America's Bank: The Epic Struggle to Create the Federal Reserve

by Roger Lowenstein

  Aldrich’s aloofness chipped away at his eroding political strength. Murray Butler, the president of Columbia University, hosted a dinner at which Aldrich was to discuss his progress. Interest was so great that Butler asked whether Aldrich would mind if a reporter or two were present. The senator replied that he would very much mind—another opportunity squandered.

  Within the Democratic Party, Aldrich was already toxic. Woodrow Wilson turned down an invitation to another dinner, this one hosted by Vanderlip, with Lord Revelstoke, a prominent British banker—purely because Aldrich was on the guest list. In theory, the Democrats were irrelevant for the next two and probably the next four years, but monetary reformers needed the Republicans to stick together. And Republican cohesion was under threat from the tectonic forces of progressivism.

  The departing Roosevelt had been veering more stridently into the progressive camp—more so than Taft. This put Republican cohesion in some doubt. The two men had an intensely personal friendship, dating to the early 1890s, when both had been appointed to posts in the administration of Benjamin Harrison, and their friendship had deepened through scores of intimate letters and by Taft’s steadfast service in Roosevelt’s cabinet, including the difficult post of governor general of the Philippines. However, their temperaments were dissimilar. Taft, who hailed from a political family in Ohio, was not a crowd-pleaser like the endlessly quotable and ever charismatic Roosevelt. Taft’s ambition had been to become a judge—to preside in the quiet of a courtroom. He shared none of Roosevelt’s affinity for leading a crusade. “What I am anxious to do,” he noted shortly before he took the oath of office, “is to do something, and not to make a pronunciamento.” Although Taft professed an eagerness to carry on the Roosevelt agenda, he declined to retain certain members of Roosevelt’s cabinet, which bruised his mentor’s ego. When the Tafts stayed at the White House March 3, the night before the inauguration, the conversation at dinner was strained. Even in late January—five weeks ahead of inauguration day—Vanderlip was writing, “It is coming to be an open secret that there has been a distinct break between the President and the President-Elect.” This was ominous for Republican cohesion and ominous for the Aldrich agenda.

  CHAPTER SIX

  PROGRESSIVISM

  Neither the political prejudice of the past nor the ghost of Andrew Jackson . . . will stand in the way.

  —NELSON ALDRICH

  Financial questions are perplexing and elusive ones.

  —WILLIAM HOWARD TAFT

  AS THE TAFT ADMINISTRATION got under way, Nelson Aldrich’s work on monetary reform was sidetracked by an explosive issue—the tariff. Always a contentious subject, the tariff heated the political stove and energized Aldrich’s many opponents, including within his own party. Just when he was on the cusp of proposing the first serious banking reform in half a century, Aldrich put himself at risk of becoming a marginal—even a hated—figure.

  Republicans had always supported high tariffs, but by 1909 there was a consensus that duties were too high. They were seen by the party’s progressive wing as a burdensome tax on trade and unfair to farmers, who depended on selling goods into export markets. Since the tariff tilted the economic playing field, benefiting favored industries while jacking up prices for consumers, it was hated by laissez-faire Democrats as well. Taft, a principled but politically maladroit leader, called on Congress to enact significant reductions. This put Aldrich in a delicate spot: he could either legislate against the interests of his business friends or antagonize his party’s progressives, whose support would be vital on the issue of banking reform.

  Even a glimpse at Aldrich’s mail gives a hint of the tariff’s critical importance, and of the enormous influence that Aldrich wielded in the Senate. He was bombarded with pleas from corporations who regarded trade protection as their sovereign right. U.S. Steel lobbied him on steel duties; National Biscuit sought help on biscuits. Aldrich heard from producers of iron, of vanillin, of plate glass, of glass bottles, of jewelry, of leather hides, of lead pencils, of newsprint, of wallpaper, of glue, of umbrella frames. He especially heard from the textile industry in New England, which had long enjoyed his particular protection. The stakes were high. An agent of the Royal Weaving Company in Pawtucket, Rhode Island, typified the pressure, bluntly stating, “I would like to feel sure that our industry is taken care of.”

  Against these letters Aldrich had to balance, or at least consider, a deluge of pleas from foreign embassies. Cuba wanted duty-free entry for pineapples, Brazil for coffee, Great Britain for “canned kippered herrings.” France sought lower barriers for silk muslin, Norway for sardines, and Turkey for raisins, figs, dates, and, indeed, “crude opium.”

  The tariff battle showcased Aldrich’s legislative prowess. Its complexity played to his mastery of detail. Always at ease working in the shadows, Aldrich negotiated with the House leaders in secret, sometimes absconding for lengthy motorcar sessions in Washington’s Rock Creek Park. Meanwhile, Paul Warburg despaired of making progress on monetary reform while its foremost statesman was absent. “I pray every day,” he scribbled to Piatt Andrew, “for a speedy end of the Tariff wrangle so that the deck may be cleared for action on the currency question.” Andrew at least kept the Monetary Commission humming, overseeing its research, corresponding with economists, and hobnobbing with politicos. Andrew basked in the notion that he was helping history unfold. An economist with a sense of larger purpose, he took a day off from commission work and motored to Gettysburg; on another, he went to watch Orville Wright attempt to fly in an “aeroplane.”

  The tariff work thrust Aldrich together with Taft, leading to a friendship that was useful to Aldrich but politically risky for the President. The senator became a regular at the White House; in the warm evenings the two hashed out duty schedules on the White House portico. Taft pressed Aldrich to lower duties, but the affable chief executive found it difficult to confront the senator, whom he increasingly admired.

  The President had more success on the related matter of an income tax amendment. The issues were connected, as progressives hoped that income taxes, once approved, would displace the tariff as a revenue source. Economists such as Columbia’s Seligman believed that a progressive tax could be a tool for social equity and level the disparities that the tariff supposedly created.

  Aldrich did agree, reluctantly, to Taft’s call for a resolution for an income tax amendment (which now would need three-quarters of the state legislatures for ratification). But on the more central issue of lowering the tariff, he was unwilling to betray his business cronies, who, he felt, had always stuck by him. Despite the disapproval from many in his party, and despite the pleadings of his president, Aldrich produced a tariff that was highly favorable to textiles and to industry overall. While Taft did win some battles, the lack of substantive reform may be judged by the praise heaped on Aldrich by the National Association of Manufacturers, whose president gloated that the bill “meets the full approval of the manufacturers represented at this association.” Broadly speaking, the Payne-Aldrich tariff (the House sponsor was the fiercely protectionist Sereno E. Payne of New York) slightly reduced the duty, but the structure of protectionism remained intact.* Aldrich had been handed a chance to champion reform and had smothered it. He would soon pay a price.

  Effectively, Payne-Aldrich marked the beginning of a civil war within the Republican Party. Taft was branded as incapable of standing up to Aldrich—not exactly the enemy of progressives but no longer useful to their cause. The senator himself was the enemy. Aldrich had been hoping to use this time to quietly work out details of currency reform. He now became the subject of bitter attacks.

  Senator Jonathan Dolliver of Iowa shouted at Aldrich on the Senate floor that he would have to accept the “moral consequences” of the tariff, on cotton in particular. Robert La Follette and other progressives smoothly shifted gears from attacking Aldrich on the tariff to savaging whatever he might be cooking up in bank
ing reform. Iowa’s other senator, Albert B. Cummins, told an audience in Chicago he suspected that Aldrich’s prospective remedy would be “a central bank” and that his “scheme” would be intolerable, for it would subject the currency to the authority of a few selfish men and, ultimately, “enslave the financial world.” Cummins knew nothing about banking, but he sensed Aldrich’s vulnerability.

  A perceptive journalist wrote that Aldrich, on whom his party’s hopes for currency reform depended, was now “distrusted, disliked, even hated and vilified as few other men in public are hated and vilified.” The portrait wasn’t entirely bleak. The writer applauded his legislative skills; indeed, he saluted Aldrich as “the ablest man in the U.S. Senate.” But a chasm separated Aldrich from the public. He was too chilly and remote to appeal to people’s “sentiment.” His hair thinning, now a wispy white, he was barely known to the public, for, as this critic lamented, “nobody has really given us an intimate view of the man.”

  As if to escape the hostile political climate, in August 1909 Aldrich and Andrew embarked on a second European study tour. In England they met with the cream of British political life, including the young president of the Board of Trade, Winston Churchill. Aldrich may have hoped that political conditions at home would improve in his absence, as if progressivism were only a passing storm. The bankers in his circle, frustrated at Aldrich’s leisurely pace, tried to push matters along. Harry Davison, now in the upper echelon at Morgan’s, arranged for dinners and speaking engagements for Aldrich upon his return. George Reynolds, who had accompanied the Monetary Commission the previous summer, hatched the idea of the senator’s making a barnstorming tour in the West to repair his political standing. Warburg gave him a nudge. These banker-advisers, a generation younger, took it upon themselves to lighten the older man’s burden. In Davison’s case, the difference in age aroused a mutual interest and friendship.

  Davison also looked after Aldrich financially. When Bankers Trust, of which Davison was a founder, sold public stock, Davison allotted one hundred shares to Aldrich at a price of $40,000—well below the market value. “I am particularly pleased to have you have this stock, as I believe it will give a good account of itself,” Davison wrote helpfully. “It is selling today on a basis of a little more than $500 a share [$50,000 total]. I hope, however, you will see fit to put it away, as it should improve with seasoning.” Davison did not think of this gift as at all unethical. Morgan’s habitually looked after its friends, which accorded with its self-image as a benevolent institution. In truth, feathering the nest of a politician who was charged with reforming the banking laws was hardly an act of altruism; it was very much in Morgan’s economic interest.

  Aldrich, of course, was accustomed to leveraging his position for private gain. Over the summer he wrote to the president of Mexico, Porfirio Díaz, asking him to intervene regarding “some interests of mine”—most likely rubber—threatened by an action in the Mexican courts. Aldrich by now was a very wealthy man, devoting significant time to rebuilding his house at Warwick—windowsills were a particular concern—and to his securities transactions and buying a yacht.

  The focus returned to banking in September, when The Wall Street Journal published a series favorable to a central bank. Even ordinary Americans began to show interest. The school superintendent in Oberlin, Ohio, made inquiries to the Monetary Commission; T. R. Brandt, cashier of the First National Bank of Tombstone, Arizona, sent Aldrich suggestions, as did an anonymous writer who signed his letter “A Business Man.” Books rolled off the presses, including Money and Currency by one D. W. Ravenscroft, who modestly described himself as “having had no education.” Currency questions had always stirred the imagination of cranks, but a genuine intellectual ferment swirled around the topic of a central bank. The most interesting proposal was that of Victor Morawetz, a railroad lawyer, who argued that the United States was too big and diverse a territory for a single central bank. Instead, Morawetz proposed a system of independent regional banks.

  President Taft did not get more than superficially involved in the issue, though his occasional comments were supportive. In the fall of 1909, he spent some of his dwindling political capital on Aldrich, expressing his full confidence that whatever remedy the Monetary Commission proposed would be free of “Wall Street influences.” This was becoming the litmus test of monetary reform—a Jacksonian condition that any new institution be free of the taint of either Wall Street or Washington. And it was into Jackson territory—nine midwestern cities, starting with Chicago and finishing in Detroit—that, in the first part of November, Aldrich was bound.

  Given that it was unfriendly terrain, Aldrich made a reasonably good showing. His handlers had prepared a full schedule of lunches with local notables and lectures in the evenings. The senator stressed that a healthy banking system was vital irrespective of geography. “Our system,” he told the Commercial Club in St. Louis, “must be one which will satisfy the manufacturers of New England, the agriculturists of the Mississippi valley, and the miners of the Rocky Mountains and the Pacific Coast, and the merchants of all sections.” He encouraged farmers to support him on the grounds that they were also capitalists. Local coverage tended to be more favorable after his appearances than before. A newspaper in Milwaukee, barely concealing its surprise, declared, “Senator Aldrich does not in the slightest degree suggest the czar-like manipulator of the Senate that some have painted him.” Aldrich had to be pleased in Omaha when a man in the audience exclaimed, “You must be an elk because you shed your horns so easily.”

  However, there was also ominous criticism of Aldrich in nearly every city. The influential Kansas City Star published bitingly satirical “questions” for the visitor, such as “What do you do when you are not running the Senate? Do you know any insurgent Senators by sight? Did you ever see a voter? What did he look like?” More disappointing, few critics bothered to reflect on his message or evaluate central banking on its merits.

  Aldrich had read enough of the commission histories to realize that talk of a central bank set off profoundly American fears of federal (or Wall Street) domination. He felt he was fighting a phantom, he said: “the ghost of Andrew Jackson.” Although Warburg and he were not in frequent touch, they arrived at similar conclusions and used strikingly similar turns of phrase.

  Warburg by now was well versed in the country’s political traditions; indeed, in his papers there is a tantalizing scrap from the diary of Philip Hone, a one-term mayor of New York, who wrote, on the occasion of Jackson’s death in 1845, “The universal American nation is in mourning. Stripes, black . . . darken the columns of the newspapers. . . . Now, to my thinking, the country had greater cause to mourn on the day of his birth than on that of his decease.” Warburg would never have voiced such disrespectful musings, though he may have felt them. But Jacksonism, he held, was not incurable. Warburg believed that if Americans were exposed to the arguments for a central bank, their fears would melt before the steamroller of (as he saw it) his irrefutable logic. Popular antagonism, he maintained, was due to “ignorance” rather than “the ghost of Andrew Jackson.”

  Aldrich, similarly, thought the public had to be educated before he could propose legislation. When the commission met in late November 1909—its first formal meeting in a year—the members were eager to draft a bill, but Aldrich decreed that the next stage would be to blanket the country with educational literature. After his battering out west, Aldrich had no desire to face the public, though he was amenable to airing his ideas in forums he judged to be safe. The Economic Club of New York, which held its gala dinner in the Hotel Astor at the end of the month, was just such a refuge, with Davison, J. P. Morgan, and Andrew looking on approvingly from the head table. Aldrich’s address suggested just how much he had come under Warburg’s spell. He touted the idea of a central reserve that banks could draw upon “as water is drawn from a great reservoir”—a distinctly Warburgian image. And Aldrich made plain his favorable impressi
on of the European central banks, whose distinguishing features he described in some detail. He stressed that commercial banks in Europe held only a thin wedge of “till money,” rarely more than 3 or 4 percent of their deposits. They felt confident keeping so little cash, he noted, because they believed “a credit at the central bank is better and safer than a corresponding amount in their own possession.” To New Yorkers for whom the 1907 Panic was still a recent memory, this was an arresting thought.

  Banking reform and the progressive movement each hurtled ahead, like separate freight cars approaching a fateful junction. While progressivism appealed to people in each of the major parties, progressives within the Republican camp were increasingly rebelling against the party leadership. Early in 1910, Frank Vanderlip fretted to James Stillman, “The insurgents have been showing growing strength and the President increasing weakness.” The Taft-Aldrich wing was losing ground.

  Aldrich was unprepared to deal with the progressives. He did not fully appreciate that the movement was about more than just a series of laws regulating food safety and railroads fares. Progressivism embodied an attitudinal shift toward a more benevolent and representative society; it was concerned with elevating the condition of the poor and giving a greater say, and a greater role, to the swelling ranks of the middle class. Its guiding ethos was that education and empirical research could foster scientific, nonpartisan reform—although very little that progressivism achieved was actually nonpartisan. Its effects were seen over a wide range of topics: settlement houses, worker pensions, primary elections, corporate regulations, and the growth of public schools.