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

by Roger Lowenstein

  Pioneers were often jacks-of-all-trades, and Owen cultivated diverse business interests, including livestock and real estate. As he later noted in a campaign letter, he rode horseback, for one purpose or another, “all over Oklahoma.” As a businessman, Owen witnessed a monetary system that was a crude form of barter. Muskogee had a population of 1,200, white, black, and red. Farmers and ranchers, who bought their necessities in Muskogee, would bring an animal to town as the basis for credit. If the farmer or rancher had a surplus after making a purchase, the merchant gave him scrip, which circulated as money. This was embryonic banking.

  In 1890, Owen and other residents organized the First National Bank of Muskogee. Bandits being prevalent, an armed guard stood constant watch. But as Owen discovered, the bank had more to fear from its own customers. During the Panic of 1893, frightened depositors withdrew half of their funds, and the bank nearly failed.

  Scarred by the near miss, Owen became a student of banking. He attended the Democratic convention of 1896, saw Bryan in his glory, and unsuccessfully proposed a measure to protect the country from future panics. In 1898 he traveled to European capitals to study central banking—the same mission Aldrich was to embark on a decade later. When Oklahoma was admitted to the union in 1907, Owen was elected one of its senators. His first speech on the Senate floor was an attack on Aldrich. Owen was a Jeffersonian Democrat, more progressive than Glass. The racial politics of the South wedded Glass to tradition; by contrast, promoting Indian claims nurtured Owen’s taste for reform. He championed direct elections to the Senate, women’s suffrage, an income tax. Having seen a banking panic firsthand, he gravitated to the Bryan view that government should issue the currency, to ensure that the currency did not run short. Glass, who favored bank currency, vehemently disagreed.

  For Untermyer, whose feud with Glass was out in the open, the chance to influence the legislation via Glass’s Senate counterpart must have been a godsend. In an odd alliance of Wall Street insider and prairie populist, Untermyer offered to bring bankers to Greystone to give Owen a quick tutorial. In rapid succession, the senator was introduced to Vanderlip, Warburg, and Hepburn; the former two would correspond with him extensively. Through these contacts, Owen reached out to Professor Piatt Andrew, who essentially drafted his bill.

  Notwithstanding that Owen was mentored by Aldrich’s former colleagues, his bill was a loosely worded version of Glass’s save for two key points. Owen thought the new institution’s notes should be issued by the federal government, whereas Glass, of course, favored notes issued by the Reserve Banks and backed by their members’ assets. Put simply, Owen wanted government money, Glass, private bank notes. Also, Owen wanted the entire Federal Reserve Board to be appointed by the president; Glass thought some of the directors should be chosen by bankers. In other words, on two pivotal issues, the Glass bill was closer to the bankers’ position, while Owen, faithful to his hero Bryan, wanted the government in charge. Glass represented the Victorian age of laissez-faire while Owen favored twentieth-century progressivism, with its credo that even high finance should be subject to government control. One or the other would have to give.

  At some point in May, Owen alerted Bryan that the Glass bill, which the Wilson administration was supporting, did violence to their shared principles. The chameleonlike Untermyer invited Bryan to lunch and delivered a similar warning. It was now only a matter of time before the President discovered he had a problem deep within his cabinet. On May 11, House alerted Wilson that Bryan was “waking up to the fact that the proposed bill was not to his liking and that it did not provide for direct government issue.”

  Four days later, House reiterated to the President: “I saw Primus [their code name for Bryan] today and had quite a talk with him. He brought up the currency question and I am very much afraid that he is a long way afield from your views.” Bryan, who had been frustrated over his inability to see the bill, now asked that Glass walk him through it. House suggested, as an alternative, that Wilson meet with Bryan. The President sensed that such a meeting could be disastrous.

  Instead, the assignment went to McAdoo. Initially, Bryan had not been happy with McAdoo’s selection as Treasury secretary, suspecting he was a pawn of Wall Street, but in the cabinet the pair had quickly become friends. When they met to discuss the banking bill, however, McAdoo made no headway. Bryan’s self-image, as well as his popular following, was rooted in the perception that he stood for the “people” against the banks. Public control of the banking system was a matter of high principle.

  On May 20, the day after his unsuccessful meeting with Bryan, McAdoo uncorked one of the more bizarre episodes in the long campaign for a central bank. Convinced that the Glass bill would fly neither with bankers (who had been muttering their disapproval) nor with Bryan, McAdoo dashed off an entirely new plan, which he outlined in a memorandum to Colonel House. His notion was to snip through the hornet’s nest of conflicting demands:

  We run against so much of prejudice upon the part of the bankers particularly, to any plan that does not fit their preconceived and established notions, that we shall, I think, have to cut away entirely from all the mazes and hazes of previous discussions and bring out something new and simple and direct.

  The essence of the McAdoo plan was for a government-owned central bank, under the dominion of the Treasury Department. His plan was elegantly crafted, intended to please both sides. Bryan would get government control, Wall Street would get centralization as well as rationalization. There would be only four or five reserve centers, and all government notes and bank notes would be replaced by a single currency issued by the Treasury.

  It is not certain who drafted the McAdoo plan; McAdoo had a hand in it, as did his assistant secretary, John Skelton Williams, who was an archenemy of Wall Street. The plan also bore the thumbprint of the ubiquitous Untermyer.

  House immediately pitched the idea to Wilson, urging that he adopt a measure “along the lines suggested by Mr. Untermyer and one which Primus [Bryan] and Senator Owen will probably accept.” The Colonel, who was in over his head, said the McAdoo scheme, save for its provision for government-issued money, was “not different from the one we have in mind,” meaning the Glass bill. He also asserted that the McAdoo plan would find favor with bankers.

  House was wrong on both counts; moreover, it was fantastic of him to think that Wilson would jettison a committee chairman with whom he had been working since the previous December. House had clearly been seduced by Untermyer, to whom he ascribed magical powers of persuasion. He recommended that Wilson smuggle Untermyer into the White House to set the McAdoo plan into action: “Pythias [McAdoo] or Owen could get him to Washington and when he was there you could arrange to see him for an hour in the evening and it is quite possible that no one would know.”

  House should have consigned this dubious plot twist to his anonymously published novel. The day after writing Wilson, as if acknowledging his need for a dose of fresh air, House sailed to England on the RMS Mauretania, the fastest liner on the seas, white hulled with four black smokestacks. The Colonel encountered, to their mutual surprise, Warburg on the same boat. Warburg, who was bound for the Swiss Alps, heard what was afoot and wrote a lengthy missive on board, which eventually reached the White House, denouncing both the Owen bill and the McAdoo plan for investing government with too much power over banking.

  But Warburg’s absence diminished his influence, and McAdoo was charging ahead. The Treasury secretary summoned Glass to his office, where he dropped the bombshell that he was promoting a government bank rather than the Glass bill.

  “Are you serious?” said Glass.

  “Hell, yes,” McAdoo replied.

  McAdoo seems to have caught the bug of nearly everyone involved in reform—thinking he could write a bill superior to the one on the table. Years later, he claimed he had proposed a government bank because, as he put it, “I could see clearly that the Federal Reserve Banks were des
tined to be . . . an integral part of public finance.”

  Glass recounted that he was “astounded” when he left the Treasury (Glass often affected shock when others took positions contrary to his). He must have realized that his work of the past year was about to be consigned to the dustbin. In despair, the chairman directed Willis to round up negative reactions to the McAdoo plan from bankers—a tactic the two had employed before.

  Wilson now was in an awkward spot. He had three bills on his desk—two more than he wanted. He could not ignore a proposal from an important member of his cabinet; on the other hand, he was intent on preserving a solid front among Democrats in Congress. He wanted a bill that the leaders in both chambers backed, and which Wilson could then endorse as an “administration bill.”

  Toward the end of May, McAdoo met with Owen and Glass, with the hope of crafting some mutually agreeable solution. They made little progress. In June, when the House Banking Committee was officially reconstituted, Glass, now installed as chairman, complained to Willis, “I am all in the air and do not know what to say to members of my committee.”

  However, on June 6, Glass got an audience with the President. He brought with him telegrams from bankers affirming their opposition to the McAdoo plan. Glass read aloud an especially emphatic letter, from George Reynolds. Wilson seemed surprised; his interest in the Treasury secretary’s scheme evaporated on the spot. “I fear Mac is deceived,” Wilson said, “but fortunately the thing has not gone so far it cannot be stopped.”

  With Glass reassured of Wilson’s support, he confided in Hepburn, a banker in whom he trusted, “The chief point of danger now seems to be the apparent intractability of our friend Senator Owen.” Glass’s language suggests that he had come to regard bankers as his allies against the radicals in his party. Three days after seeing Wilson, Glass met with Owen. He found the senator in a conciliatory mood, willing to go along with most aspects of the Glass bill. However, they remained divided on the issue of control. Glass was willing to support a seven-person board with up to four directors—a majority—appointed by the president, in addition to three banker nominees. Owen insisted that all seven directors represent the public.

  While the legislators were trying to hash out a deal, Wall Street laid an egg. During late May and early June, stocks plunged, approaching the levels of the previous panic. Credit markets tightened severely. Noting the prospect for a bumper wheat crop, which would burn through vaults of cash, traders became anxious about the prospect of a credit squeeze in autumn. In a frightening echo of 1907, higher interest rates in Europe were luring gold out of the United States. Vanderlip reported to Paris, “We will need the gold badly in the fall I am afraid.” In a follow-up, he added, “The pessimism here in Wall Street is extreme.”

  McAdoo suspected that Wall Street might be contriving the disturbance to scramble the legislation. This was unlikely, but he moved to stabilize the situation by announcing his readiness (under the 1908 Aldrich-Vreeland Act, which had been hastily enacted after the previous panic) to issue emergency currency. Markets did promptly settle down. Regardless of how earnestly bankers trumpeted the virtues of laissez-faire, in times of unrest markets looked to Washington to provide stability. The fact that Aldrich-Vreeland, never more than a Band-Aid, was set to expire in 1914 gave further impetus to reform. “Currency legislation,” The Wall Street Journal opined, “should be pushed rapidly.”

  The unspoken obstacle was Bryan, and Wilson summoned him to the White House. The President, who had worked hard in the past year to mend their past differences, now asked for Bryan’s support. Bryan wanted to remain loyal; however, when Wilson confirmed what was in the bill, the Commoner said he had no choice but to oppose it. Invoking, rather loosely, the legacy of Jefferson and Jackson, he said he could not violate the Democratic Party’s long-standing commitment to government-issued money. Furthermore, Bryan objected to putting bankers on the board. He expressed “deep regret,” and offered to mute his criticism and even to resign.

  Wilson now faced a political crisis. He somberly told Tumulty, his secretary, “It begins to look as if Bryan and I have come to the parting of the ways on the currency bill.” The two discussed the potential fallout should the secretary of state resign. Without Bryan’s active help, banking reform would surely be dead.*

  It was fortunate for Wilson that he was fresh from a triumph on the tariff. In recent weeks, corporate lobbyists (who formerly had worked so effectively with Aldrich) had descended on the Senate, aiming to gut the House measure. It had begun to look as though history would repeat—tariff reform in the House followed by a stealthy retreat in the upper chamber. But Wilson had a knack for channeling public outrage to political effect. Genuinely furious, he had exploded that protectionist lobbyists were so numerous in Washington that “a brick couldn’t be thrown without hitting one of them.” Having gotten the public’s attention, he had maneuvered the Senate, where Democrats had only a thin majority, into conducting an inquiry into the conflicts of interest tainting numerous senators. During the first week in June, the public was treated to a spectacle, as senator after senator confessed to personal investments that had been favored by duty protection ratified by their own votes. Senator Nathan Bryan of Florida testified to interests in an orange grove; William Jackson of Maryland that he was part owner of a lumber mill; Henry F. Lippitt of Rhode Island to holdings in cotton. The revelations were highly embarrassing. Although Republicans continued to engage in delaying tactics, they were now too scandalized to vote against reform. Senator Robert La Follette rejoiced, “The country is indebted to President Wilson for [blowing] the lid off the congressional lobby.” Wilson had shown he could force business to back down.

  • • •

  WILSON WAS DETERMINED to be equally tough with bankers. However, banking was a more challenging subject. As he sifted through the maze of conflicting opinions, he summoned Louis Brandeis for a consultation at the White House. Brandeis was not a member of the administration, and in his law career he had focused on railroads and utilities—not banking. But Wilson had immense respect for him (bolstered by his effective advice during the campaign). Brandeis met with the President on June 11 and, as Wilson requested, memorialized his thoughts by letter immediately after. A few phrases will demonstrate that Brandeis regarded the financial class—insofar as it sought a public role—with contempt. Although he recognized that bankers were experts in their industry, he warned the President, “It is extremely dangerous to follow their advice even in a field technically their own.” According to Brandeis, advice from financiers would inevitably be self-interested, and the conflict between the administration’s goals and what bankers wanted was “irreconcilable.” Therefore, concessions to bankers would prove “futile.” He advised Wilson to insist on public control of the currency and to limit the role of bankers to a strictly advisory one.

  Wilson must have expected that the fiery Brandeis would deliver such an impassioned response; most likely, it solidified the President in his own views. On the evening of June 17—six days after Brandeis’s visit—Wilson held a parley with Glass, Owen, and McAdoo in the Cabinet Room of the White House, and informed them he had decided, as Glass put it, “to eliminate all banking representation from the Federal Reserve Board.” The board would be composed of three cabinet-level officers (the Treasury secretary, the comptroller of the currency, and the agriculture secretary) and four presidential appointees. McAdoo, having given up his own plan with reluctance, agreed that government should be “in the saddle.” Owen, of course, went along as well. Only Glass objected—vehemently. The Virginian, fearing that bankers would abandon the bill, actually took their side, protesting that it was an “injustice” to deny bankers (who were putting up the capital) a voice in the new entity. Resorting to a familiar tactic, Glass argued that Wilson’s position would raise political obstacles, especially with Republicans in the Senate. The debate lasted two hours, but the President wouldn’t budge. Not only did h
e opt for a fully political board, he scotched—at Bryan’s insistence—a key demand of bankers: namely, that the government insulate them during the transition by fully protecting them against losses in their holdings of government bonds. (Under the prevailing system, these bonds were required to issue National Bank Notes, and thus benefited from artificially high demand; under the new system, their value was expected to drop.)

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

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