Unlike Vanderlip, Warburg maintained a supportive stance in public and tried to modify the bill from within. He and Owen fortuitously shared a train ride from Washington to New York, affording Warburg the chance to lobby the senator at length. He tried to disabuse Owen of his “pet theories” of banking, which were laden with prairie suspicions. Owen held his ground, but once back in Washington, he began consulting Warburg on changes in the draft. Warburg was also called to mediate between the committee’s warring factions. Although the attempt failed, members of both parties subsequently sought his counsel. Warburg also forwarded to McAdoo, Colonel House, and various senators a flood of correspondence from European bankers echoing his prescriptions.
Warburg’s relentless lobbying seemed to bear fruit when, on November 20, the Owen faction cut the number of Reserve Banks to eight, the minimum that Wilson would accept. Warburg also persuaded Owen to make changes in the discounting section, a technical area of great interest to Warburg. Meanwhile, Hitchcock (with help from Vanderlip and Strong) prepared a separate bill, with only four Reserve Banks and public stock subscription. Even the four banks would be controlled by Washington—a very centralized scheme.
Although unwilling to vote for Owen’s bill (the Senate counterpart of the measure that had passed in the House), Hitchcock at least acquiesced in a legislative maneuver that allowed reform to get out of committee. Since the panel could not endorse a bill, it simply referred two bills, recommending neither. Then, Wilson ordered the Senate Democrats to meet in caucus, to align the party behind the Owen bill. While Hitchcock insisted he would not comply with the caucus, Wilson had signaled that he considered the Owen bill a make-or-break test of loyalty.
Banking reform finally got to the Senate floor in December, at the start of the regular session. Wilson, in his annual message to Congress on December 2, urged the Senate to move with dispatch.* He emphasized the plan’s benefit to farmers. Adding to the pressure on the upper chamber, the President put his plans for a Christmas vacation on hold, pending enactment. He also directed Democrats in the Senate to table plans for a holiday recess—not a trivial matter in an era when members could hardly fly home for a weekend. With Wilson riding herd, Senate leaders imposed a grueling schedule of day and night sessions lasting until eleven p.m. Even Vanderlip admitted that the President was becoming an exceptionally forceful executive. All pursed lips, the banker exclaimed, “I have never seen so much power wielded by any administration as Wilson seems to have.”
The first order of business in the Senate was to choose between the Owen and the Hitchcock measures. As the debate began, Owen held a slim lead. But the Senate became embroiled in a paramount issue that, up until that point, had remained curiously offstage—inflation. Although all of the rival measures reaffirmed the country’s commitment to the gold standard, there was understandable fear that the creation of a new machinery designed to foster access to credit would end up debasing the money. Senators hotly debated whether reserve notes themselves should be “legal tender”—or merely paper that could be redeemed for gold. The distinction was mostly theoretical, because the vast majority of citizens would choose to carry reserve notes rather than specie. Still, the Senate’s legal tender standard, seeming to endow the Fed with greater license, alarmed monetary purists, since if it prevailed, the new Reserve Banks would be minting not just notes but “money.”
Further stoking inflation fears, the Owen bill, as compared with the House measure, was more conducive to stimulating credit (credit is the basis of money; more of it leads to more dollars in circulation). For instance, at Warburg’s urging, the Senate cut reserve requirements below those in the House, enabling banks to issue more loans and, again, create more money. The most controversial feature in the Senate bill was a provision for a deposit guarantee. The notion of insuring deposits as a means of forestalling bank runs had been on the margins of the debate since 1907 and, of course, was favored by Bryan. It was considered a radical step—one that would encourage imprudent banking.
Nonetheless, Wall Street, which had visions of a muscular Federal Reserve that would pump up credit and arm American banks to do business overseas, preferred the Senate’s version of Glass-Owen to the House’s. The upper chamber not only permitted national banks to open foreign branches but explicitly permitted the new Reserve Banks to trade in securities “at home or abroad.” The House bill, more faithful to Glass’s original Princeton blueprint, was more cautious. For instance, the Senate employed forceful language in authorizing the Federal Reserve Board to compel one Reserve Bank to loan money to another. This was important, because it enabled the board to coax the various parts of the system into working as a whole. The language in the House was more restrictive.
Thanks to pressure from farm state senators, the Owen bill was also permissive toward farmers, extending to six months, instead of just ninety days, the agricultural paper eligible for discount (in practical terms, this meant that a rural bank could lend money to a farmer to cover the entire growing season, and redeem the loan at the local Federal Reserve Bank). Owen’s bill also permitted national banks, for the first time, to write mortgages on farms. Not since the heyday of silver had a banking proposal gone so far to liberalize rural credits. Banking traditionalists, especially in the East, were terrified of the potential for inflation.
Such concerns boiled over on December 13, when Elihu Root, the senior senator from New York, delivered an eloquent peroration that attacked the Owen bill as an inflationary menace. Root, a Republican, was a prestigious figure, secretary of both war and state under Roosevelt (he had recently been awarded the Nobel Peace Prize) and an accomplished corporate lawyer. On the Senate floor, he charged that the “universal experience” of paper currency is the tendency to increase circulation. Inflation was a product of human nature, and “little by little business is enlarged with easy money. . . . Bankers are not free from it—they are human. The members of the Federal Reserve Board will not be free from it. . . . Regional bankers will not be free from it.”
Root supplied facts and figures attesting to an increase in the money stock; he claimed that under the proposed legislation, money in circulation would rise without limit. In fact, if any country had defied the “universal experience” of inflation, it was the United States over the previous forty years. Prices had consistently fallen from the 1870s to the McKinley era. Since 1896, the trend had reversed, but in 1913 price levels remained no higher—probably, they were lower—than after the Civil War. Root was quite right to consider whether a new agency for circulating currency could lead to inflation, but he understated the bill’s considerable safeguards. Although no explicit ceiling on the currency was written into the bills in either chamber, the Reserve Banks could issue notes only in exchange for qualified bank paper. Moreover, the Reserve Banks would have to back their notes with a gold reserve. The bill contained a safeguard of a different kind by authorizing the Reserve Banks for only twenty years. This replicated the limited authorization of the ill-fated first and second Banks of the United States. (In 1927, this sunset provision over the Fed would be abolished.)
While the Senate was trying to get its head around inflation, the President was in a state of seclusion. Always of delicate health, Wilson had been under a strain from the still escalating turmoil in Mexico, as well as from his self-imposed deadline on banking. He had not been well since attending the Army-Navy game on a blustery day, when he had caught a cold. Having seemed to recover, he had gone for a walk in a bracing wind, scorning an overcoat, and developed an infection. He was feeling “bum and blue,” he confessed to Mary Peck. His condition spread concern through the White House. Wilson’s doctor ordered him abed and forbade visitors. He also insisted that the President take his rest in a southern clime, banking bill or no banking bill. Wilson stayed put but was inopportunely silent.
Luckily for Wilson, public support for the administration bill was mounting, especially from workaday bankers who much preferred t
he Owen version to the Hitchcock proposal. He also got support from Warburg, who defended the legislation against inflation charges. Even with the deadline approaching, Warburg peppered Senator Owen with suggestions for improving the bill. He also corresponded with business executives, trying to goad them into further lobbying. When Wade, the St. Louis banker, pronounced himself well satisfied with the bill as it stood, Warburg, still pushing a plan to concentrate the reserve banks, accused him of “throwing up [his] hands.” This was a mere ten days before Christmas.
Glass had maintained a wary distance from Warburg, but as the legislation reached a climax relations between the two framers—one a self-educated southerner, the other a sophisticated European—considerably warmed. Warburg kept Glass closely informed of his discussions with senators, which Glass no doubt appreciated. After a lengthy chat at Glass’s hotel, the Virginian stunned Warburg by urging him to consider a position (should it be offered) on the prospective Federal Reserve Board. As a recently naturalized citizen still craving acceptance, Warburg was deeply moved.
On December 17, after eighty hours of debate, Senate Democrats imposed a time limit on speeches and scheduled a vote for two days later. As a precaution, they acquiesced to a demand of Root and the inflation hawks and upped the gold backing for Federal Reserve notes from 33 percent to 40 percent. Wilson by now was well enough to appear in public. Showing no ill effects, he went for a ride—with his physician—in a closed motorcar and again refused to let Congress consider a recess. On the nineteenth, a Friday, the Senate considered the Hitchcock bill and voted it down 43–41. By this slimmest of margins it turned to the Owen bill. Hitchcock proclaimed that, the bill having been improved by his labors, he would accede. Six Republicans joined every Democrat for a resounding 54–34 vote in favor.
Warburg rifled off a congratulatory note to Owen. He revealed his true feelings about the Senate (including Owen) to a fellow European, to whom he groused, “It is a terribly tiring business to try to influence these hundred obstinate and ignorant men.” Not that Warburg had tired of it. Even though he preferred the Senate bill to the House’s, Warburg was far from satisfied and hoped that the “best work” still lay ahead. Unable to stop agitating, he implored the president of the U.S. Chamber of Commerce to lobby for last-minute changes in the conference committee.
The gap between the House and Senate bills was unusually large. The two bills differed on the number of Reserve Banks, the requirements for reserves, deposit insurance, the composition of the Reserve Board, and dozens of other points. Glass, worried to the end, saw “no prospect at all of an immediate agreement.”
The conferees worked with surprising speed. The Senate prevailed on most of the headline issues. Reserve Banks were to be established in “not less than eight nor more than twelve cities” (the House had said at least twelve). The exact number and the locations would be chosen by an organization committee including the Treasury secretary. The Senate’s sharp cuts to bank reserve requirements were also retained. (Today, reserve ratios are even lower than in 1913, reflecting the modern emphasis on promoting bank lending, although at an incremental cost to prudence.)* The conference committee also sweetened the pill for banks in a pair of changes still in force today: first, each bank’s contribution to the Reserve system was reduced to a manageable 6 percent of its capital and surplus; additionally, the dividend that member banks would receive was raised, in accord with the Senate bill, also to 6 percent.
However, the House conferees, led by Glass, would not budge on “legal tender.” Technically, Federal Reserve notes would not be lawful money until an act of Congress in 1933, although in a practical sense they were regarded as money from the outset. Glass was so worried about inflation that the conference deleted authority to print $1 and $2 bills (somehow regarded as more of a menace); the smallest denomination would be a $5 note. The Act called for gradual retirement of the Civil War–era National Bank Notes, but America’s various other currencies—silver certificates, gold coins, greenbacks, and so forth—remained in circulation. Monetary uniformity would be long in coming.* Even reserve notes would carry distinctive engravings to designate the particular city of issue.
The conferees tackled the truly sticky points in a marathon session on Sunday, December 21. At the eleventh hour, due to inflation concerns, Glass refused to let banks count reserve notes in their vaults as “reserves”—a bitter disappointment to Warburg, though one he would later reverse.* The sharpest conflict was over the deposit guarantee. Bankers opposed it as an invitation to reckless banking. Although the idea of insurance did have support in the House, Glass thought the Senate’s version was poorly structured. At 1:30 a.m. on Monday, the deposit guarantee was stricken. (Deposit insurance would finally be established when Glass was in the Senate, in the Glass-Steagall Act of 1933—too late to avert the Depression-era bank runs.)
Only the makeup of the board remained unsettled. The Senate bill called for six appointees in addition to the Treasury secretary. The House fancied a board that was little more than an appendage of the White House, including three sitting members of the administration. The conference settled on just two—the Treasury secretary and the comptroller of the currency. McAdoo was in frequent contact with the negotiators and seems to have succeeded in bolstering the authority of the Treasury secretary. The power of the board was amplified; terms of members (later known as governors) were increased to ten years, in staggered sequence, so that no president could name a full board. It was now 4:10 a.m., not quite daybreak.
Colonel House arrived at McAdoo’s home for breakfast and found the Treasury secretary, who had barely slept, in pajamas. For all of Monday, they waited for news from the Capitol; the bill would not be law until each chamber approved the conference report. In the evening, the Colonel went to the White House, where he dined alone with the Wilsons. The two friends were in an expansive mood; the prospect of great tidings in the offing led them to reflect on other historic moments. House asked the President how he rated the Gettysburg Address; Wilson said he rated it very highly. After dinner, the group retired to an upstairs sitting room by a fire. Although Wilson wanted to steer the discussion toward the imminent legislation, Ellen, who was in an agitated frame of mind, repeatedly brought up the topic of the couple’s finances. The First Lady, who would be dead within the year, suggested that when Woodrow left office he could earn income from writing, as Roosevelt did. Wilson said the kind of books he wrote didn’t sell as well. House offered to recommend some investments.
Finally, the men repaired to Wilson’s study. House gave the President a list of potential Reserve Board nominees—certainly including Warburg—which they discussed at length. As they chatted, Wilson received periodic updates on the proceedings in the Capitol. House remarked on Wilson’s successes over his first year, but Wilson was haunted by his experience at Princeton: he had had great success at the college, he recalled, until all of a sudden he had become embroiled in controversies with alumni and trustees. “He seemed to fear,” Colonel House jotted down that evening, “that such a denouement might occur again.”
That same evening, in the House of Representatives, Glass presented the conference report—the compromise bill. He elaborated on the conference changes and opened the floor to debate. The chairman found it necessary to refute a claim by Frank Vanderlip that the new notes would lack security and be a kind of fiat currency. Glass was pleased to note that Paul Warburg, “perhaps the greatest international banker in America,” not only disagreed with Vanderlip but had been in Washington protesting that the security behind the notes was actually too exacting. The House discussed such matters for a couple of hours. Then it voted, adopting the conference report by an overwhelming margin.
The Senate met the following afternoon, December 23. It adopted the report with nearly a two-thirds majority. Wilson and his family, members of Congress, and others gathered in the Oval Office just before six o’clock. A print of the bill, on parchment, was placed
on the flat-top mahogany desk, the last page folded for the President’s signature. The color had returned to Wilson’s cheeks. “I’ll do the deed first,” he noted, “and then I will have something to say.” The President asked Glass, who had been hidden in the crowd, and Owen to stand more prominently beside his desk. Owen looked somber; Glass was beaming. At 6:02 p.m., nimbly shifting among four gold pens, Wilson signed the Federal Reserve Act into law. He expressed his “deep gratification” at being able to sign this bill. The previous banking law, he recalled, had been in place since the Civil War; the necessary “readjustments” had taken more than a generation to resolve. Monetary reform had been actively debated for twenty years. The President paid tribute to the “skill and patience” of Glass and Owen. He staked a partisan claim—that the Democratic Party, long distrusted, was now demonstrating its ability to govern. The Federal Reserve Act, he added, was not a measure hostile to business as some had claimed, but “friendly and serviceable.”
It was too late in the day, and too late in the year, for a long speech. The family’s bags were already packed for Pass Christian, Mississippi, where the Wilsons—with the President’s doctor—would spend the holidays, in a cottage overlooking the balmy waters of the Gulf Coast. At 10:45 p.m., the family boarded a railcar south.
It was a year since Glass, terrified of centralization, had visited the president-elect in Princeton. In twelve short months, Wilson had wrung from a party steeped in devotion to Andrew Jackson, and to the crudest anti-banking stereotypes, the filaments of a central bank. Agriculture Secretary David Houston wrote in his diary, “The impossible has happened.” A loyal Democrat, refreshingly unbiased, Houston noted that the law had been adopted by a Congress “dominated by the Democrats, two thirds of whom had been unsound on currency questions,” and that the majority of the Republicans had been similarly unsound.
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