Glass, feeling he had won after all, was immediately persuaded. Bryan, now, also agreed to support the bill. This meant that Owen would go along as well. It has been suggested that Bryan didn’t realize that the notes would retain much of the character of private bank issues and that, in effect, he had been played. It is also possible that Bryan sensed that once paper currency—even in a superficial sense—was proclaimed to be an obligation of the United States, people would begin to think of money differently. The long march of the twentieth century would be toward government dollars (such as circulate today) unfettered by any link to either bank assets or to specie. Wilson’s compromise was a step in that direction: a step, that is, toward fiat currency.
On June 20, the text of the bill (with the changes ordered by Wilson) was finally released and published in newspapers across the country. Editorial reaction was harsh. To conservative publishers, the notion of the federal government’s controlling a large, private industry was new and profoundly shocking. Opinion writers said the bill represented a surrender to the philosophy of Bryan. The New York Sun, an organ of Wall Street, said the measure was “covered all over with the slime of Bryanism.” If so, then the Reichsbank and the Bank of France, whose directors and governors, respectively, were appointed by the state, were covered with the same slime, a point the Sun overlooked. The more dispassionate New York Times conceded that the Glass bill had much to recommend it. Nonetheless, it termed the measure “radical” and judged it to be the work of bank-hating populists (which hardly described Carter Glass). The Washington Post, daunted by the prospect of a banking system run by political appointees, warily predicted that the power to be lodged in the new Federal Reserve Board could be “greater in some respects than the power now wielded by the President of the United States.”
Wilson smoothly deflected the criticism. When a reporter noted that critics were calling it “the Bryanesque bill,” the President retorted, “Those things don’t count. It will be called all kinds of a thing before they get through with it.”
The administration had more pressing concerns than editorial carping. Members of the House Banking Committee, realizing the bill had been prepared without their input, were in a sullen and rebellious mood. Wilson, at Glass’s urging, invited the committee Democrats to the White House and implored them to support the bill (it eased his task that Bryan made his endorsement public). Nonetheless, the President confided to his friend Mary Peck that he was preoccupied with the banking bill—“Not an hour can I let it out of my mind.” It was a difficult subject for him:
It is not like the tariff, about which opinion has been forming long years through. There are almost as many judgments as there are men. To form a single plan and a single intention about it seems at times a task so various and so elusive that it is hard to keep one’s heart from failing.
Presenting the legislation, Wilson broke with tradition again. On June 23, formally got up in black frock coat, gray trousers, and a dark cravat, the President returned to the Capitol. His wife and two of their daughters were seated in the President’s pew. Speaker of the House Champ Clark (whom Wilson had bested at the Democratic convention) rapped his gavel, and Wilson, accompanied by Secret Service men, entered from a doorway in the rear. All rose, he ascended the rostrum, and Clark announced the President of the United States. Wilson read his speech, nodding on occasional words for emphasis. It took only nine minutes. He stressed—fittingly, on such a sweltering afternoon—that the hardship of working through the “heated season” was no excuse for delay. “We must act now,” he said, snapping his jaws at the word, “at whatever sacrifice to ourselves.”
Wilson depicted banking reform as a companion to still pending tariff reductions—together, the two measures would set business free from the twin shackles of arbitrary duties and inadequate credit. He cited three principles for banking reform. One was the cliché that the currency should be “elastic,” by which he meant flexible in quantity, to meet the ebb and flow of demand. Another echoed Warburg: “Our banking laws must mobilize reserves,” Wilson said. And this, he asserted, would accomplish a third purpose—abolishing the concentration of monetary resources “in [just] a few hands.” Banks, Wilson concluded ringingly, should be the instruments and not the masters of business.
• • •
THE AMERICAN BANKERS ASSOCIATION, members of whose currency commission were conveniently meeting in New York, at the Waldorf Hotel, now went on a counterattack. The view of midwestern bankers, including James Forgan, president of the First National Bank of Chicago, was emphatically negative. Bankers had urged reform for years; now that it looked as though reform could bring about federal control, they were not so happy.
Bankers generally applauded the aspect of individual Reserve Banks, which Willis had designed to be owned by banks and run by bankers—so-called bankers’ banks. However, La Salle Street was uncomfortable with the central board—a public body—and unsettled that the Glass bill authorized Washington to determine the key interest rate, known as the discount rate, in each district.
Many bankers also objected to the compulsory shifting of reserves. Country banks would lose the interest they collected from depositing funds in banks in the city; city banks would lose control of the money. Breaking this dependent relationship was, of course, one of the primary purposes of the legislation. The goal was to establish collective reserves to replace the archaic pattern of every bank for itself. In practice, many bankers treated their vault reserves as a drug that—however harmful in theory—was impossible to give up. Laughlin observed, with justification, that the banks cared less about reform than about their “selfish private interests.” It is also true that many bankers were frightened by the prospect of being forced to fundamentally alter how they did business.
Two days after Wilson’s appearance on Capitol Hill, Glass, who was still feeling protective toward the industry, led a troop of bankers—including Wade of St. Louis, Reynolds of Chicago, and Sol Wexler from New Orleans, all influential members of the ABA’s currency commission—to see the President. McAdoo and Owen were present, but it was Glass’s show. The congressman was in the awkward position of providing moral support to the bankers as they lobbied for changes to his own bill. The hard-driving Wade, who had emigrated from Ireland in infancy and worked in construction as a boy before becoming a banker, struck a contrast with the scholarly Wilson, whose office was lined with leather-bound books. Wade spoke forcefully against Wilson’s all-political board. “Will one of you gentlemen,” the President shot back, “tell me in which civilized country of the earth there are important government boards of control on which private interests are represented?” A painful silence followed.
The bankers lost that round, but they won important concessions. Discount rates would be set by each individual Reserve Bank, subject to Washington’s approval. (Given that banks would have more control at the Reserve Bank level, bankers were eager to shift power away from the center.) Second, the problematic government bonds would be refinanced, removing the threat of losses as banks transitioned to the new system. Third and most remarkably, banks would be permitted, at the discretion of the Reserve Board, to keep a portion of their reserves in banks downstream, as they had done for years. Wilson and Glass were foolish to give in on this point, which threatened the integrity of the system. In return, Glass believed he had won the bankers’ promise of support.
The following day, June 26, Glass and Owen introduced identical bills in their respective chambers. Far from a radical manifesto, Glass-Owen struck a sensible middle ground, with power shared between the center and the regions and between the public and private domains.* Save for the concessions to Bryan, the proposed Reserve system was essentially faithful to what central bank partisans such as Warburg had been preaching. Thus, reserve requirements had been cut and the number of Reserve Banks had been trimmed, to “not less than twelve” (still too many to Warburg’s liking). Perhaps most remarkably, given the
Democratic Party’s hostility to centralism, Wilson’s innocent “capstone” had evolved into something approaching the dominant central organ that Wall Street had been hankering for. As now proposed, the Federal Reserve Board had authority to require one Reserve Bank to lend money to another, supervise each Reserve Bank’s issue of notes, examine their books, and, if it chose, remove their executives. Also dear to Wall Street’s heart, Glass-Owen permitted the Reserve Banks to finance import and export trade.
No onlooker in 1913 could have predicted that one day the Fed’s most well-advertised duty would be setting interest rates. The bill’s primary purpose was to mobilize reserves, the better to avert a crisis, and to modernize the banking system. Its emphasis was on the mechanics of how the Reserve Banks would provide liquidity to banks—that is, by purchasing their short-term loans. However, an intriguing clause stated that interest rates should be adjusted “with a view to accommodating the commerce of the country and promoting a stable price level.” Buried in that phrase was the suggestion of what became, through a subsequent act of Congress, the Fed’s dual mandate—promoting growth and minimizing inflation.
Glass imagined that since the banks had (mostly) prevailed and since Bryan, too, had been placated, both his left and his right flank were covered. In fact, neither of them was. Harmony with the banks was shattered first. At the White House, Glass had understood the bankers to promise unwavering support. The bankers, actually, left Washington supportive of the bill in general, but still determined to fight for improvements. After conferring with colleagues, they realized that much of the industry was still opposed. Country banks found the requirement that they subscribe to stock in their local Reserve Bank too onerous. Chicago was terrified of losing deposits and wanted even more modifications to the reserves clause. Wall Street was exceedingly hostile to federal control. Warburg, summering in the Swiss alpine village of Sils-Maria, finally got hold of a copy of the bill and, though satisfied with most of its provisions, was horrified by the concessions to Bryan. He cabled House, “Is there anything I can do in the currency situation? It looks to me as if they were bungling it most terribly.”* One by one, the Aldrich crowd was roused into resistance. Davison begged Aldrich to meet and plan a counterstrategy. Andrew penned a damning review of the bill, calling it “Bryanized.”
The ABA was also critical, although some of its members were willing to bargain for half a loaf. Reynolds and Wade expected to support the bill, but wanted to see improvements first. Forgan, the closest that Chicago had to a J. P. Morgan, was simply opposed. At sixty-one, Forgan was older than other ABA leaders and, with his wide sideburns and handlebar mustache, considerably more steeped in nineteenth-century traditions. Forgan distributed to members of the House Banking Committee a pamphlet asserting that the bill would pose a danger to the country. The New York Times, parroting Forgan as well as New York bankers, hyperbolically submitted that the bankers’ objections rendered the bill, in its present form, “dead and done for.” As veterans of Gettysburg gathered in Washington to commemorate the fiftieth anniversary of the Civil War battle, the flimsy consensus on banking seemed to be melting in the summer heat.
Glass, who had mightily extended himself for the bankers, was livid. He regarded the bankers’ renewed demands as a renunciation of their “agreement.” Abruptly, he decided that his banker allies could not be trusted and shifted into what Willis was to describe as a state of “warfare.” Glass withdrew his offer to compromise and reinstated language making it compulsory that banks pull their reserves from banks in the cities and park them, more securely, in the Federal Reserve banks, with a portion kept in their own vaults. Even if he had acted in pique, it was a sensible move that resurrected the bill’s essential purpose.
Early in July, Glass and McAdoo attempted, once again, to mollify the bankers. The government’s 2 percent bonds mysteriously began to trade lower, to a point where banks, which held some $700 million of these bonds, were threatened with serious losses. Banks had purchased these bonds so that, under the National Banking Act, they would be entitled to circulate bank notes. McAdoo and Glass sympathized with the banks, feeling that since the government now was changing the rules, bondholders should be protected. Evidently—to judge from the bonds’ cascading prices—the recent changes to the bill had not done the trick. In short order, the bill was further amended, seemingly guaranteeing the bonds’ value.
However, the bonds continued to plummet. McAdoo smelled a rat. Never very trusting of Wall Street, the onetime tunnel financier hotly accused New York bankers of conspiring to artificially drive down prices to frighten country banks and turn them against the bill.
Such a conspiracy was unlikely, but the ill will between Wall Street and the administration was not so easily repaired. In a public letter, Vanderlip threatened that if the legislation retained its noxious element of federal control, the country’s seventy-five hundred national banks would feel free to recharter as state banks (for whom membership was voluntary), take their $11 billion in assets, and defect from the National Banking system. The threat to desert the new Federal Reserve—even before it was created—was a gun to the head. But if Vanderlip imagined that either McAdoo or Glass might back down, he was deluded. It was a measure of his remove that even while threatening to undermine the system, Vanderlip affected a haughty air of noblesse oblige, insisting that only businessmen—not public officials—should be trusted to look after the public interest. “There must, in fact, be a central bank and that is what the proposed measure creates,” Vanderlip said curtly. “The objection is not to the powers granted but to the hands in which they are placed.”
While McAdoo and Glass were sparring with banks, House Democrats began to savage the bill for being too kind to bankers. Wilson at first underestimated the threat. However, in mid-July, he confided to Ellen, who was spending her maiden summer as First Lady at an artists’ colony in Cornish, New Hampshire, “We have a difficult Banking and Currency Committee to deal with in the House.” Actually, it was more serious than that. Rural Democratic congressmen from the West and South, known as “agrarians,” were much like the populist agitators of the nineteenth century. Rather than use silver-backed money to inflate commodity prices, the latest crop of populists wanted to channel more bank loans directly to farmers, who still made up some 30 percent of the U.S. population. Although the Glass-Owen bill specifically included bank loans to agriculture as being eligible for Federal Reserve discounts, the agrarians were wary of leaving the process up to bankers. They also feared that the new central bank would become too cozy toward member banks, and even, in an emergency, protect the banks from losses. (This fear would look prescient during the financial crisis of 2008.) However, agrarians were not opposed to government protection—they simply wanted it extended toward farmers rather than banks.
The spiritual leader of the agrarians was Robert Henry, a Texas Democrat who was chairman of the House Rules Committee. Henry was an engaging talker, who traded on his reputation for being close to Bryan and commanded loyalty among backcountry members of the Banking Committee. Henry insisted that the Federal Reserve Board should include a bona fide farmworker as well as a representative of organized labor. To bankers, this was worse than a board of politicians. Even more troubling to the orthodoxy, Henry challenged the basis of the new Federal Reserve notes. Mistrusting bankers, Henry disliked any sort of currency that was based on bank assets. He wanted the bill amended so that agricultural assets (such as warehouse receipts) would become the basis of money. This new money would be loaned, on generous terms, to farmers.
On July 23, the agrarians on the Banking Committee broke into open rebellion, proposing a controversial amendment to ban interlocking directorates (preventing any director from serving on the board of more than one national bank). The amendment was extraneous to monetary reform, and though it was sound from a corporate-governance perspective, in the context of the Glass-Owen legislation it was a volatile distraction. Knowing that it w
ould extinguish whatever support still remained among bankers, Glass opposed it. The amendment was adopted over his protest. With his committee, and his bill, in crisis, fireworks erupted. James Ragsdale, a South Carolina ally of Henry, proposed a series of amendments to fundamentally alter the bill. The most eye-catching would direct the Reserve Banks to issue $700 million worth of loans divided among three new classes of United States currency (each to a powerful interest group): $300 million for ordinary business loans, $200 million for state projects such as bridges and roads, and $200 million to corn, cotton, and wheat farmers. In other words, bank credit was to be apportioned by the U.S. Congress. Bankers, who had considered this to be their job, were naturally appalled. The amendments, apparently inspired by Henry, were, according to the shocked editors of the Times, “quite beyond the pale of discussion.” It was unclear whether Henry had the support of Bryan, which he seemed to be reckoning on. But plainly, Glass had lost control of the Banking Committee. Wilson would need to step in again.
CHAPTER THIRTEEN
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