America's Bank: The Epic Struggle to Create the Federal Reserve (25 page)

Owing to the Democrats’ large majority,
the debate in the House
was brief. The Republicans tried to distract the chamber by proposing an amendment endorsing the gold standard (which the legislation had left untouched). As expected, some of the Democrats became aroused by the mention of the Republican metal and wanted to substitute “coin” for “gold,” to include a place for silver. Fearing a tempest, Glass called Bryan. The Commoner had no interest in revisiting old crusades and advised that silver was “irrelevant.” On September 18, the gold standard amendment was approved. Hours later, Glass-Owen passed by a thumping vote of 285–85. All but three Democrats voted in favor.

Glass could not have done it without Bryan, and Bryan, surely the least likely man to champion a central bank, had cooperated only due to Wilson’s dogged courtship and careful compromising. Willis
ascribed the credit “almost exclusively to
the unswerving determination of the President
.” Wilson was elated. He wrote to his “own darling,” Ellen, that he was overjoyed to see the bill pass “
by so splendid a majority
.”

Nevertheless, the outlook in
the Senate was problematic
. Local control was less of a concern in the upper chamber, and many senators agreed with the ABA that twelve Reserve Banks were well too many. The Republicans on the Banking Committee favored a more centralized approach and so did two of the Democrats—Gilbert Hitchcock of Nebraska and James O’Gorman of New York. Another Democrat, James Reed of Missouri, was a demagogue and reflexively oppositional. Without those three, the Democrats’ 7–5 majority on the committee would shrink to a 4–8 minority.

In contrast to the brisk proceedings in the House, the Senate committee scheduled extensive hearings, with a witness list that was stacked with fault-finding bankers.
Forgan was the lead witness
; he insisted that Congress ditch Glass-Owen for a single bank. Festus Wade, objecting to the bill’s compulsory features, was even harsher. “To many of us, and I admit I am one, this bill is repulsive,” the banker said. As such views were known, the purpose of the hearings was less to inform than to sow discord and delay.

Owen, who was not an effective chair, sought to cut the proceedings short, but the Democratic holdouts ganged up with the minority and the hearings dragged on. The list of witnesses included a hardware executive from Duluth, a lumber merchant from Minneapolis, a smattering of economists and lawyers, and a parade of bankers. The quarrelsome senators brazenly led their witnesses and tried to elicit negative comments. Despite their efforts, a rich diversity of viewpoints emerged. A telling exchange occurred between Senator Hitchcock and Thomas McRae, a country banker from Prescott, Arkansas, whose tiny institution boasted capital and surplus of a mere $150,000. McRae, like other Arkansas bankers, was accustomed to spreading his reserves among banks in New York, St. Louis, and Little Rock.
Under Glass-Owen, McRae would be forced to shift his reserves to the nearest Federal Reserve Bank. Hitchcock, emphasizing the bill’s coercive character, tried to goad him into denouncing it. McRae did not bite.

H
ITCHCOCK
:
You have the power to control it
. Do you want all that wiped out, to have all your eggs put in one basket and no assurance that your paper will be discounted when you present it?

M
C
R
AE
: Your question assumes that the place where I can now present my paper will have plenty of money to accommodate me. This was not true in 1907.

McRae testified that, given the ever present threat of a panic, prudence required him to operate with an overabundance of cash. The cotton farmers in Prescott did their borrowing from March through the summer; when the loan season peaked, McRae generally put $2 million in the safe, just to have on hand. The money, in other words, sat idle. “The purpose of this bill,” McRae volunteered, lecturing the senator, “is to require public funds of the United States to be kept in circulation.”

But country bankers, with their deeply held suspicions
of centralized banking, did have concerns. They were unhappy at being made to invest their capital in the Federal Reserve when dividends would be capped at 5 percent—less than they typically earned on loans. And they feared that under the new system, the cumbersome process for clearing checks would be overhauled, rationalizing a business on which they earned tidy fees.

Wall Street’s view of the bill
was ambiguous. Bankers were vocal with a few key criticisms but favored the bill’s guiding principle of concentrating reserves. And they
tended to be less oppositional
in private. Warburg was a prime example. Appalled by the populist rhetoric of politicians, he adamantly opposed putting the banks under
political control. In an article published just before he returned from Switzerland, Warburg fulminated that “
in our country, with every
untrained amateur a candidate for any office . . . a political management would prove fatal.” Yet Warburg’s criticisms, relayed from his mountain lair in Europe via Colonel House, were always intended to improve the Glass-Owen legislation—not to forestall it. Reform had been his idea, and he remained an avid supporter.

If Warburg’s view was predictably double-edged, Frank
Vanderlip’s was maddeningly inconsistent
. In midsummer, heading into an uncertain harvest, the head of America’s largest bank had publicly warned Glass that the bill’s weaknesses were such that it would be better not to have a bill at all; in the fall, as money market conditions eased, his mood improved. By late September, Vanderlip was confessing to James Stillman, “The more consideration I give to the currency bill, the more I am inclined to believe that we need not be frightened [of it].”

With bankers’ opinions scattered
and shifting, the industry could do little to break the impasse in the Senate Banking Committee. Inevitably, the responsibility defaulted to the President. Ellen Wilson had remained in Cornish through the Indian summer, and in that era, when long-distance telephoning was a luxury, even the First Family communicated via the mail. Wilson tried to reassure his fretful wife not to worry about the bill or its effect on him—“
Don’t be anxious
about me,” read one typical passage. Ellen, often depressed, disregarded him and inquired about the flood of worrisome news stories. Wilson was more candid with his friend Mary Peck, to whom he wrote in late September, “The struggle goes on down here without intermission. Why it should
be
a struggle is hard (cynicism put on one side) to say.” Frustrated by the committee’s refusal to act, the idealistic Wilson wondered why “public men” should have to be led “to what all the country knows to be their duty.”

Once again, he moved on the tariff first.
The President leaned
full bore on the Senate, which (remarkably) approved more drastic
cuts than the House. On October 3, using two gold pens, Wilson signed the Revenue Act of 1913, sharply reducing tariff rates from the Aldrich tariff of 1909. The measure also instituted an income tax of 1 percent above $4,000 and steeper rates on higher incomes. Secretary of Agriculture David Houston could scarcely believe it. “A progressive income tax!” he noted with astonishment. “I did not much think we should live to see these things.” Vanderlip offered the jaundiced, and accurate, prophecy that the income tax would be “
extremely annoying
. The machinery of collection will make it as unpopular as the tax itself.”

A cornerstone in the progressive agenda, the income tax was a harbinger of the coming era of big government. However, to Americans of the day, few of whom reached the threshold of taxation, the tariff cuts seemed more epochal.
*
For Wilson, who had always regarded the tariff as a burden on ordinary citizens to benefit northern manufacturers, the legislation fulfilled a long-standing dream. Yet the reform, he felt, would not be complete until Congress also reformed the banking system. Even at the White House signing ceremony, the President was mindful of unfinished business. “
So I feel tonight
,” he offered poetically, “like a man who is lodging happily in the inn which lies half way along the journey.”

Intent on cracking the whip over the Banking Committee,
Wilson tabled plans
for an extended vacation with Ellen in New Hampshire and put off a visit to Panama, where the American canal was nearing completion. Nor, he insisted, would he allow Congress to recess before the Senate dealt with Glass-Owen. Congress was still in the “special session” that had started in the spring. The regular session would begin on December 1.
Wilson was adamant
that the Senate give him a proper banking bill before that date, so he could then
shift his focus to antitrust reform. But the opposition would not be quieted.

When the ABA held its annual convention
in Boston, on October 8, some two thousand delegates ratified the criticisms drafted in Chicago and denounced Glass-Owen as “socialistic.” A week later, Senator Nelson
Aldrich emerged from the obscurity
of his retirement and savaged the bill as a triumph of “Bryanism.” Wilson could ignore Aldrich but the President was furious at the ABA. His mounting stack of mail—which he eagerly showed to visitors—was running heavily in support of the legislation. Both the Merchants’ Association of New York and the U.S. Chamber of Commerce endorsed Glass-Owen early in October, suggesting that business was also on board. Wilson believed that the banks were trying to “poison” an otherwise favorable climate. Even though his suspicions had an element of truth, the industry was neither so united nor so calculating. America had
more than 25,000 banks
of various classes—some were opposed, some criticized Glass-Owen in the hope of landing a better deal, and some supported it.

Wilson next threatened
to take the bill to a party caucus, essentially forcing the measure on Democrats in the Senate as he had in the House. However, given the strong opposition from Democratic senators, that step was problematic.
*
It also would guarantee the enmity of every Republican. The President then floated, as a trial balloon, the possibility of squeezing the refusenik senators by campaigning directly in their home states. But he realized he could not afford to alienate the Senate. He protested, a bit too loudly, to the
Washington Post,
“I never said any such thing. It is contrary to both my thought and character.”

With the administration momentarily flummoxed, Treasury Secretary McAdoo invited Owen, the Senate Banking Committee
chairman, aboard a revenue cutter, one of the armed ships then operated by the Treasury Department to enforce customs duties. Over two days,
they anchored on the Potomac
and talked strategy. On October 16, after the secretary had regrouped with his boss, Wilson
unveiled a softer approach
, inviting O’Gorman, Reed, and Hitchcock to separate conclaves at the White House.

Each of the three holdouts
was a first-term senator with distinct reasons for defying the President. Hitchcock was a Nebraska rival to Bryan and the publisher of the influential
Omaha World-Herald
. He was fiercely independent, having abandoned the Republican Party of his father (who had also been a U.S. senator). He was not a man to bow to a president, and as a director of several Nebraska banks, Hitchcock genuinely preferred a central bank to the dozen Reserve Banks in Glass-Owen. O’Gorman’s resistance was a matter of politics. A former New York judge, O’Gorman was an ally of Tammany Hall and eager to deliver the clubhouse its share of federal appointments. Wilson had seemingly slighted his need for patronage and was disdainful toward the machine, which had set O’Gorman against him. Reed, a former mayor of Kansas City, was opposed to Glass-Owen from the other political extreme—that is, he hewed to the Jacksonian tradition of opposition to any form of banking combination. Reed was a skillful speaker and a hard drinker who despised Wilson’s self-righteousness. He styled himself a maverick but was contentious for its own sake, a point suggested by H. L. Mencken’s later tribute: “
The stature of such a man
as Reed is not to be counted by his successes. The important thing is that he fights.”

After the three renegades
left the White House, Reed told reporters that for Glass-Owen to win the committee’s support it would have to undergo drastic alteration. However, the tone of the resistance softened. Over the next several days, Reed and O’Gorman each delivered
more encouraging remarks
(Hitchcock was immovable). Wilson offered an olive branch by suggesting that
he might be willing to
compromise
with proponents of a central bank by modestly reducing the number of Reserve Banks.

This more hopeful climate was shattered in less than an hour. On October 23, Vanderlip, the impulsive steward of National City Bank, appeared before the committee and dropped the equivalent of a bomb by proposing a radically different plan.

The genesis of Vanderlip’s proposal
was an appearance at the committee earlier in October. It is notable that, in his first testimony, although he found fault with various technical features of the bill, such as the vagueness of its definition of the powers of the Federal Reserve Board, he was supportive overall. He testified that the legislation would rechannel into ordinary commerce millions of dollars that were currently tied up in the stock market; moreover, he stated that the new Reserve Banks, with their ability to manipulate interest rates, would give the United States newfound power to discourage the flight of gold.
Privately, he expressed himself
more forcefully and more candidly: the prospect of lower reserve requirements, he wrote unblushingly to Stillman, would liberate National City from having to tie up so much of its capital, and thus permit it to aggressively expand. While Vanderlip’s public testimony was more circumspect, it jarred some of the members into rethinking the legislation. In an illuminating exchange, Joseph Bristow, a Kansas progressive, asked whether he would advise amending Glass-Owen so that farm mortgages could be discounted for reserve notes. Positively not, Vanderlip replied, elaborating that it was a mistake to think of banks as (merely) creditors. “Banks,” he averred, “
are the great debtors of the country
.” To be sure of satisfying their depositors, their assets had to be in liquid form. This is why the bill stipulated ninety-day commercial loans as eligible for discount. Mortgages, being the
least
liquid paper, could not be readily converted into cash. Vanderlip’s insight was validated nearly a century later: modern investment bankers created an entire industry out of converting mortgages into tradable and
supposedly liquid securities, but during the 2008 meltdown, these wizards discovered that mortgages were not so liquid as they had imagined. Committee members in 1913 could not have known that, but Vanderlip’s superior understanding left them dazzled.