. When a reporter noted that critics were calling it “the Bryanesque bill,” the President retorted, “
Those things don’t count
. It will be called all kinds of a thing before they get through with it.”

The administration had more pressing concerns than editorial carping. Members of the House Banking Committee, realizing the bill had been prepared without their input, were in a sullen and rebellious mood.
Wilson, at Glass’s urging, invited
the committee Democrats to the White House and implored them to support the bill (it eased his task that Bryan made his endorsement public). Nonetheless, the President confided to his friend Mary Peck that he was
preoccupied with the banking bill—“
Not an hour can I let
it out of my mind.” It was a difficult subject for him:

It is not like the tariff, about which opinion has been forming long years through. There are almost as many judgments as there are men. To form a single plan and a single intention about it seems at times a task so various and so elusive that it is hard to keep one’s heart from failing.

Presenting the legislation, Wilson broke with tradition again. On June 23, formally got up in black frock coat, gray trousers, and a dark cravat,
the President returned to the Capitol
. His wife and two of their daughters were seated in the President’s pew. Speaker of the House Champ Clark (whom Wilson had bested at the Democratic convention) rapped his gavel, and Wilson, accompanied by Secret Service men, entered from a doorway in the rear. All rose, he ascended the rostrum, and Clark announced the President of the United States. Wilson read his speech, nodding on occasional words for emphasis. It took only nine minutes. He stressed—fittingly, on such a sweltering afternoon—that the hardship of working through the “heated season” was no excuse for delay. “We must act now,” he said, snapping his jaws at the word, “at whatever sacrifice to ourselves.”

Wilson depicted banking reform as a companion to still pending tariff reductions—together, the two measures would set business free from the twin shackles of arbitrary duties and inadequate credit. He cited three principles for banking reform. One was the cliché that the currency should be “elastic,” by which he meant flexible in quantity, to meet the ebb and flow of demand. Another echoed Warburg: “Our banking laws must mobilize reserves,” Wilson said. And this, he asserted, would accomplish a third purpose—abolishing the concentration of monetary resources “in [just] a few hands.” Banks,
Wilson concluded ringingly, should be the instruments and not the masters of business.

•   •   •

T
HE
A
MERICAN
B
ANKERS
A
SSOCIATION
, members of whose currency commission were conveniently meeting in New York, at the Waldorf Hotel, now went on a counterattack. The view of midwestern bankers, including James Forgan, president of the First National Bank of Chicago, was emphatically negative.
Bankers had urged reform
for years; now that it looked as though reform could bring about federal control, they were not so happy.

Bankers generally applauded the aspect of individual Reserve Banks, which Willis had designed to be owned by banks and run by bankers—so-called bankers’ banks. However, La Salle Street was uncomfortable with the central board—a public body—and unsettled that
the Glass bill authorized Washington
to determine the key interest rate, known as the discount rate, in each district.

Many bankers also objected to the compulsory shifting of reserves. Country banks would lose the interest they collected from depositing funds in banks in the city; city banks would lose control of the money. Breaking this dependent relationship was, of course, one of the primary purposes of the legislation.
The goal was to establish collective
reserves to replace the archaic pattern of every bank for itself. In practice, many bankers treated their vault reserves as a drug that—however harmful in theory—was impossible to give up. Laughlin observed, with justification, that the banks cared less about reform than about their “selfish private interests.” It is also true that many bankers were frightened by the prospect of being forced to fundamentally alter how they did business.

Two days after Wilson’s appearance on Capitol Hill, Glass, who was still feeling protective toward the industry, led a troop of bankers—including Wade of St. Louis, Reynolds of Chicago, and Sol Wexler from New Orleans, all influential members of the ABA’s
currency commission—to see the President. McAdoo and Owen were present, but it was Glass’s show. The congressman was in the awkward position of providing moral support to the bankers as they lobbied for changes to his own bill. The hard-driving Wade, who had emigrated from Ireland in infancy and worked in construction as a boy before becoming a banker, struck a contrast with the scholarly Wilson, whose office was lined with leather-bound books.
Wade spoke forcefully against
Wilson’s all-political board. “Will one of you gentlemen,” the President shot back, “tell me in which civilized country of the earth there are important government boards of control on which private interests are represented?” A painful silence followed.

The bankers lost that round, but
they won important concessions
. Discount rates would be set by each individual Reserve Bank, subject to Washington’s approval. (Given that banks would have more control at the Reserve Bank level, bankers were eager to shift power away from the center.) Second, the problematic government bonds would be refinanced, removing the threat of losses as banks transitioned to the new system. Third and most remarkably, banks would be permitted, at the discretion of the Reserve Board, to keep a portion of their reserves in banks downstream, as they had done for years. Wilson and Glass were foolish to give in on this point, which threatened the integrity of the system. In return, Glass believed he had won the bankers’ promise of support.

The following day, June 26, Glass and Owen introduced identical bills in their respective chambers. Far from a radical manifesto, Glass-Owen
struck a sensible middle ground
, with power shared between the center and the regions and between the public and private domains.
*
Save for the concessions to Bryan, the proposed Reserve system was essentially faithful to what central bank partisans
such as Warburg had been preaching. Thus, reserve requirements had been cut and the number of Reserve Banks had been trimmed, to “
not less than twelve
” (still too many to Warburg’s liking). Perhaps most remarkably, given the Democratic Party’s hostility to centralism, Wilson’s innocent “capstone” had evolved into something approaching the dominant central organ that Wall Street had been hankering for. As now proposed, the Federal Reserve Board had authority to require one Reserve Bank to lend money to another, supervise each Reserve Bank’s issue of notes, examine their books, and, if it chose, remove their executives. Also dear to Wall Street’s heart, Glass-Owen permitted the Reserve Banks to finance import and export trade.

No onlooker in 1913 could have predicted that one day the Fed’s most well-advertised duty would be setting interest rates. The bill’s primary purpose was to mobilize reserves, the better to avert a crisis, and to modernize the banking system. Its emphasis was on
the mechanics of how the Reserve Banks
would provide liquidity to banks—that is, by purchasing their short-term loans. However, an intriguing clause stated that interest rates should be adjusted “
with a view to accommodating
the commerce of the country and promoting a stable price level.” Buried in that phrase was the suggestion of what became, through a subsequent act of Congress, the Fed’s dual mandate—promoting growth and minimizing inflation.

Glass imagined that since the banks
had (mostly) prevailed and since Bryan, too, had been placated, both his left and his right flank were covered. In fact, neither of them was. Harmony with the banks was shattered first. At the White House, Glass had understood the bankers to promise unwavering support. The bankers, actually, left Washington supportive of the bill in general, but still determined to fight for improvements. After conferring with colleagues, they realized that much of the industry was still opposed. Country banks found the requirement that they subscribe to stock in their local Reserve Bank too onerous. Chicago was terrified of losing deposits and
wanted even more modifications to the reserves clause. Wall Street was exceedingly hostile to federal control.
Warburg, summering
in the Swiss alpine village of Sils-Maria, finally got hold of a copy of the bill and, though satisfied with most of its provisions, was horrified by the concessions to Bryan. He cabled House, “Is there anything I can do in the currency situation? It looks to me as if they were bungling it most terribly.”
*
One by one, the Aldrich crowd was roused into resistance.
Davison begged Aldrich
to meet and plan a counterstrategy. Andrew penned a damning review of the bill,
calling it “Bryanized
.”

The ABA was also critical
, although some of its members were willing to bargain for half a loaf. Reynolds and Wade expected to support the bill, but wanted to see improvements first. Forgan, the closest that Chicago had to a J. P. Morgan, was simply opposed. At sixty-one, Forgan was older than other ABA leaders and, with his wide sideburns and handlebar mustache, considerably more steeped in nineteenth-century traditions.
Forgan distributed to members
of the House Banking Committee a pamphlet asserting that the bill would pose a danger to the country.
The New York Times,
parroting Forgan as well as New York bankers, hyperbolically submitted that the bankers’ objections rendered the bill, in its present form, “
dead and done for
.” As veterans of Gettysburg gathered in Washington to commemorate the fiftieth anniversary of the Civil War battle, the flimsy consensus on banking seemed to be melting in the summer heat.

Glass, who had mightily extended himself
for the bankers, was livid. He regarded the bankers’ renewed demands as a renunciation of their “agreement.” Abruptly, he decided that his banker allies could not be trusted and shifted into what Willis was to describe as a state of “warfare.” Glass withdrew his offer to compromise and reinstated language making it compulsory that banks pull their reserves from
banks in the cities and park them, more securely, in the Federal Reserve banks, with a portion kept in their own vaults. Even if he had acted in pique, it was a sensible move that resurrected the bill’s essential purpose.