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

by Roger Lowenstein

  Aldrich also appeared at the American Academy of Political and Social Science in Philadelphia, where he hinted about the nature of his forthcoming plan and promised the goods “in the near future.” Warburg and the other conspirators awaited publication, but as the holidays approached, Aldrich greeted them with silence. Warburg suspected the delay was owing to the senator’s tendency to procrastinate, but as the calendar turned to 1911 it became clear that Aldrich’s health was deteriorating, physically as well as psychologically.

  Although Aldrich’s family tried to hush it up, press accounts grew steadily more worrisome. “Senator Aldrich Ill; Friends Worried over Reports That He Has Throat Trouble,” the Times reported on January 6, 1911. A week later, the paper retracted the report of throat trouble, divulging now that Aldrich was “quite ill at his home.” It closed menacingly, “He is abed and does not receive even his secretary.”

  It seems clear that Aldrich was suffering an aggravated form of the nervous melancholia that he had experienced as a younger man—in short, a breakdown. His Jekyl confreres tactfully attributed his illness to the mental strain of his work on monetary reform. Abby’s diary attests to her husband’s “spell of feeling very nervous” and to his recurrent sleeplessness. Presumably, more than hard work was at issue. Aldrich had finally completed a blueprint embodying three years of intensive study—a document that he fancied incorporated the height of banking wisdom. But his term expired in March, and the incoming Congress was unlikely to show any interest. The realization that his crowning work could conceivably wind up on the scrap heap may have pushed him over the edge to depression. There was little that doctors could offer for his condition other than the advice of rest. The senator’s personal physician counseled that he avoid all “excitement.”

  Aldrich’s ill-timed absence posed a vexing issue for Warburg, who had managed to gain the joint endorsement of three commercial groups for a reform plan very much resembling the still under-wraps Aldrich Plan.* An assembly of such groups under the auspices of the National Board of Trade was to convene in Washington on January 18. Warburg felt it was vital for the Aldrich Plan to be surfaced before that date, so the Board of Trade could offer its endorsement.

  But Aldrich was confined to his bedchamber, leaving Andrew to try to steer the Plan to the finish line. Andrew spent New Year’s with the Davisons on Long Island, then returned home for a weekend of high-stakes meetings to win over James Forgan, the acknowledged dean of the Chicago bankers. On Friday, January 6, Andrew hosted Forgan and James Laughlin, the University of Chicago economics professor, at lunch. Saturday evening the group dined at the White House, and the following day they met with Treasury Secretary Franklin MacVeagh. Andrew was not immediately persuasive. As Forgan and Laughlin made for the train back to Chicago, Forgan cackled derisively, “Laughlin, did you ever see such a mess of a banking bill?”

  Warburg, meanwhile, was fending off inquiries from Wall Street, including a pesky suggestion from Samuel Sachs, who wanted assurance that private banks such as his small firm, Goldman Sachs, would be permitted to deal directly with the new central bank. (Goldman was an investment bank, whereas the Aldrich Plan envisioned a cooperative of national, or commercial, banks.) Warburg’s reply was evasive, but he recognized—a century in advance of Lloyd Blankfein—that coziness with the likes of Goldman was ill advised. “My own view,” Warburg replied, “is that it would be better not to open the door for the criticism that private interest might enjoy undue favoritism with the central bank.”

  On January 15, with still no plan before the public, the Jekyl conspirators minus Aldrich reassembled in Andrew’s one-room apartment, a few blocks from the White House. Andrew had dined at the Aldriches’ two nights earlier, and the senator had asked that a letter be prepared to accompany the Plan. The group worked on it through the day, with Vanderlip doing the drafting. Then, Davison shepherded the letter to Aldrich, who penciled in some changes and signed.

  The Aldrich Plan was released two days later. It was presented as the work of Aldrich personally, addressed to his fellow members of the Monetary Commission. The letter took pains to characterize the Reserve Association not as a “central bank,” but as an institution more suited to American needs. The goal was to bring about three seminal changes: a more unified banking system; a more logical basis for the currency; and the development of a market in bank paper, so that liquid funds would be loaned to businesses rather than to stock market traders.

  In an effort to disarm the inevitable critics, the senator’s letter affirmed that the provisions of the Plan had been submitted to the commission and to the American people “for their criticism and action, and not as the last word that can be said on the subject.” Aldrich himself was absent. His doctors had ordered him, urgently, to go south. Even as the plan was making news, he was headed back to Jekyl Island for an enforced rest.

  The New York Times obliged Aldrich by roundly proclaiming, “Aldrich Money Plan Avoids Central Bank.” Immediately, Leslie Shaw, the free-swinging former Treasury secretary, retorted that the Reserve Association was a central bank “under false colors.” Thus the debate over the Aldrich Plan was framed: a debate less over its merits than over terminology—over whether it was, or was not, a central bank.

  The hostile political climate ruled out trying to enact the Plan for the moment. By a quirk of history, monetary reform had become linked in the public’s mind not to progressivism, where it belonged, but to the archconservatism that Aldrich symbolized. His colleagues’ strategy was to galvanize public opinion and hope that the opposition would soften under a deluge of favorable publicity. Warburg, with his customary brio, led the way. He had developed surprising cunning in politicking in his adopted home. He managed to be quoted in the press effusively praising the Plan while neglecting to mention that he was one of its primary drafters. He appeared in Washington not as the author of the Plan but as a fervid supporter, representing the Chamber of Commerce and two other commercial bodies. In this guise, he won the coveted endorsement of the Board of Trade. To top off this juggernaut, Warburg persuaded the board to adopt his resolution to form a “Business Men’s Monetary Reform League” to spread favorable publicity. Warburg was careful to stipulate that the new league have its headquarters in Chicago so as to avoid the suggestion of Wall Street influence.

  The release of the Aldrich Plan—a first draft, as it turned out, for the future Federal Reserve Act—marked an important milestone. After years of denial and then debate, a genuine, if imperfect, program was on the table. It spelled the end of the period in which bankers were the generals in the reform campaign. Now that a plan existed in the public arena, the torch passed, uncertainly, to politicians.

  CHAPTER EIGHT

  INTO THE CRUCIBLE

  We want the views of all men to be put into the crucible.

  —NELSON ALDRICH

  PAUL WARBURG HAD VETTED his ideas through Nelson Aldrich and with bankers, but his plan now faced a series of different, more difficult challenges. What had been theory now moved into the realm of practical politics. What had been debated by financial men would be tested in the realm of the press and of the public. Reform would require many iterations, especially as American politics was swiftly radicalizing, becoming ever more hostile to bankers. Thus, the Aldrich gang would gradually recede. Warburg would remain a significant influence, if often in the background, but the direct responsibility for reform shifted to Congress—that is, to legislators who were not themselves financial experts. Inevitably, lawmakers resorted to extensive debate and horse-trading, not to mention acrimonious charges and, at times, sheer demagoguery. As elected politicians, they faced the consummate challenge of reconciling Warburg’s arguments for centralization with the public’s abiding mistrust of large financial bodies.

  Perhaps there might have been no Federal Reserve had Congress not launched a series of sensational hearings that, while not precisely germane to monetary reform, warmed the public to
the idea of legislation. And even when a bill advanced, reform-minded bankers found it in some respects unrecognizable and also unpalatable. Bankers had been schooled in traditional doctrines of money, meaning money backed by gold or by the assets of banks. In the early twentieth century, populists such as William Jennings Bryan had begun to advocate the previously heretical idea of “fiat money”—money issued on the whim of government. The debate was part of a larger disagreement over who should control the financial system. In keeping with the laissez-faire tradition, Wall Street had mostly been able to run itself. But when Woodrow Wilson would attempt to steer reform through Congress in 1913, he would be confronted by a demand, emblematic of the times, that the banking industry be controlled by the public.

  The most significant lawmaker in the process was Carter Glass, a cautious reformer if ever there was one. The Virginia Democrat was politically acute, deferential to bankers, wary of the public’s fear of centralization, and fearful of antagonizing either constituency. He was also ambitious and, while admirably aware of his limitations in finance, thoroughly committed to substantive reform.

  When the Aldrich Plan was drafted, the Democrats had only just won control of the House, and Glass had yet to emerge from obscurity. Republicans still held the White House but looked increasingly shaky, and the Aldrich gang, aware that they faced steep political odds, rolled out a strategy for legislation. The first task was to gain the prized endorsement of the American Bankers Association (ABA), along with support from the business community, and use these as a wedge to make inroads with the public. Then, the Aldrich Plan could be formally introduced in Congress as a reform proposal with broad backing. With Aldrich on Jekyl Island, his colleagues, emphasizing the need for industry support, secured the approval of James Forgan and George Reynolds, the two prominent Chicago bankers. Hoping to capitalize on their momentum, the senator’s allies thought to invite twenty or so carefully selected bankers to a retreat in Atlantic City. Wary of disturbing Aldrich’s rest, but needing his approval, Harry Davison gingerly cabled, on behalf of Frank Vanderlip, Warburg, and himself: “I am very sorry to bother you with this. Frank Paul and I believe this is a psychological time to have a meeting called of . . . prominent bankers in various sections of the country to discuss your proposed plan. Are you willing that I should instruct Arthur [Shelton] to invite the men in your name?” Aldrich responded three days later in the affirmative but stressed he could not be involved in any of the preparations.

  The retreat took place over three days in February 1911, hosted by the entire Jekyl cast save Aldrich. The bankers quickly endorsed the general outline of the Aldrich Plan—presumably because it conformed to their laissez-faire tastes. But the bankers had conditions. They wanted state banks, not just national banks, to be eligible to join the Reserve Association. They wanted more lenient rules to govern the discounting of paper, so that bankers could exchange virtually any type of loan for Reserve Association notes (and thus convert such loans into money). Even more brazenly, the bankers demanded a hike in the 5 percent ceiling on dividends that the Reserve Association would pay to member banks. Most worrisome of all, they objected to even the bare element of political control agreed upon in the original draft.

  Piatt Andrew protested that the price of the bankers’ endorsement would be a plan so friendly to the industry it would be unacceptable to the public at large. However, there was enough common ground to move forward with a presentation to the ABA—whenever, that is, Aldrich returned from Jekyl Island.

  Aldrich found it hard to be away from the action but saw no alternative. “Every attempt to do my work or to think seriously on any subject,” he wrote to William Howard Taft, “brings back my sleeplessness.” The President replied, affectionately, “I long for your presence. I feel as Scott said of Roderick Dhu—‘A blast upon your bugle horn were worth a thousand men.’”* Groping for a silver lining, Taft added that since there was nothing the matter with Aldrich “organically,” according to Aldrich’s physician, the senator needed only to rest “to rid yourself of the notion that you are breaking down.”

  Through January and early February, Aldrich remained in a highly agitated state. His nights were racked by insomnia, which put a strain on Abby as well. “Am improving so slowly I find it imperative to avoid all excitement of new questions,” he cabled Davison. His household devoted meticulous attention to his condition and care. On February 12, Abby found it worth recording in her diary that the senator “slept well two nights.” As his strength returned, he took walks on the Georgia beach. He went trout fishing under the turquoise sky; in the evenings he played bridge. By the end of the month his appetite had returned and he was playing golf. In the first week in March, the desperate cloud having lifted, the Aldriches went home to Rhode Island.

  Aldrich was now a retired senator. However, he faced the serious business at the end of March of negotiating with Forgan, who represented the currency committee of the ABA, over the revisions demanded by the bankers at Atlantic City. Aldrich capitulated on nearly every point. In particular, he agreed to weaken the control of the President over the leadership of the Reserve Association. In the draft composed on Jekyl Island, the President would select the association’s governor and two deputy governors—and could remove them at will. Forgan demanded—and Aldrich agreed—to let the President name only the governor, and to vest the power of removing all three officials in the banker-dominated board. (To his credit, Aldrich refused to yield on raising the dividend cap.)

  The result was to make the Reserve Association, while unchanged in its essentials, more fully the creature of the banking industry. Forgan also had a useful marketing suggestion—that the name be changed to the National Reserve Association, a more public-sounding body. Finally, Forgan insisted that member banks should be able to count the association notes that they held in their vaults as reserves—thus resolving in Warburg’s favor the dispute that had flared on Jekyl Island. Aldrich, no longer concerned with this detail, did not object. He now had the working endorsement of the country’s singular financial body and could set his sights on ratification by the full ABA, which was to meet in the fall in New Orleans.

  Warburg, while reaping a victory on the issue of reserves, was busy laying the groundwork for the new businessmen’s group—the National Citizens’ League for the Promotion of a Sound Banking System. The aim of the Citizens’ League was to attract businesspeople to the cause by enticing them with the prospect of making credit more available and sustainable. Its purpose was to show that Main Street was just as enthusiastic about banking reform as Wall Street. In order to craft a heartland image, its executives were recruited exclusively from the Midwest—its president, John V. Farwell, was a Chicago dry goods wholesaler, and its board was composed of the cream of the Chicago business establishment, including Julius Rosenwald of Sears, Roebuck and Cyrus McCormick Jr. of International Harvester.

  James Laughlin, the economist (and author of the Indianapolis report), was tapped as the executive head. Laughlin went on full-time leave from the University of Chicago. Shrewdly, he told the press the league was “not an organization of bankers”—it represented not lenders but borrowers. This description was considerably less than the whole truth. As Warburg would later recount, bankers were among the league’s most liberal contributors. Moreover, Warburg was chairman of the organizing committee and responsible for setting up the branch in New York, as well as other branches, and he was intimately involved in the organization’s planning.

  The Citizens’ League’s publicity was similarly sugarcoated to appeal to Americans wary of a central bank. Its constant refrain was that it favored “cooperation, not dominant centralization.” In fact, the league was backed by men, such as Warburg, who favored as much centralization as the political process would permit. Nonetheless, officials tried to portray the league as a spontaneous creation of local communities, a financial version of a 4-H Club. When addressing audiences outside of New York, they took e
very opportunity to distance themselves from “Wall Street.” This pose of being unconnected to Gotham was deliberate; as Warburg later admitted, “it would have been fatal to launch such an enterprise from New York.”

  The league’s strategy was also controversial. Formally, it would support principles and goals that very much resembled those of the Aldrich Plan without specifically committing to the Plan itself. Laughlin thought this necessary to make a nonpartisan appeal and to establish a reputation as an independent voice. Aldrich feared it would merely sow confusion. Since the Citizens’ League’s mission (in his view) was to promote the Aldrich Plan, why not just say so?

  But Laughlin had a prickly, self-important streak. And he was hearing from all sides that to sell reform—in particular to Democrats in the House—it was vital that the movement not be associated with Aldrich. Two of his former students, the journalist H. Parker Willis and Theodore Roosevelt himself, forcefully argued that Aldrich was too toxic politically. Thus, Laughlin began to consider submitting a plan of his own. This would have cut the legs out from under the Aldrich Plan.

  Over the summer of 1911, Aldrich became newly despondent over the thought that the Citizens’ League was a fifth column that would destroy his creation from within. A rift opened between Laughlin and the New York chapter of the league. The latter was a front for Warburg—who developed a strong dislike for the professor.

  Relations were further strained when Laughlin decided that Aldrich should retire from the crusade. He aired this sensitive idea with the senator, in the company of Davison and Warburg. To add to the pressure on Aldrich, the possibility of his withdrawal was leaked to the Times, which saw great practical sense in divorcing the unpopular Aldrich from his cause. “The credit of his achievement can never be taken from him,” the paper editorialized in an unctuous tone. “Mr. Aldrich would be the last man in the world to let the pride of authorship stand in the way of . . . adoption.” Not quite.