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Origins of the Federal Reserve Banking System- Part 3

Interest-Rates / Central Banks Nov 14, 2009 - 03:32 AM GMT

By: Murray_N_Rothbard


Jacob Schiff Ignites the Drive for a Central Bank

The defeat of the Fowler Bill for broader asset currency and branch banking in 1902, coupled with the failure of Secretary of Treasury Shaw's attempts of 1903–1905 to use the Treasury as a central bank, led the big bankers and their economist allies to adopt a new solution: the frank imposition of a central bank in the United States.

"In short, there was far too much freedom and decentralization in the system."

The campaign for a central bank was kicked off by a fateful speech in January 1906 by the powerful Jacob H. Schiff, head of the Wall Street investment bank of Kuhn, Loeb and Co., before the New York Chamber of Commerce. Schiff complained that, in the autumn of 1905, when "the country needed money," the Treasury, instead of working to expand the money supply, reduced government deposits in the national banks, thereby precipitating a financial crisis, a "disgrace" in which the New York clearinghouse banks had been forced to contract their loans drastically, sending interest rates sky-high. An "elastic currency" for the nation was therefore imperative, and Schiff urged the New York Chamber's committee on finance to draw up a comprehensive plan for a modern banking system to provide for an elastic currency (Bankers Magazine 1906, pp. 114–15).

A colleague who had already been agitating behind the scenes for a central bank was Schiff's partner, Paul Moritz Warburg, who had suggested the plan to Schiff as early as 1903. Warburg had emigrated from the German investment firm of M. M. Warburg and Company in 1897, and before long his major function at Kuhn, Loeb was to agitate to bring the blessings of European central banking to the United States.[20]

It took less than a month for the finance committee of the New York Chamber to issue its report, but the bank reformers were furious, denouncing it as remarkably ignorant. When Frank A. Vanderlip, of Rockefeller's flagship bank, the National City Bank of New York, reported on this development, his boss, James Stillman, suggested that a new five-man special commission be set up by the New York Chamber to come back with a plan for currency reform.

In response, Vanderlip proposed that the five-man commission consist of himself; Schiff; J. P. Morgan; George Baker of the First National Bank of New York, Morgan's closest and longest associate; and former Secretary of the Treasury Lyman Gage, now president of the Rockefeller-controlled US Trust Company. Thus, the commission would consist of two Rockefeller men (Vanderlip and Gage), two Morgan men (Morgan and Baker), and one representative from Kuhn, Loeb.

Only Vanderlip was available to serve, however, so the commission had to be redrawn. In addition to Vanderlip, beginning in March 1906, there sat, instead of Schiff, his close friend Isidore Straus, a director of R. H. Macy and Company. Instead of Morgan and Baker there now served two Morgan men: Dumont Clarke, president of the American Exchange National Bank and a personal adviser to J. P. Morgan and Charles A. Conant, treasurer of Morton and Company. The fifth man was a veteran of the Indianapolis Monetary Convention, John Claflin, of H. B. Claflin and Company, a large integrated wholesaling concern. Coming on board as secretary of the new currency committee was Vanderlip's old friend Joseph French Johnson, now of New York University, who had been calling for a central bank since 1900.

"The reformers wanted a credit inflation controlled by and confined to the large national banks; they most emphatically did not want uncontrolled state-bank inflation that would siphon resources to small entrepreneurs and "speculative" marginal producers."

The commission used the old Indianapolis questionnaire technique: acquiring legitimacy by sending out a detailed questionnaire on currency to a number of financial leaders. With Johnson in charge of mailing and collating the questionnaire replies, Conant spent his time visiting and interviewing the heads of the central banks in Europe.

The special commission delivered its report to the New York Chamber in October, 1906. To eliminate instability and the danger of an inelastic currency, the commission called for the creation of a "central bank of issue under the control of the government." In keeping with other bank reformers, such as Professor Abram Piatt Andrew of Harvard University, Thomas Nixon Carver of Harvard, and Albert Strauss, partner of J. P. Morgan and Company, the commission was scornful of Secretary Shaw's attempt to use the Treasury as a central bank. Shaw was particularly obnoxious because he was still insisting, in his last annual report of 1906, that the Treasury, under his aegis, had constituted a "great central bank."

The commission, along with the other reformers, denounced the Treasury for overinflating by keeping interest rates excessively low; a central bank, in contrast, would have much larger capital and undisputed control over the money market, and thus would be able to manipulate the discount rate effectively to keep the economy under proper control. The important point, declared the committee, is that there be "centralization of financial responsibility." In the meantime, short of establishing a central bank, the committee urged that, at the least, the national bank's powers to issue notes be expanded to include being based on general assets as well as government bonds (Livingston 1986, pp. 159–64).

After drafting and publishing this "Currency Report," the reformers used the report as the lever for expanding the agitation for a central bank and broader note-issue powers to other corporate and financial institutions. The next step was the powerful American Bankers Association (ABA). In 1905, the executive council of the ABA had appointed a currency committee which, the following year, recommended an emergency-assets currency that would be issued by a federal commission, resembling an embryonic central bank.

In a tumultuous plenary session of the ABA convention in October, 1906, the ABA rejected this plan, but agreed to appoint a 15-man currency commission that was instructed to meet with the New York Chamber currency committee and attempt to agree on appropriate legislation.

Particularly prominent on the ABA currency commission were,

Arthur Reynolds, president of the Des Moines National Bank, close to the Morgan-oriented Des Moines Regency, and brother of the prominent Chicago banker, George M. Reynolds, formerly of Des Moines and then president of the Morgan-oriented Continental National Bank of Chicago and the powerful chairman of the executive council of the ABA.

James B. Forgan, president of the Rockefeller-run First National Bank of Chicago, and close friend of Jacob Schiff of Kuhn, Loeb, as well as of Vanderlip.

Joseph T. Talbert, vice president of the Rockefeller-dominated Commercial National Bank of Chicago, and soon to become vice president of Rockefeller's flagship bank, the National City Bank of New York.

Myron T. Herrick, one of the most prominent Rockefeller politicians and businessmen in the country. Herrick was the head of the Cleveland Society of Savings, and was one of the small team of close Rockefeller business allies who, along with Mark Hanna, bailed out Governor William McKinley from bankruptcy in 1893. Herrick was a previous president of the ABA, had just finished a two-year stint as Governor of Ohio, and was later to become Ambassador to France under his old friend and political ally William Howard Taft as well as later under President Warren G. Harding, also a recipient of Herrick's political support and financial largesse.

Chairman of the ABA commission was A. Barton Hepburn, president of one of the leading Morgan commercial banks, the Chase National Bank of New York, and author of the well-regarded History of Coinage and Currency in the United States.

After meeting with Vanderlip and Conant as the representatives from the New York Chamber committee, the ABA commission, along with Vanderlip and Conant, agreed on at least the transition demands of the reformers. The ABA commission presented proposals to the public, the press, and the Congress in December 1906, for a broader-asset currency as well as provisions for emergency issue of banknotes by national banks.

But just as sentiment for a broader-assets currency became prominent, the bank reformers began to worry about an uncontrolled adoption of such a currency. For that would mean that national-bank credit and notes would expand, and that, in the existing system, small state banks would be able to pyramid and inflate credit on top of the national credit, using the expanded national bank notes as their reserves.

The reformers wanted a credit inflation controlled by and confined to the large national banks; they most emphatically did not want uncontrolled state-bank inflation that would siphon resources to small entrepreneurs and "speculative" marginal producers. The problem was aggravated by the accelerated rate of increase in the number of small southern and western state banks after 1900.

Another grave problem for the reformers was that commercial paper was a different system from that of Europe. In Europe, commercial paper, and hence bank assets, were two-name notes endorsed by a small group of wealthy acceptance banks. In contrast to this acceptance paper system, commercial paper in the United States was unendorsed single-name paper, with the bank taking a chance on the creditworthiness of the business borrower. Hence, a decentralized financial system in the United States was not subject to big-banker control.

Worries about the existing system and hence about uncontrolled asset currency were voiced by the top bank reformers. Thus, Vanderlip expressed concern that "there are so many state banks that might count these [national-bank] notes in their reserves." Schiff warned that "it will prove unwise, if not dangerous, to clothe six thousand banks or more with the privilege to issue independently a purely credit currency." And, from the Morgan side, a similar concern was voiced by Victor Morawetz, the powerful chairman of the board of the Atchison, Topeka and Santa Fe Railroad (Livingston 1986, pp. 168–69).

Taking the lead in approaching this problem of small banks and decentralization was Paul Moritz Warburg, of Kuhn, Loeb, fresh from his banking experience in Europe. In January 1907, Warburg began years of tireless agitation for central banking with two articles, "Defects and Needs of our Banking System," and "A Plan for a Modified Central Bank."[21]

Calling openly for a central bank, Warburg pointed out that one of the important functions of such a bank would be to restrict the eligibility of bank assets to be used for expansion of bank deposits. Presumably, too, the central bank could move to require banks to use acceptance paper or otherwise try to create an acceptance market in the United States.[22]

By the summer of 1907, the Bankers Magazine was reporting a decline in influential banker support for broadening asset currency and a strong move toward the "central bank project." Bankers Magazine (1907, pp. 314–15) noted as a crucial reason the fact that asset currency would be expanding bank services to "small producers and dealers."

It was surely no accident that Warburg himself was the principal beneficiary of this policy. Warburg became Chairman of the Board, from its founding in 1920, of the International Acceptance Bank, the world's largest acceptance bank, as well as director of the Westinghouse Acceptance Bank and of several other acceptance houses. In 1919, Warburg was the chief founder and chairman of the executive committee of the American Acceptance Council, the trade association of acceptance houses. (See Rothbard 1983, pp. 119–23).

The Panic of 1907 and Mobilization for a Central Bank

A severe financial crisis, the Panic of 1907, struck in early October. Not only was there a general recession and contraction, but the major banks in New York and Chicago were, as in most other depressions in American history, allowed by the government to suspend specie payments; that is, to continue in operation while being relieved of their contractual obligation to redeem their notes and deposits in cash or in gold.

While the Treasury had stimulated inflation during 1905–1907, there was nothing it could do to prevent suspensions of payment, or to alleviate "the competitive hoarding of currency" after the panic; that is, the attempt to demand cash in return for increasingly shaky bank notes and deposits.

Very quickly after the panic, banker and business opinion consolidated on behalf of a central bank, an institution that could regulate the economy and serve as a lender of last resort to bail banks out of trouble. The reformers now faced a two-fold task: hammering out details of a new central bank, and more importantly, mobilizing public opinion on its behalf.

"Very quickly after the panic, banker and business opinion consolidated on behalf of a central bank. The task was made easier by the growing alliance and symbiosis between academia and the power elite."

The first step in such mobilization was to win the support of the nation's academics and experts. The task was made easier by the growing alliance and symbiosis between academia and the power elite. Two organizations that proved particularly useful for this mobilization were the American Academy of Political and Social Science (AAPSS) of Philadelphia, and the Academy of Political Science (APS) of Columbia University, both of which included in their ranks leading corporate-liberal businessmen, financiers, attorneys, and academics.

Nicholas Murray Butler, the highly influential president of Columbia University, explained that the Academy of Political Science "is an intermediary between … the scholars and the men of affairs, those who may perhaps be said to be amateurs in scholarship." Here, he pointed out, is where they "come together" (Livingston 1986, p. 175, n. 30).

It is not surprising, then, that the American Academy of Political and Social Science, the American Association for the Advancement of Science (AAAS), and Columbia University held three symposia during the winter of 1907–1908, each calling for a central bank, and thereby disseminating the message of a central bank to a carefully selected elite public. Not surprisingly, too, E. R. A. Seligman was the organizer of the Columbia conference, gratified that his university was providing a platform for leading bankers and financial journalists to advocate a central bank, especially, he added, because "it is proverbially difficult in a democracy to secure a hearing for the conclusions of experts." Then in 1908 Seligman collected the addresses into a volume, The Currency Problem.

Professor Seligman set the tone for the gathering in his opening address. The Panic of 1907, he alleged, was moderate because its effects had been tempered by the growth of industrial trusts, which provided a more controlled and "more correct adjustment of present investment to future needs" than would a "horde of small competitors." In that way, Seligman displayed no comprehension of how competitive markets facilitate adjustments.

One big problem, however, still remained for Seligman. The horde of small competitors, for whom Seligman had so much contempt, still prevailed in the field of currency and banking. The problem was that the banking system was still decentralized. As Seligman declared, "Even more important than the inelasticity of our note issue is its decentralization. The struggle which has been victoriously fought out everywhere else [in creating trusts] must be undertaken here in earnest and with vigor" (Livingston 1986, p. 177).

The next address was that of Frank Vanderlip. To Vanderlip, in contrast to Seligman, the Panic of 1907 was "one of the great calamities of history" — the result of a decentralized, competitive American banking system, with 15,000 banks all competing vigorously for control of cash reserves. The terrible thing is that "each institution stands alone, concerned first with its own safety, and using every endeavor to pile up reserves without regard" to the effect of such actions on other banking institutions.

This backward system must be changed, to follow the lead of other great nations, where a central bank is able to mobilize and centralize reserves, and create an elastic currency system. Putting the situation in virtually Marxian terms, Vanderlip declared that the alien, external power of the free and competitive market must be replaced by central control following modern, allegedly scientific principles of banking.

Thomas Wheelock, editor of the Wall Street Journal, then rung the changes on the common theme by applying it to the volatile call-loan market in New York. The market is volatile, Wheelock claimed, because the small country banks are able to lend on that market, and their deposits in New York banks then rise and fall in uncontrolled fashion. Therefore, there must be central, corporate control over country-bank money in the call-loan market.

A. Barton Hepburn, head of Morgan's Chase National Bank, came next, and spoke of the great importance of having a central bank that would issue a monopoly of bank notes. It was particularly important that the central bank be able to discount the assets of national banks, and thus supply an elastic currency.

The last speaker was Paul Warburg, who lectured his audience on the superiority of European over American banking, particularly in (1) having a central bank, as against decentralized American banking; and (2) — his old hobby horse — enjoying "modern" acceptance paper instead of single-name promissory notes. Warburg emphasized that these two institutions must function together. In particular, tight government central-bank control must replace competition and decentralization: "Small banks constitute a danger."

The other two symposia were very similar. At the AAPSS symposium in Philadelphia, in December 1907, several leading investment bankers and Comptroller of the Currency William B. Ridgely came out in favor of a central bank. It was no accident that members of the AAPSS's advisory committee on currency included A. Barton Hepburn; Morgan attorney and statesman Elihu Root; Morgan's long-time personal attorney Francis Lynde Stetson; and J. P. Morgan himself.

Meanwhile, the AAAS symposium in January 1908 was organized by none other than Charles A. Conant, who happened to be chairman of the AAAS's social and economic section for the year. Speakers included Columbia economist J. B. Clark, Frank Vanderlip, Conant, and Vanderlip's friend George E. Roberts, head of the Rockefeller-oriented Commercial National Bank of Chicago, who would later wind up at the National City Bank.

All in all, the task of the bank reformers was well summed up by J. R. Duffield, secretary of the Bankers Publishing Company, in January 1908: "It is recognized generally that before legislation can be had there must be an educational campaign carried on, first among the bankers, and later among commercial organizations, and finally among the people as a whole." That strategy was well under way.

During the same month, the legislative lead in banking reform was taken by the formidable Senator Nelson W. Aldrich, (Republican, Rhode Island), head of the Senate Finance Committee, and, as the father-in-law of John D. Rockefeller, Jr., Rockefeller's man in the US Senate. He introduced the Aldrich Bill, which focused on a relatively minor interbank dispute about whether and on what basis the national banks could issue special emergency currency. A compromise was finally hammered out and passed, as the Aldrich-Vreeland Act, in 1908.[23]

But the important part of the Aldrich-Vreeland Act, which got very little public attention, but was perceptively hailed by the bank reformers, was the establishment of a National Monetary Commission that would investigate the currency question and suggest proposals for comprehensive banking reform. Two enthusiastic comments on the Monetary Commission were particularly perceptive and prophetic.

One was that of Sereno S. Pratt of the Wall Street Journal. Pratt virtually conceded that the purpose of the commission was to swamp the public with supposed expertise and thereby "educate" them into supporting banking reform:

Reform can only be brought about by educating the people up to it, and such education must necessarily take much time. In no other way can such education be effected more thoroughly and rapidly than by means of a commission … [that] would make an international study of the subject and present an exhaustive report, which could be made the basis for an intelligent agitation.

The results of the "study" were of course predetermined, as would be the membership of the allegedly impartial study commission.

Another function of the commission, as stated by Festus J. Wade, St. Louis banker and member of the currency commission of the American Bankers Association, was to "keep the financial issue out of politics" and put it squarely in the safe custody of carefully selected "experts" (Livingston 1986, pp. 182–83). Thus the National Monetary Commission was the apotheosis of the clever commission concept, launched in Indianapolis a decade earlier.

Aldrich lost no time setting up the National Monetary Commission (NMC), which was launched in June 1908. The official members were an equal number of Senators and Representatives, but these were mere window dressing. The real work would be done by the copious staff, appointed and directed by Aldrich, who told his counterpart in the House, Cleveland Republican Theodore Burton, "My idea is, of course, that everything shall be done in the most quiet manner possible, and without any public announcement." From the beginning, Aldrich determined that the NMC would be run as an alliance of Rockefeller, Morgan, and Kuhn, Loeb people. The two top expert posts advising or joining the commission were both suggested by Morgan leaders.

On the advice of J. P. Morgan, seconded by Jacob Schiff, Aldrich picked as his top adviser the formidable Henry P. Davison, Morgan partner, founder of Morgan's Bankers' Trust Company, and vice president of George F. Baker's First National Bank of New York. It would be Davison who, on the outbreak of World War I, would rush to England to cement J. P. Morgan and Company's close ties with the Bank of England, and to receive an appointment as monopoly underwriter for all British and French government bonds to be floated in the United States for the duration of the war.

For technical economic expertise, Aldrich accepted the recommendation of President Roosevelt's close friend and fellow Morgan man, Charles Eliot, president of Harvard University, who urged the appointment of Harvard economist A. Piatt Andrew. And an ex officio commission member chosen by Aldrich himself was George M. Reynolds, president of the Rockefeller-oriented Continental National Bank of Chicago.

The NMC spent the fall touring Europe and conferring on information and strategy with heads of large European banks and central banks. As director of research, A. Piatt Andrew began to organize American banking experts and to commission reports and studies. The National City Bank's foreign exchange department was commissioned to write papers on bankers' acceptances and foreign debt, while Warburg and Bankers' Trust official Fred Kent wrote on the European discount market.

Having gathered information and advice in Europe in the fall of 1908, the NMC was ready to go into high gear by the end of the year. In December, the commission hired the inevitable Charles A. Conant for research, public relations, and agitprop. Behind the facade of the Congressmen and Senators on the commission, Senator Aldrich began to form and expand his inner circle, which soon included Warburg and Vanderlip.

Warburg formed around him a subcircle of friends and acquaintances from the currency committee of the New York Merchants' Association, headed by Irving T. Bush, and from the top ranks of the American Economic Association, to whom he had delivered an address advocating central banking in December 1908.

Warburg met and corresponded frequently with leading academic economists advocating banking reform, including E. R. A. Seligman; Thomas Nixon Carver of Harvard; Henry R. Seager of Columbia; Davis R. Dewey, historian of banking at MIT, long-time secretary-treasurer of the AEA and brother of the progressive philosopher John Dewey; Oliver M. W. Sprague, professor of banking at Harvard, of the Morgan-connected Sprague family; Frank W. Taussig of Harvard; and Irving Fisher of Yale.

During 1909, however, the reformers faced an important problem: they had to bring such leading bankers as James B. Forgan, head of the Rockefeller-oriented First National Bank of Chicago, solidly into line in support of a central bank. It was not that Forgan objected to centralized reserves or a lender of last resort — quite the contrary. It was rather that Forgan recognized that, under the National Banking System, large banks such as his own were already performing quasi-central-banking functions with their own country-bank depositors; and he didn't want his bank deprived of such functions by a new central bank.

The bank reformers therefore went out of their way to bring such men as Forgan into enthusiastic support for the new scheme. In his presidential address to the powerful American Bankers Association in mid-September, 1909, George M. Reynolds not only came out flatly in favor of a central bank in America, to be modeled after the German Reichsbank; he also assured Forgan and others that such a central bank would act as depository of reserves only for the large national banks in the central reserve cities, while the national banks would continue to hold deposits for the country banks.

Mollified, Forgan held a private conference with Aldrich's inner circle and came fully on board for the central bank. As an outgrowth of Forgan's concerns, the reformers decided to cloak their new central bank in a spurious veil of "regionalism" and "decentralism" through establishing regional reserve centers, which would provide the appearance of virtually independent regional central banks to cover the reality of an orthodox, European, central-bank monolith.

As a result, noted railroad attorney Victor Morawetz made his famous speech in November 1909, calling for regional banking districts under the ultimate direction of one central control board. Thus, reserves and note issue would be supposedly decentralized in the hands of the regional reserve banks, while they would really be centralized and coordinated by the central control board. This, of course, was the scheme eventually adopted in the Federal Reserve System.[24]

On September 14, at the same time as Reynolds's address to the nation's bankers, another significant address took place. President William Howard Taft, speaking in Boston, suggested that the country seriously consider establishing a central bank. Taft had been close to the reformers — especially his Rockefeller-oriented friends Aldrich and Burton — since 1900. But the business press understood the great significance of this public address: that it was, as the Wall Street Journal put it, a crucial step, "towards removing the subject from the realm of theory to that of practical politics" (quoted in Livingston 1986, p. 191).

One week later, a fateful event in American history occurred. The banking reformers moved to escalate their agitation by creating a virtual government-bank-press complex to drive through a central bank. On September 22, 1909, the Wall Street Journal took the lead in this development by beginning a notable, front-page, 14-part series on "A Central Bank of Issue." These were unsigned editorials by the Journal, but they were actually written by the ubiquitous Charles A. Conant, from his vantage point as salaried chief propagandist of the US government's National Monetary Commission.

The series was a summary of the reformers' position, also going out of the way to assure the Forgans of this world that the new central bank "would probably deal directly only with the larger national banks, leaving it for the latter to rediscount for their more remote correspondents" (ibid.).

To the standard arguments for the central bank: "elasticity" of the money supply, protecting bank reserves by manipulating the discount rate and the international flow of gold, and combating crises by bailing out individual banks, Conant added a Conant twist: the importance of regulating interest rates and the flow of capital in a world marked by surplus capital. Government debt would, for Conant, provide the important function of sopping up surplus capital; that is, providing profitable outlets for savings by financing government expenditures.

"Government debt would provide the important function of sopping up surplus capital; that is, providing profitable outlets for savings by financing government expenditures."

The Wall Street Journal series inaugurated a shrewd and successful campaign by Conant to manipulate the nation's press and get it behind the idea of a central bank. Building on his experience in 1898, Conant, along with Aldrich's secretary, Arthur B. Shelton, prepared abstracts of commission materials for the newspapers during February and March of 1910. Soon Shelton recruited J. P. Gavitt, head of the Washington bureau of the Associated Press, to scan commission abstracts, articles, and forthcoming books for "newsy paragraphs" to catch the eye of newspaper editors.

The academic organizations proved particularly helpful to the NMC, lending their cloak of disinterested expertise to the endeavor. In February, Robert E. Ely, the secretary of the APS, proposed to Aldrich that a special volume of its Proceedings be devoted to banking and currency reform, to be published in cooperation with the NMC, in order to "popularize in the best sense, some of the valuable work of [the] Commission" (quoted in Livingston 1986, p. 194).

And yet, Ely had the gall to add that, even though the APS would advertise the NMC's arguments and conclusions, it would retain its "objectivity" by avoiding its own specific policy recommendations. As Ely put it, "We shall not advocate a central bank, but we shall only give the best results of your work in condensed form and untechnical language."

The AAPSS, too, weighed in with its own special volume, Banking Problems (1910), featuring an introduction by A. Piatt Andrew of Harvard and the NMC, and articles by veteran bank reformers such as Joseph French Johnson, Horace White, and Morgan Bankers' Trust official Fred I. Kent. But most of the articles were from leaders of Rockefeller's National City Bank of New York, including George E. Roberts, former Chicago banker and US Mint official about to join National City.

Meanwhile, Paul M. Warburg capped his lengthy campaign for a central bank in a famous speech to the New York YMCA on March 23, on "A United Reserve Bank for the United States." Warburg basically outlined the structure of his beloved German Reichsbank, but he was careful to begin his talk by noting a recent poll in the Banking Law Journal that 60 percent of the nation's bankers favored a central bank provided it was "not controlled by 'Wall Street' or any monopolistic interest."

To calm this fear, Warburg insisted that, semantically, the new Reserve Bank not be called a central bank, and that the Reserve Bank's governing board be chosen by government officials, merchants, and bankers — with bankers, of course, dominating the choices. He also provided a distinctive Warburg-twist by insisting that the Reserve Bank replace the hated single-name paper system of commercial credit dominant in the United States, by the European system whereby a reserve bank provided a guaranteed and subsidized market for two-named commercial paper endorsed by acceptance banks. In this way, the United Reserve Bank would correct the "complete lack of modern bills of exchange [i.e., acceptances]" in the United States.

Warburg added that the entire idea of a free and self-regulating market was obsolete, particularly in the money market. Instead, the action of the market must be replaced by "the best judgment of the best experts." And guess who was slated to be one of the best of those best experts?

"Warburg added that the entire idea of a free and self-regulating market was obsolete, particularly in the money market. Instead, the action of the market must be replaced by "the best judgment of the best experts." And guess who was slated to be one of the best of those best experts?"

The greatest cheerleader for the Warburg plan, and the man who introduced Warburg's volume on banking reform (1911) was his kinsman and member of the Seligman investment-banking family, Columbia economist E. R. A. Seligman (Rothbard 1984, pp. 98–99; Livingston 1986, pp. 194–98).

So delighted was the Merchants' Association of New York with Warburg's speech that it distributed 30,000 copies during the spring of 1910. Warburg had paved the way for this support by regularly meeting with the currency committee of the Merchants Association since October 1908, and his efforts were aided by the fact that the resident expert for the merchants committee was none other than Joseph French Johnson.

At the same time, in the spring of 1910, the numerous research volumes published by the NMC poured onto the market. The object was to swamp public opinion with a parade of impressive analytic and historical scholarship, all allegedly "scientific" and "value-free," but all designed to aid in furthering the common agenda of a central bank.

Typical was E. W. Kemmerer's mammoth statistical study of seasonal variations in the demand for money. Emphasis was placed on the problem of the "inelasticity" of the supply of cash, in particular the difficulty of expanding that supply when needed. While Kemmerer felt precluded from spelling out the policy implications — establishing a central bank — in the book, his acknowledgments in the preface to Fred Kent and the inevitable Charles Conant were a tip-off to the cognoscenti, and Kemmerer himself disclosed them in his address to the Academy of Political Science the following November.

Now that the theoretical and scholarly groundwork had been laid, by the latter half of 1910 it was time to formulate a concrete practical plan and put on a mighty putsch on its behalf. In the book on Reform of the Currency, published by the APS, Warburg made the point with crystal clarity: "Advance is possible only by outlining a tangible plan" that would set the terms of the debate from then on (p. 203).

The tangible-plan phase of the central-bank movement was launched by the ever-pliant APS, which held a monetary conference in November 1910, in conjunction with the New York Chamber of Commerce and the Merchants' Association of New York. The members of the NMC were the guests of honor at this conclave, and delegates were chosen by governors of 22 states, as well as presidents of 24 chambers of commerce.

Also attending were a large number of economists, monetary analysts, and representatives of most of the top banks in the country. Attendants at the conference included Frank Vanderlip, Elihu Root, Thomas W. Lamont of the Morgans, Jacob Schiff, and J. P. Morgan.

The formal sessions of the conference were organized around papers by Kemmerer, Laughlin, Johnson, Bush, Warburg, and Conant, and the general atmosphere was that bankers and businessmen were to take their general guidance from the attendant scholars. As James B. Forgan, the Chicago banker who was now solidly in the central-banking camp, put it, "Let the theorists, those who … can study from past history and from present conditions the effect of what we are doing, lay down principles for us, and let us help them with the details."

C. Stuart Patterson pointed to the great lessons of the Indianapolis Monetary Commission, and the way in which its proposals triumphed in action because "we went home and organized an aggressive and active movement." Patterson then laid down the marching orders of what this would mean concretely for the assembled troops: "That is just what you must do in this case, you must uphold the hands of Senator Aldrich. You have got to see that the bill which he formulates … obtains the support of every part of this country" (Livingston 1986, pp. 205–07).

With the New York monetary conference over, it was now time for Aldrich, surrounded by a few of the topmost leaders of the financial elite, to go off in seclusion and hammer out a detailed plan around which all parts of the central-bank movement could rally. Someone in the Aldrich inner circle, probably Morgan partner Henry P. Davison, got the idea of convening a small group of top leaders in a super-secret conclave to draft the central-bank bill. On November 22, 1910, Senator Aldrich, with a handful of companions, set forth in a privately chartered railroad car from Hoboken, New Jersey to the coast of Georgia, where they sailed to an exclusive retreat, the Jekyll Island Club.

Facilities for their meeting were arranged by club member and coowner J. P. Morgan. The cover story released to the press was that this was a simple duck-hunting expedition, and the conferees took elaborate precautions on the trips there and back to preserve their secrecy. Thus, the attendees addressed each other only by first name, and the railroad car was kept dark and closed off from reporters or other travelers on the train. One reporter apparently caught on to the purpose of the meeting, but was in some way persuaded by Henry P. Davison to maintain silence.

The conferees worked for a solid week at Jekyll Island to hammer out the draft of the Federal Reserve bill. In addition to Aldrich, the conferees included Henry P. Davison, Morgan partner; Paul Warburg, whose address in the spring had greatly impressed Aldrich; Frank A. Vanderlip, vice president of the National City Bank of New York; and finally, A. Piatt Andrew, head of the NMC staff, who had recently been made assistant secretary of the treasury by President Taft.

After a week of meetings, the six men had forged a plan for a central bank, which eventually became the Aldrich Bill. Vanderlip acted as secretary of the meeting and contributed the final writing.

The only substantial disagreement was tactical, with Aldrich attempting to hold out for a straightforward central bank on the European model, while Warburg and the other bankers insisted that the reality of central control be cloaked in the politically palatable camouflage of "decentralization." It is amusing that the bankers were the more politically astute, while the politician Aldrich wanted to waive political considerations. Warburg and the bankers won out, and the final draft was basically the Warburg plan with a decentralized patina taken from Morawetz.

The financial power elite now had themselves a bill. The significance of the composition of the small meeting must be stressed: two Rockefeller men (Aldrich, Vanderlip), two Morgans (Davison and Norton), one Kuhn, Loeb person (Warburg), and one economist friendly to both camps (Andrew) (Rothbard 1984, pp. 99–101; Vanderlip 1935, pp. 210–19).

After working on some revisions of the Jekyll Island draft with Forgan and George Reynolds, Aldrich presented the Jekyll Island draft as the Aldrich Plan to the full NMC in January 1911. But here an unusual event occurred. Instead of quickly presenting this Aldrich Bill to the Congress, its drafters waited for a full year, until January 1912. Why the unprecedented year's delay?

The problem was that the Democrats swept the Congressional elections in 1910, and Aldrich, disheartened, decided not to run for reelection to the Senate the following year. The Democratic triumph meant that the reformers had to devote a year of intensive agitation to convert the Democrats, and to intensify propaganda to the rest of banking, business, and the public. In short, the reformers needed to regroup and accelerate their agitation.

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 financial elites of this country, 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."

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 past five years, introduced a joint resolution to the monetary conference supporting the Aldrich Plan, and proposing the establishment of a new "business men'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.

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 at 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 US 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.[25]

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 proreform experts as John Perrin, head of the American National Bank of Indianapolis, and George E. Roberts of the National City Bank of New York.

A consultant on the newspaper campaign was H. H. Kohlsaat, former executive committee member of the Indianapolis Monetary Convention. Laughlin 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, 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. (Kolko 1983, p. 186)

By November 1911, it was easy pickings to have the full American Bankers Association endorse the Aldrich Plan. The 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' 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 the 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" (Kolko 1983, p. 235). In fact, there was very little substantive difference between the Aldrich and Glass bills: the goal of the bank reformers had been triumphantly achieved.[26]

"To achieve the Leviathan State, interests seeking special privilege and intellectuals offering scholarship and ideology must work hand in hand."


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 highlighted the vital supporting role of the growing number of technocratic experts and academics, who were happy to lend the patina of their allegedly scientific expertise to the elite's 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 professoriate. To achieve the Leviathan State, interests seeking special privilege and intellectuals offering scholarship and ideology must work hand in hand.

Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an economist, economic historian, and libertarian political philosopher. See Murray N. Rothbard's article archives. Comment on the blog.

This article originally appeared in Quarterly Journal of Austrian Economics, Vol. 2, No. 3 (Fall 1999), pp. 3–51. It is also reprinted in A History of Money and Banking in the United States and as a monograph.

References Cited

Attali, Jacques. 1986. A Man of Influence: Sir Siegmund Warburg, 1902–82. London, Weidenfeld and Nicholson.

Bankers Magazine. 1906. Vol. 72 (January) & 1907. Vol. 75 (September).

Birmingham, Stephen. 1977. Our Crowd: The Jewish Families of New York. New York: Pocket Books.

Burch, Philip H. Jr. 1981. Elites in American History. Vol. 2: The Civil War to the New Deal. New York: Holmes and Meier.

Conant, Charles A. 1905. The Principles of Money and Banking. New York: Harper and Brothers.

Chapman, J. S. 1901. Review of "Charles Conant's The United States in the Orient." Economic Journal 2.

Dorfman, Joseph. 1949. The Economic Mind in American Civilization. Vol. 3. New York: Viking Press.

Etherington, Norma. 1982. "Reconsidering Theories of Imperialism." History and Theory 21, no. 1. 1984.

——. Theories of Imperialism: War, Conquest, and Capital. Totowa, N.J.: Barnes and Noble.

Healy, David. 1970. US Expansionism: The Imperialist Urge in the 1890s. Madison: University of Wisconsin Press.

Friedman, Milton, and Anna Jacobson Schwartz. 1963. A Monetary History of the United States, 1867–1960. Princeton, N.J.: National Bureau of Economic Research.

Jenks, Jeremiah W., E. R. A. Seligman, Albert Shaw, Edward R. Strobel, and Charles S. Hamlin. 1900. Essays in Colonial Finance. Publications of the American Economic Association. 3rd Series.

Johnson, Joseph French. 1900. "The Currency Act of March 14, 1900." Political Science Quarterly 15.

Kolko, Gabriel. 1983. The Triumph of Conservatism: A Reinterpretation of American History. Glencoe, Ill.: Free Press.

Livingston, James. 1986. Origins of the Federal Reserve System: Money, Class and Corporate Capitalism, 1890–1913. Ithaca, N.Y.: Cornell University Press.

Parrini, Carl P., and Martin J. Sklar. 1983. "New Thinking about the Market, 1896–1904: Some American Economists on Investment and the Theory of Surplus Capital." Journal of Economic History 43 (September).

Paul, Ron, and Lewis Lehrman. 1982. The Case for Gold: A Minority Report on the US Gold Commission. Washington, D.C.: Cato Institute.

Rosenberg, Emily S. 1985. "Foundations of United States International Financial Power: Gold Standard Diplomacy, 1900–1905." Business History Review 59 (Summer).

Rothbard, Murray. 1983. America's Great Depression. 4th Ed. New York: Richardson and Snyder. 1984.

"The Federal Reserve as a Cartelization Device: The Early Years, 1913–1920." In Bernie Siegel, ed., Money in Crisis. San Francisco: Pacific Institute, 1984.

Seidel, Robert N. 1972. "American Reformers Abroad: The Kemmerer Missions in South America, 1923–1931." Journal of Economic History 32 (June).

Silva, Edward T., and Sheila A. Slaughter. 1984. Serving Power: The Making of the Academic Social Science Expert. Westport, Conn.: Greenwood Press.

Taussig, Frank W. 1893. "What Should Congress Do About Money?" Review of Reviews (August). Quoted in Dorfman (1949) 1900. "The Currency Act of 1900." Quarterly Journal of Economics 14 (May).

Taylor, F.M. 1898. "The Final Report of the Indianapolis Monetary Commission." Journal of Political Economy 6 (June).

Vanderlip, Frank A. 1935. From Farm Boy to Financier. New York: D. Appleton-Century.

Warburg, Paul M. 1911. The Reform of the Currency. H. R. Mussey, ed. New York: Academy of Political Science.

——. 1914. "Essays on Banking Reform in the United States." Proceedings of the Academy of Political Science 4 (July).

——. 1930. The Federal Reserve System. 2 Vols. New York: Macmillan.

Ware, Louise. 1951. George Foster Peabody. Athens: University of Georgia Press.

West, Robert Craig. 1977. Banking Reform and the Federal Reserve, 1863–1923. Ithaca, N.Y.: Cornell University Press.

Willis, Henry Parker. 1923. The Federal Reserve System. New York: Ronald Press.


[1] On the National Banking System background and on the increasing unhappiness of the big banks, see Murray N. Rothbard (1984, pp. 89–94), Ron Paul and Lewis Lehrman (1982), and Gabriel Kolko (1983, pp. 139–46).

[2] Indeed, much of the political history of the United States from the late 19th century until World War II may be interpreted by the closeness of each administration to one of these sometimes cooperating, more often conflicting, financial groupings: Cleveland (Morgan), McKinley (Rockefeller), Theodore Roosevelt (Morgan), Taft (Rockefeller), Wilson (Morgan), Harding (Rockefeller), Coolidge (Morgan), Hoover (Morgan), or Franklin Roosevelt (Harriman–Kuhn, Loeb–Rockefeller).

[3] For the memorandum, see James Livingston (1986, pp. 104–05).

[4] On Hadley, Jenks, and especially Conant, see Carl P. Parrini and Martin J. Sklar (1983, pp. 559–78). The authors point out that Conant's and Hadley's major works of 1896 were both published by G. P. Putnam's Sons of New York. The President of Putnam's was George Haven Putnam, a leader in the new banking reform movement (ibid., p. 561, n 2).

[5] The final report, including its recommendations for a central bank, was hailed by F. M. Taylor, in his "The Final Report of the Indianapolis Monetary Commission," Journal of Political Economy 6 (June 1898): 293–322. Taylor also exulted that the convention had been "one of the most notable movements of our time — the first thoroughly organized movement of the business classes in the whole country directed to the bringing about of a radical change in national legislation" (ibid., p. 322).

[6] Joseph French Johnson (1900, pp. 482–507). Johnson, however, deplored the one fly in the Bank of England ointment — the remnant of the hard-money Peel's Act of 1844 that placed restrictions on the quantity of bank-note issue (ibid., p. 496).

[7] Nelson W. Aldrich, who entered the Senate a moderately wealthy wholesale grocer and left years later a multimillionaire, was the father-in-law of John D. Rockefeller, Jr. His grandson and namesake, Nelson Aldrich Rockefeller, later became vice president of the United States, and head of the "corporate liberal" wing of the Republican party.

[8] Baker was head of the Morgan-dominated First National Bank of New York, and served as a director of virtually every important Morgan-run enterprise, including: Chase National Bank, Guaranty Trust Company, Morton Trust Company, Mutual Life Insurance Company, AT&T, Consolidated Gas Company of New York, Erie Railroad, New York Central Railroad, Pullman Company, and United States Steel. See Burch (1981, pp. 190, 229).

[9] On the meeting, see Livingston (1986, p. 155).

[10] On Gage and Shaw's manipulations, see Rothbard (1984, pp. 94–96) and Friedman and Schwartz (1963, pp. 148–56).

[11] Indeed, the adoption of this theory of the alleged necessity for imperialism in the "later stages" of capitalism went from proimperialists like the US Investor, Charles A. Conant, and Brooks Adams in 1898–1899, to the Marxist H. Gaylord Wilshire in 1900–1901, and in turn to the English left-liberal anti-imperialist John A. Hobson, who in turn influenced Lenin. See in particular Norman Etherington (1984; 1982, pp. 1–36).

[12] See also Etherington (1984, p. 24).

[13] Seligman was also related by marriage to the Loebs and to Paul Warburg of Kuhn, Loeb. Specifically, E. R. A. Seligman's brother, Isaac N. was married to Guta Loeb, sister of Paul Warburg's wife, Nina. See Stephen Birmingham (1977, appendix).

[14] See the illuminating article by Emily S. Rosenberg (1985, pp. 172–73).

[15] Also getting their start in administering imperialism in Puerto Rico were economist and demographer W. H. Willcox of Cornell, who conducted the first census on the island as well as in Cuba in 1900, and Roland P. Falkner, statistician and bank reformer first at the University of Pennsylvania, and then head of the Division of Documents at the Library of Congress, who became commissioner of education in Puerto Rico in 1903. Falkner went on to head the US Commission to Liberia in 1909 and to be a member of the Joint Land Commission of the US and Chinese governments. Harvard economist Thomas S. Adams served as assistant treasurer to Hollander in Puerto Rico. Political scientist William F. Willoughby succeeded Hollander as treasurer (Silva and Slaughter 1984, pp. 137–38).

[16] See Rosenberg (1985, pp. 177–81). Other economists and social scientists helping to administer imperialism in the Philippines were Carl C. Plehn of the University of California, who served as chief statistician to the Philippine Commission in 1900–1901, and Bernard Moses, historian, political scientist and economist at the University of California, an ardent advocate of imperialism who served on the Philippine Commission from 1901–1903, and then became an expert in Latin American affairs, joining in a series of Pan-American conferences.

Political scientist David P. Barrows became superintendent of schools in Manila and director of education for eight years, from 1901 to 1909. This experience ignited a lifelong interest in the military for Barrows, who, while a professor at Berkeley and a general in the California National Guard in 1934, led the troops that broke the San Francisco longshoremen's strike. During World War II, Barrows carried over his interest in coercion to help in the forced internment of Japanese Americans in concentration camps. On Barrows, see Silva and Slaughter (1984, pp. 137–38). On Moses, see Dorfman (1949, pp. 96–98).

[17] It is certainly possible that one of the reasons for the outbreak of the nationalist Mexican Revolution of 1910, in part a revolution against US influence, was a reaction against the US-led currency manipulation and the coerced shift from silver to gold. Certainly, research needs to be done into this possibility.

[18] The failure, however, did not diminish the US government's demand for Jenks's services. He went on to advise the Mexican government, serve as a member of the Nicaraguan High Commission under President Wilson's occupation regime, and also headed the Far Eastern Bureau of the State Department (Silva and Slaughter 1989, pp. 136–37).

[19] For an excellent study of the Kemmerer missions in the 1920s see Seidel (1972, pp. 520–45).

[20] Schiff and Warburg were related by marriage. Schiff, from a prominent German banking family, was a son-in-l

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