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

by Roger Lowenstein

  “I was not here for three weeks”: Harold Kellock, “Warburg, the Revolutionist,” The Century Magazine 90 (n.s. 68—May to October 1915).

  Paul seemed to make money: Ron Chernow, The Warburgs: The Twentieth-Century Odyssey of a Remarkable Jewish Family (New York: Random House, 1993), 40.

  Overall, his field study: Kellock, “Warburg, the Revolutionist.”

  running the family bank: Chernow, The Warburgs, 69.

  Warburg was shocked by the primitiveness: Paul M. Warburg, The Federal Reserve System: Its Origin and Growth—Reflections and Recollections (New York: Macmillan, 1930), 1:14–16.

  approximately fifteen thousand banks: “Changes in the Number and Size of Banks in the United States, 1834–1931, Material Prepared for the Information of the Federal Reserve System by the Federal Reserve Committee on Branch, Group, and Chain Banking,” 3, available at http://fraser.stlouisfed.org/docs/historical/federal%20reserve%20history/frcom_br_gp_ch_banking/changes_in_banks_1834_1931.pdf. This report gives a figure of 13,925 banks in 1900; by 1903 the total was slightly higher than 15,000. The report was written for a Fed committee appointed in 1930, J. H. Riddle, executive secretary and director of research.

  “How is the great international financier?”: This anecdote is from Warburg, Federal Reserve System, 1:18–19, except for the detail on Edward Harriman, which is from the research notes collected by Jeannette Paddock Nichols and Nathaniel W. Stephenson for the latter’s biography found in the Nelson W. Aldrich Papers, Reel 61. (These research notes are found in various reels of the Aldrich Papers and all are hereinafter cited as “Biographer’s notes.”)

  Aldrich had high aspirations: Jerome L. Sternstein, “Nelson W. Aldrich: The Making of the ‘General Manager of the United States,’ 1841–1886,” A.B. thesis, Brooklyn College, 1959, 199–200.

  “its splendid white marble staircase”: Nathaniel Wright Stephenson, Nelson W. Aldrich: A Leader in American Politics (New York: Scribner’s, 1930), 11–12.

  His father, a skilled machinist: Biographer’s notes, Aldrich Papers, Reel 58.

  Aldrich felt acutely: Sternstein, “Nelson W. Aldrich,” 9.

  Rejection furnished Aldrich: Ibid., 38–41; the letter to Abby is on p. 32.

  Aldrich elevated himself: Biographical details on Senator Aldrich generally come from Stephenson, Nelson W. Aldrich. The impression that Aldrich felt entitled to membership in the aristocracy is informed by Nelson W. Aldrich Jr., Old Money: The Mythology of Wealth in America (1988; repr., New York: Allworth Press, 1996), in particular p. 14; this is also the source for the objets (p. 26) and the land acquisition (p. 27). Details about the château come from Biographer’s notes, Aldrich Papers, Reel 58; Aldrich, Old Money, 26; and Stephenson, Nelson W. Aldrich, 192.

  “most earnest and cherished hope”: Sternstein, “Nelson W. Aldrich,” 150–51.

  a rambling tour of Europe: Ibid., 84–100.

  “a basis for his commitment”: Ibid., 105.

  “If I am deeply impressed”: Quoted in ibid., 105–6.

  smiled rather than laughed out loud: Biographer’s notes, Aldrich Papers, Reel 58. See also Aldrich, Old Money, 13–21.

  Rarely did he debate: Biographer’s notes, Aldrich Papers, Reel 59.

  “side whiskers close cut”: Stephenson, Nelson W. Aldrich, 44.

  “a blindness to inessentials”: Sternstein, “Nelson W. Aldrich,” 159.

  Rhode Island legislative bosses: Sternstein, “Nelson W. Aldrich,” 52–53; and Aldrich, Old Money, 15–16.

  the hot issue was the tariff: Author’s correspondence with Douglas A. Irwin.

  had 170 volumes shipped: Biographer’s notes, Aldrich Papers, Reel 58.

  “the general liberty of trade”: Adam Smith, The Wealth of Nations (1776).

  highest concentration of industry: Sternstein, “Nelson W. Aldrich,” 194.

  family that ran the Sugar Trust: There is a rich literature on Aldrich’s relationship with the Sugar Trust; see especially Jerome L. Sternstein, “Corruption in the Guilded Age Senate: Nelson W. Aldrich and the Sugar Trust,” Capitol Studies: A Journal of the Capitol and Congress 6, no. 1 (Spring 1978), as well as Biographer’s notes, Aldrich Papers, Reel 59; and Sternstein, “Nelson W. Aldrich,” 236. Other details in this paragraph come from Sternstein, “Nelson W. Aldrich,” 191, 198–201, 236, 248, 255–56, 260, and 262.

  persuading William McKinley: Biographer’s notes, Aldrich Papers, Reel 59.

  bankers desperate to halt: Michael Clark Rockefeller, “Nelson W. Aldrich and Banking Reform: A Conservative Leader in the Progressive Era,” A.B. thesis, Harvard College, 1960, 6.

  “Our currency is as good as gold”: Barton Hepburn, A History of Currency in the United States (New York: Macmillan, 1924), v–xvi.

  “Aldrich is a great man”: Sternstein, “Nelson W. Aldrich,” 4.

  “would adopt it as his own”: Hepburn, History of Currency, v–xvi.

  This “stupid condition”: Banking and Currency Reform: Hearings Before the Subcommittee of the Committee on Banking and Currency, Charged with Investigating Plan of Banking and Currency Reform and Reporting Constructive Legislation Thereof, 62nd Cong., 3rd sess., House of Representatives, January 7, 1913 (Washington, D.C.: Government Printing Office, 1913), 77, available at http://books.google.com/books?id=pc0qAAAAYAAJ&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false.

  “To a person trained under”: Warburg, The Federal Reserve System, 1:17.

  “a lively and intimate daily exchange”: Ibid., 1:14–15.

  “Once started, the poor check”: James G. Cannon and David Kinley, National Monetary Commission, Clearing Houses and Credit Instruments (Washington, D.C.: Government Printing Office, 1911), 6:70–73.

  more than two hundred trusts: Richard Hofstadter, The Age of Reform: From Bryan to F.D.R. (New York: Vintage, 1955), 168–69, 232.

  America had far more banks: Kellock, “Warburg, the Revolutionist.”

  “there existed as many disconnected”: Warburg, The Federal Reserve System, 1:12.

  Warburg frequently unburdened himself: “Aldrich Becomes Converted to Idea of a Central Bank, May–October, 1908,” Aldrich Papers, Reel 61 (from Warburg Papers).

  His one innovation was to suggest: “What Congress Left Undone,” The Outlook 73, no. 11 (March 14, 1903), available at www.unz.org/Pub/Outlook-1903mar14-00597a02. See also Rockefeller, “Nelson W. Aldrich and Banking Reform,” 6; Stephenson, Nelson W. Aldrich, 210; Robert H. Wiebe, Businessmen and Reform: A Study of the Progressive Movement (Chicago: Elephant, 1989), 64; and McCulley, Banks and Politics During the Progressive Era, 104–5.

  A card-playing companion of J. P. Morgan: Jerome L. Sternstein, “King Leopold II, Senator Nelson W. Aldrich, and the Strange Beginnings of American Economic Penetration of the Congo,” African Historical Studies 2, no. 2 (1969).

  “it became easy for Aldrich”: Rockefeller, “Nelson W. Aldrich and Banking Reform,” 50.

  Many articles focused on the gross inequities: Arthur Weinberg and Lila Weinberg, eds., The Muckrakers: The Era in Journalism That Moved America to Reform—The Most Significant Magazine Articles of 1902–1912 (New York: Simon and Schuster, 1965), xiv, xv, and xix.

  “the chief exploiter of the American people”: David Graham Phillips, “The Treason of the Senate,” Cosmopolitan, March 1906. The previous year, Aldrich had been the focus of another broadside: Lincoln Steffens, “Rhode Island: A State for Sale,” McClure’s Magazine 24, no. 4 (February 1905).

  “look no way but downward”: Weinberg and Weinberg, The Muckrakers, xvii.

  Critics also thought the attacks: Ibid., xvi–xvii, 70.

  America had 3,800 of them: Ibid., xiii, xiv.

  CHAPTER THREE: JITTERS ON WALL STREET

  “There is just as true patriotism”: Vanderlip to Woodrow Wilson, October 29, 1912, telegram, Frank A. Vanderlip Papers, Box 1-4.
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  Schiff feared that America’s prosperity: Cyrus Adler, Jacob H. Schiff: His Life and Letters (1928; repr., Grosse Pointe, Mich.: Scholarly Press, 1968), 1:277–79. The $100 million figure comes from A. Piatt Andrew, “The Treasury and the Banks Under Secretary Shaw,” The Quarterly Journal of Economics 21, no. 4 (August 1907), 542–43.

  the hidebound National Banking system: Biographer’s notes, Nelson A. Aldrich Papers, Reel 61, which makes reference to the “hard-boiled” loyalty shown by American bankers toward the National Banking Act.

  Vanderlip had grown up: Biographical details in this and the next paragraph come from Frank A. Vanderlip with Boyden Sparkes, From Farm Boy to Financier (New York: D. Appleton-Century, 1935); the opinion of Roosevelt is found on 80–82.

  ferried four eggs: Anna Robeson Burr, James Stillman: The Portrait of a Banker (New York: Duffield, 1927), 185.

  Even though the U.S. economy had grown: Henry Parker Willis, The Federal Reserve System: Legislation, Organization and Operation (New York: Ronald Press, 1923), 486. The 40 percent figure was given during the 1913 Senate debate on the Federal Reserve Act; in 1906, the percentage most likely was less, but it was still impressively high.

  the dollar would overtake the pound: J. Lawrence Broz first proposed the thesis that American bankers lobbying for a central bank were motivated, at least in part, by their private interest in seeing the dollar become an international currency. See Broz’s “The Origins of Central Banking: Solutions to the Free-Rider Problem,” International Organization 52, no. 2 (Spring 1998), 231–68, as well as his “Origins of the Federal Reserve System: International Incentives and the Domestic Free-Rider Problem,” International Organization 53, no. 1 (Winter 1999), 39–70. See also Adler, Jacob H. Schiff, 280–81, which quotes Schiff at the New York Chamber of Commerce: “Our merchants who buy goods in China, Japan, South America, and elsewhere must, to our mortification, still settle their transactions in London, Paris, or Germany, just as the very money we loaned to Japan recently had to be remitted to London.”

  “unable to make use of their credit”: “The Currency,” report by the Special Committee of the Chamber of Commerce, New York State, submitted October 4, 1906, and adopted November 1, 1906, available at https://archive.org/stream/currencyreport00newyrich/currencyreport00newyrich_djvu.txt.

  “a majority of the bankers”: Ibid.

  “New York bankers are, with few exceptions”: Richard T. McCulley, Banks and Politics During the Progressive Era: The Origins of the Federal Reserve System, 1897–1913 (New York: Garland, 1992), 89–90.

  “If you go away from New York City”: Adler, Jacob H. Schiff, 284–85.

  “The immediate effect has been”: Vanderlip to James Stillman, April 27, 1906, Vanderlip Papers, Box 1-2. Details on Stillman’s mansion from Burr, James Stillman, 248, 275. See also Kerry A. Odell and Marc D. Weidenmier, “Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907,” Journal of Economic History 64, no. 4 (December 2004).

  “The drain which California”: Vanderlip to James Stillman, May 4, 1906, Vanderlip Papers, Box 1-2.

  In April and three times later: Andrew, “The Treasury and the Banks Under Secretary Shaw,” 543.

  a short-term loan of $10 million: Ibid., 545.

  “granaries and warehouses were empty”: Annual Report of the Secretary of the Treasury on the State of the Finances, 1906, 39, 41.

  “business men returned to their desks”: Ibid., 41–42.

  “with great benefit”: Ibid., 39, 42.

  The total funds at his disposal: Richard H. Timberlake Jr., The Origins of Central Banking in the United States (Cambridge, Mass.: Harvard University Press, 1978), 220–21.

  fully 11 percent: Harold van B. Cleveland and Thomas F. Huertas, Citibank: 1812–1970 (Cambridge, Mass: Harvard University Press, 1985), 49.

  “had begun to smell kerosene”: McCulley, Banks and Politics During the Progressive Era, 123.

  “a ring of powerful Wall Street speculators”: Timberlake, The Origins of Central Banking in the United States, 179.

  “finds its level about as quickly”: Annual Report of the Secretary, 1906, 42–43.

  some future “autocrat”: Timberlake, The Origins of Central Banking in the United States, 179.

  “Outside relief in business”: Andrew, “The Treasury and the Banks Under Secretary Shaw,” 544, 559, 561, and 565.

  Shaw immodestly suggested: Shaw specifically claimed that if he was given $100 million to be deposited with or withdrawn from banks at his pleasure, and was permitted to set reserve requirements, he could avert any panic that threatened either the United States or Europe: see Annual Report of the Secretary, 1906, 46, 49.

  the ABA championed a bill: McCulley, Banks and Politics During the Progressive Era, 92–93; and Robert H. Wiebe, Businessmen and Reform: A Study of the Progressive Movement (Chicago: Elephant, 1989), 63–64.

  But the prospect of branch banking: McCulley, Banks and Politics During the Progressive Era, 92, 95–97, 124, and 133; and Michael Clark Rockefeller, “Nelson W. Aldrich and Banking Reform: A Conservative Leader in the Progressive Era,” A.B. thesis, Harvard College, 1960, vi, x, and xi.

  “The bankers are still divided”: Wiebe, Businessmen and Reform, 65.

  the system was run by “God”: Henry F. Pringle, The Life and Times of William Howard Taft (New York: Farrar and Rinehart, 1939), 2:716.

  “abhorrence of both extremes”: Paul M. Warburg, The Federal Reserve System: Its Origin and Growth—Reflections and Recollections (New York: Macmillan, 1930), 1:12.

  “You ought to write”: Harold Kellock, “Warburg, the Revolutionist,” The Century Magazine 90 (n.s. 68—May to October 1915).

  “The Bank of England is extremely nervous”: Vanderlip to James Stillman, March 22, 1907, Vanderlip Papers, Box 1-2.

  London raised its interest rate: Andrew, “The Treasury and the Banks Under Secretary Shaw,” 548 (also the source for Reichsbank).

  directing British banks to liquidate: O. M. W. Sprague, National Monetary Commission, History of Crises Under the National Banking System, 61st Cong., 2d sess. (Washington, D.C.: Government Printing Office, 1910), 241.

  “the Wall Street boom punctured”: McCulley, Banks and Politics During the Progressive Era, 125.

  Wall Street tried to replace: Ibid., 119; and Sprague, History of Crises, 241.

  “I have felt for some time”: Cleveland and Huertas, Citibank, 51–52.

  “buoyancy and hopefulness”: Perkins to J. P. Morgan, April 30, 1907, George W. Perkins Sr. Papers, Box 9.

  “a great number of people and houses”: Perkins to J. P. Morgan, May 31, 1907, ibid.

  “make loans for any length of time”: Perkins to J. P. Morgan, June 19, 1907, ibid.

  “a partial fulfillment of hopes”: “Currency Outlook Under Aldrich Law,” The New York Times, March 4, 1907.

  “There seems to be a general feeling”: Perkins to J. P. Morgan, May 27, 1907, Perkins Papers, Box 9.

  CHAPTER FOUR: PANIC

  “A panic grows”: Walter Bagehot, Lombard Street: A Description of the Money Market (London, 1873), 20.

  “Who is to be Mr. Morgan’s successor?”: Ida Tarbell, “The Hunt for a Money Trust, III. The Clearing House,” American Magazine, July 1913, 42.

  “The present head of the department”: Richard H. Timberlake Jr., The Origins of Central Banking in the United States (Cambridge, Mass.: Harvard University Press, 1978), 184.

  “Not so loud, please, Mr. Street”: Frank A. Vanderlip with Boyden Sparkes, From Farm Boy to Financier (New York: D. Appleton-Century, 1935), 165–67.

  “a little let-up in general business”: Perkins to J. P. Morgan, July 12, 1907, George W. Perkins Sr. Papers, Box 9.

  The New York money market tightened: Jon Moen and Ellis W. Tallman, “The Bank Panic of 1907: The Role of Trust Companies,” The Journal
of Economic History 52, no. 3 (September 1992), 617.

  “There is nothing special to report”: Perkins to J. P. Morgan, October 3, 1907, Perkins Papers, Box 9.

  “We are all very well”: Perkins to J. P. Morgan, October 12, 1907, ibid.

  manipulate a copper-mining stock: The speculator, whose name I omitted to avoid deluging the reader with an abundance of characters, was Frederick Augustus Heinze, one of the three so-called copper kings of Butte, Montana. The mining stock was that of United Copper Company. This account is largely based on O. M. W. Sprague, “The American Crisis of 1907,” The Economic Journal 18, no. 71 (September 1908).

  And while a dollar in the national banks: Jon R. Moen and Ellis W. Tallman, “Why Didn’t the United States Establish a Central Bank Until After the Panic of 1907?” (unpublished manuscript, September 2007), 27, table 3; the figures are for New York City only. Note the precise reserve figures were 5.8 percent (5.8 cents per dollar of deposits) for trusts and 25.7 percent for banks.

  “had been of an extreme character”: Sprague, “The American Crisis of 1907,” 357.

  two of the Morse banks: Ibid., 358.

  Morse seems to have ratted out: “Knickerbocker Will Be Aided,” The New York Times, October 22, 1907. This article says that Morse urged the New York Clearing House to continue its probe into other banks, and that Morse and Barney were “at odds.”

  Barney and the unsavory Morse: Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (Hoboken, N.J.: John Wiley and Sons, 2007), 75–76. Bruner and Carr also maintain that growing rumors of the two men’s connections both contributed to Barney’s downfall and “gained credence” when Barney was forced to resign.

  private railcar: Vincent P. Carosso, The Morgans: Private International Bankers, 1854–1913 (Cambridge, Mass.: Harvard University Press, 1987), 536.

  Davison was immediately confronted: New York Clearing House, Minutes, October 21, 1907, cited in Moen and Tallman, “Why Didn’t the United States Establish a Central Bank,” 12.