A History of Money and Banking in the United States: The Colonial Era to World War II

by Murray N. Rothbard

  The members of the new Indianapolis Monetary Commission were as follows:8

  Chairman was former Senator George F. Edmunds, Republican of Vermont, attorney, and former director of several railroads.

  C. Stuart Patterson, dean of University of Pennsylvania Law School, and a top official of the Morgan-controlled Pennsylvania Railroad.

  Charles S. Fairchild, a leading New York banker, president of the New York Security and Trust Company, former partner in the Boston Brahmin investment banking firm of Lee, Higginson and Company, and executive and director of two major railroads. Fairchild, a leader in New York state politics, had been secretary of the Treasury in the first Cleveland administration. In addition, Fairchild’s father, Sidney T. Fairchild, had been a leading attorney for the Morgan-controlled New York Central Railroad.

  Stuyvesant Fish, scion of two longtime aristocratic New York families, was a partner of the Morgan-dominated New York investment bank of Morton, Bliss and Company, and then president of Illinois Central Railroad and a trustee of Mutual Life. Fish’s father had been a senator, governor, and secretary of state.

  Louis A. Garnett was a leading San Francisco businessman.

  Thomas G. Bush of Alabama was a director of the Mobile and Birmingham Railroad.

  J.W. Fries was a leading cotton manufacturer from North Carolina.

  William B. Dean was a merchant from St. Paul, Minnesota, and a director of the St. Paul–based transcontinental Great Northern Railroad, owned by James J. Hill, ally with Morgan in the titanic struggle over the Northern Pacific Railroad with Harriman, Rockefeller, and Kuhn, Loeb.

  George Leighton of St. Louis was an attorney for the Missouri Pacific Railroad.

  Robert S. Taylor was an Indiana patent attorney for the Morgan-controlled General Electric Company.

  The single most important working member of the commission was James Laurence Laughlin, head professor of political economy at the new Rockefeller-founded University of Chicago and editor of its prestigious Journal of Political Economy. It was Laughlin who supervised the operations of the commission’s staff and the writing of the reports. Indeed, the two staff assistants to the commission who wrote reports were both students of Laughlin’s at Chicago: former student L. Carroll Root, and his current graduate student Henry Parker Willis.

  The impressive sum of $50,000 was raised throughout the nation’s banking and corporate community to finance the work of the Indianapolis Monetary Commission. New York City’s large quota was raised by Morgan bankers Peabody and Orr, and heavy contributions to fill the quota came promptly from mining magnate William E. Dodge; cotton and coffee trader Henry Hentz, a director of the Mechanics National Bank; and J.P. Morgan himself.

  With the money in hand, the executive committee rented office space in Washington, D.C., in mid-September, and set the staff to sending out and collating the replies to a detailed monetary questionnaire, sent to several hundred selected experts. The monetary commission sat from late September into December 1897, sifting through the replies to the questionnaire collated by Root and Willis. The purpose of the questionnaire was to mobilize a broad base of support for the commission’s recommendations, which they could claim represented hundreds of expert views. Second, the questionnaire served as an important public relations device, making the commission and its work highly visible to the public, to the business community throughout the country, and to members of Congress. Furthermore, through this device, the commission could be seen as speaking for the business community throughout the country.

  To this end, the original idea was to publish the Indianapolis Monetary Commission’s preliminary report, adopted in mid-December, as well as the questionnaire replies in a companion volume. Plans for the questionnaire volume fell through, although it was later published as part of a series of publications on political economy and public law by the University of Pennsylvania.9

  Undaunted by the slight setback, the executive committee developed new methods of molding public opinion using the questionnaire replies as an organizing tool. In November, Hugh Hanna hired as his Washington assistant financial journalist Charles A. Conant, whose task was to propagandize and organize public opinion for the recommendations of the commission. The campaign to beat the drums for the forthcoming commission report was launched when Conant published an article in the December 1 issue of Sound Currency magazine, taking an advanced line on the report, and bolstering the conclusions not only with his own knowledge of monetary and banking history, but also with frequent statements from the as-yet-unpublished replies to the staff questionnaire.

  Over the next several months, Conant worked closely with Jules Guthridge, the general secretary of the commission; they first induced newspapers throughout the country to print abstracts of the questionnaire replies. As Guthridge wrote some commission members, he thereby stimulated “public curiosity” about the forthcoming report, and he boasted that by “careful manipulation” he was able to get the preliminary report “printed in whole or in part—principally in part—in nearly 7,500 newspapers, large and small.” In the meanwhile, Guthridge and Conant orchestrated letters of support from prominent men across the country, when the preliminary report was published on January 3, 1898. As soon as the report was published, Guthridge and Conant made these letters available to the daily newspapers. Quickly, the two built up a distribution system to spread the gospel of the report, organizing nearly 100,000 correspondents “dedicated to the enactment of the commission’s plan for banking and currency reform.”10

  The prime and immediate emphasis of the preliminary report of the Indianapolis Monetary Commission was to complete the promise of the McKinley victory by codifying and enacting what was already in place de facto: a single gold standard, with silver reduced to the status of subsidiary token currency. Completing the victory over Bryanism and free silver, however, was just a mopping-up operation; more important in the long run was the call raised by the report for banking reform to allow greater elasticity. Bank credit could then be increased in recessions and whenever seasonal pressure for redemption by agricultural country banks forced the large central reserve banks to contract their loans. The actual measures called for by the commission were of marginal importance. (More important was that the question of banking reform had been raised at all.)

  The public having been aroused by the preliminary report, the executive committee decided to organize a second and final meeting of the Indianapolis Monetary Convention, which duly met at Indianapolis on January 25, 1898. The second convention was a far grander affair than the first, bringing together 496 delegates from 31 states. Furthermore, the gathering was a cross-section of America’s top corporate leaders. While the state of Indiana naturally had the largest delegation, of 85 representatives of boards of trade and chambers of commerce, New York sent 74 delegates, including many from the Board of Trade and Transportation, the Merchants’ Association, and the Chamber of Commerce in New York City.

  Such corporate leaders attended as Cleveland iron manufacturer Alfred A. Pope, president of the National Malleable Castings Company; Virgil P. Cline, legal counsel to Rockefeller’s Standard Oil Company of Ohio; and C.A. Pillsbury of Minneapolis-St. Paul, organizer of the world’s largest flour mills. From Chicago came such business notables as Marshall Field and Albert A. Sprague, a director of the Chicago Telephone Company, subsidiary of the Morgan-controlled telephone monopoly, American Telephone and Telegraph Company. Not to be overlooked was delegate Franklin MacVeagh, a wholesale grocer from Chicago, and an uncle of a senior partner in the Wall Street law firm of Bangs, Stetson, Tracy and MacVeagh, counsel to J.P. Morgan and Company. MacVeagh, who was later to become secretary of the Treasury in the Taft administration, was wholly in the Morgan ambit. His father-in-law, Henry F. Eames, was the founder of the Commercial National Bank of Chicago, and his brother Wayne was soon to become a trustee of the Morgan-dominated Mutual Life Insurance Company.

  The purpose of the second convention, as former Secretary of the Treasury C
harles S. Fairchild candidly explained in his address to the gathering, was to mobilize the nation’s leading businessmen into a mighty and influential reform movement. As he put it, “If men of business give serious attention and study to these subjects, they will substantially agree upon legislation, and thus agreeing, their influence will be prevailing.” He concluded, “My word to you is, pull all together.” Presiding officer of the convention, Iowa Governor Leslie M. Shaw, was, however, a bit disingenuous when he told the gathering, “You represent today not the banks, for there are few bankers on this floor. You represent the business industries and the financial interests of the country.” There were plenty of bankers there, too.11 Shaw himself, later to be secretary of the Treasury under Theodore Roosevelt, was a small-town banker in Iowa, and president of the Bank of Denison who continued as bank president throughout his term as convention governor. More important in Shaw’s outlook and career was the fact that he was a longtime close friend and loyal supporter of the Des Moines Regency, the Iowa Republican machine headed by the powerful Senator William Boyd Allison. Allison, who was to obtain the Treasury post for his friend, was in turn tied closely to Charles E. Perkins, a close Morgan ally, president of the Chicago, Burlington and Quincy Railroad, and kinsman of the powerful Forbes financial group of Boston, long tied in with the Morgan interests.12

  Also serving as delegates to the second convention were several eminent economists, each of whom, however, came not as academic observers but as representatives of elements of the business community. Professor Jeremiah W. Jenks of Cornell, a proponent of trust cartelization by government and soon to become a friend and adviser of Theodore Roosevelt as governor, came as delegate from the Ithaca Business Men’s Association. Frank W. Taussig of Harvard University represented the Cambridge Merchants’ Association. Yale’s Arthur Twining Hadley, soon to be the president of Yale, represented the New Haven Chamber of Commerce, and Frank M. Taylor of the University of Michigan came as representative of the Ann Arbor Business Men’s Association. Each of these men held powerful posts in the organized economics profession, Jenkins, Taussig, and Taylor serving on the currency committee of the American Economic Association. Hadley, a leading railroad economist, also served on the boards of directors of Morgan’s New York, New Haven and Hartford and Atchison, Topeka and Santa Fe Railroads.13

  Both Taussig and Taylor were monetary theorists who, while committed to a gold standard, urged reform that would make the money supply more elastic. Taussig called for an expansion of national bank notes, which would inflate in response to the “needs of business.” As Taussig14 put it, the currency would then “grow without trammels as the needs of the community spontaneously call for increase.” Taylor, too, as one historian puts it, wanted the gold standard to be modified by “a conscious control of the movement of money” by government “in order to maintain the stability of the credit system.” Taylor justified governmental suspensions of specie payment to “protect the gold reserve.”15

  On January 26, the convention delegates duly endorsed the preliminary report with virtual unanimity, after which Professor J. Laurence Laughlin was assigned the task of drawing up a more elaborate final report, which was published and distributed a few months later. Laughlin’s—and the convention’s— final report not only came out in favor of a broadened asset base for a greatly increased amount of national bank notes, but also called explicitly for a central bank that would enjoy a monopoly of the issue of bank notes.16

  The convention delegates took the gospel of banking reform to the length and breadth of the corporate and financial communities. In April 1898, for example, A. Barton Hepburn, president of the Chase National Bank of New York, at that time a flagship commercial bank for the Morgan interests and a man who would play a large role in the drive to establish a central bank, invited Indianapolis Monetary Commissioner Robert S. Taylor to address the New York State Bankers Association on the currency question, since “bankers, like other people, need instruction upon this subject.” All the monetary commissioners, especially Taylor, were active during the first half of 1898 in exhorting groups of businessmen throughout the nation for monetary reform.

  Meanwhile, in Washington, the lobbying team of Hanna and Conant was extremely active. A bill embodying the suggestions of the monetary commission was introduced by Indiana Congressman Jesse Overstreet in January, and was reported out by the House Banking and Currency Committee in May. In the meantime, Conant met almost continuously with the banking committee members. At each stage of the legislative process, Hanna sent letters to the convention delegates and to the public, urging a letter-writing campaign in support of the bill.

  In this agitation, McKinley Secretary of the Treasury Lyman J. Gage worked closely with Hanna and his staff. Gage sponsored similar bills, and several bills along the same lines were introduced in the House in 1898 and 1899. Gage, a friend of several of the monetary commissioners, was one of the top leaders of the Rockefeller interests in the banking field. His appointment as Treasury secretary had been gained for him by Ohio’s Mark Hanna, political mastermind and financial backer of President McKinley, and old friend, high-school classmate, and business associate of John D. Rockefeller, Sr. Before his appointment to the cabinet, Gage was president of the powerful First National Bank of Chicago, one of the major commercial banks in the Rockefeller ambit. During his term in office, Gage tried to operate the Treasury as a central bank, pumping in money during recessions by purchasing government bonds on the open market, and depositing large funds with pet commercial banks. In 1900, Gage called vainly for the establishment of regional central banks.

  Finally, in his last annual report as secretary of the Treasury in 1901, Lyman Gage let the cat completely out of the bag, calling outright for a government central bank. Without such a central bank, he declared in alarm, “individual banks stand isolated and apart, separated units, with no tie of mutuality between them.” Unless a central bank established such ties, Gage warned, the panic of 1893 would be repeated.17 When he left office early the next year, Lyman Gage took up his post as president of the Rockefeller-controlled U.S. Trust Company in New York City.18

  THE GOLD STANDARD ACT OF 1900 AND AFTER

  Any reform legislation had to wait until after the elections of 1898, for the gold forces were not yet in control of Congress. In the autumn, the executive committee of the Indianapolis Monetary Convention mobilized its forces, calling on no less than 97,000 correspondents throughout the country through whom it had distributed the preliminary report. The executive committee urged its constituency to elect a gold-standard Congress; when the gold forces routed the silverites in November, the results of the election were hailed by Hanna as eminently satisfactory.

  The decks were now cleared for the McKinley administration to submit its bill, and the Congress that met in December 1899 quickly passed the measure; Congress then passed the conference report of the Gold Standard Act in March 1900.

  The currency reformers had gotten their way. It is well known that the Gold Standard Act provided for a single gold standard, with no retention of silver money except as tokens. Less well known are the clauses that began the march toward a more “elastic” currency. As Lyman Gage had suggested in 1897, national banks, previously confined to large cities, were now made possible with a small amount of capital in small towns and rural areas. And it was made far easier for national banks to issue notes. The object of these clauses, as one historian put it, was to satisfy an “increased demand for money at crop-moving time, and to meet popular cries for ‘more money’ by encouraging the organization of national banks in comparatively undeveloped regions.”19

  The reformers exulted over the passage of the Gold Standard Act, but took the line that this was only the first step on the much-needed path to fundamental banking reform. Thus, Professor Frank W. Taussig of Harvard praised the act, and greeted the emergence of a new social and ideological alignment, caused by “strong pressure from the business community” through the Indianapolis Monet
ary Convention. He particularly welcomed the fact that the Gold Standard Act “treats the national banks not as grasping and dangerous corporations but as useful institutions deserving the fostering care of the legislature.” But such tender legislative care was not enough; fundamental banking reform was needed. For, Taussig declared, “The changes in banking legislation are not such as to make possible any considerable expansion of the national system or to enable it to render the community the full service of which it is capable.” In short, the changes allowed for more and greater expansion of bank credit and the supply of money. Therefore, Taussig concluded, “It is well nigh certain that eventually Congress will have to consider once more the further remodeling of the national bank system.”20

  In fact, the Gold Standard Act of 1900 was only the opening gun of the banking reform movement. Three friends and financial journalists, two from Chicago, were to play a large role in the development of that movement. Massachusetts-born Charles A. Conant (1861–1915), a leading historian of banking, wrote A History of Modern Banks of Issue in 1896, while still a Washington correspondent for the New York Journal of Commerce and an editor of Bankers Magazine. After his stint of public relations work and lobbying for the Indianapolis convention, Conant moved to New York in 1902 to become treasurer of the Morgan-oriented Morton Trust Company. The two Chicagoans, both friends of Lyman Gage, were, along with Gage, in the Rockefeller ambit: Frank A. Vanderlip was picked by Gage as his assistant secretary of the Treasury, and when Gage left office, Vanderlip came to New York as a top executive at the flagship commercial bank of the Rockefeller interests, the National City Bank of New York. Meanwhile, Vanderlip’s close friend and mentor at the Chicago Tribune, Joseph French Johnson, had also moved east to become professor of finance at the Wharton School of the University of Pennsylvania. But no sooner had the Gold Standard Act been passed when Joseph Johnson sounded the trump by calling for more fundamental reform.