A History of Money and Banking in the United States: The Colonial Era to World War II (35 page)

60
Bankers Magazin
e 75 (September 1907): 314–15.

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nation’s academics and experts. The task was made easier by the growing alliance and symbiosis between academia and the power elite. Two organizations that proved particularly useful for this mobilization were the American Academy of Political and Social Science (AAPSS) of Philadelphia, and the Academy of Political Science (APS) of Columbia University, both of which included in their ranks leading corporate liberal businessmen, financiers, attorneys, and academics. Nicholas Murray Butler, the highly influential president of Columbia University, explained that the Academy of Political Science “is an interme-diary between . . . the scholars and the men of affairs, those who may perhaps be said to be amateurs in scholarship.” Here, he pointed out, was where they “come together.”61

It is not surprising, then, that the American Academy of Political and Social Science, the American Association for the Advancement of Science, and Columbia University held three symposia during the winter of 1907–1908, each calling for a central bank, and thereby disseminating the message of a central bank to a carefully selected elite public. Not surprising, too, was that E.R.A. Seligman was the organizer of the Columbia conference, gratified that his university was providing a platform for leading bankers and financial journalists to advocate a central bank, especially, he noted, because “it is proverbially difficult in a democracy to secure a hearing for the conclusions of experts.” Then in 1908 Seligman collected the addresses into a volume,
The Currency Problem
.

Professor Seligman set the tone for the Columbia gathering in his opening address. The panic of 1907, he alleged, was moderate because its effects had been tempered by the growth of industrial trusts, which provided a more controlled and “more correct adjustment of present investment to future needs” than would a “horde of small competitors.” In that way, Seligman displayed no comprehension of how competitive markets 61Livingston,
Origins
, p. 175, n. 30.

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

facilitate adjustments. One big problem, however, still remained for Seligman. The horde of small competitors, for whom Seligman had so much contempt, still prevailed in the field of currency and banking. The problem was that the banking system was still decentralized. As Seligman declared, Even more important than the inelasticity of our note issue is its decentralization. The struggle which has been victoriously fought out everywhere else [in creating trusts] must be undertaken here in earnest and with vigor.62

The next address was that of Frank Vanderlip. To Vanderlip, in contrast to Seligman, the panic of 1907 was “one of the great calamities of history”—the result of a decentralized, competitive American banking system, with 15,000 banks all competing vigorously for control of cash reserves. The terrible thing is that “each institution stands alone, concerned first with its own safety, and using every endeavor to pile up reserves without regard” to the effect of such actions on other banking institutions. This backward system had to be changed, to follow the lead of other great nations, where a central bank is able to mobilize and centralize reserves, and create an elastic currency system. Putting the situation in virtually Marxian terms, Vanderlip declared that the alien external power of the free and competitive market must be replaced by central control following modern, allegedly scientific principles of banking.

Thomas Wheelock, editor of the
Wall Street Journal
, then rung the changes on the common theme by applying it to the volatile call loan market in New York. The market is volatile, Wheelock claimed, because the small country banks are able to lend on that market, and their deposits in New York banks then rise and fall in uncontrolled fashion. Therefore, there must be central corporate control over country bank money in the call loan market.

A. Barton Hepburn, head of Morgan’s Chase National Bank, came next, and spoke of the great importance of having a central 62Ibid., p. 177.

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bank that would issue a monopoly of bank notes. It was particularly important that the central bank be able to discount the assets of national banks, and thus supply an elastic currency.

The last speaker was Paul Warburg, who lectured his audi-ence on the superiority of European over American banking, particularly in (1) having a central bank, as against decentralized American banking, and (2)—his old hobby horse—enjoying

“modern” acceptance paper instead of single-name promissory notes. Warburg emphasized that these two institutions must function together. In particular, tight government central bank control must replace competition and decentralization: “Small banks constitute a danger.”

The other two symposia were very similar. At the AAPSS

symposium in Philadelphia, in December 1907, several leading investment bankers and Comptroller of the Currency William B.

Ridgely came out in favor of a central bank. It was no accident that members of the AAPSS’s advisory committee on currency included A. Barton Hepburn; Morgan attorney and statesman Elihu Root; Morgan’s longtime personal attorney, Francis Lynde Stetson; and J.P. Morgan himself. Meanwhile the AAAS

symposium in January 1908 was organized by none other than Charles A. Conant, who happened to be chairman of the AAAS’s social and economic section for the year. Speakers included Columbia economist J.B. Clark, Frank Vanderlip, Conant, and Vanderlip’s friend George E. Roberts, head of the Rockefeller-oriented Commercial National Bank of Chicago, who would later wind up at the National City Bank.

All in all, the task of the bank reformers was well summed up by J.R. Duffield, secretary of the Bankers Publishing Company, in January 1908: “It is recognized generally that before legislation can be had there must be an educational campaign carried on, first among the bankers, and later among commercial organizations, and finally among the people as a whole.” That strategy was well under way.

During the same month, the legislative lead in banking reform was taken by the formidable Senator Nelson W.

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

Aldrich (R-R.I.), head of the Senate Finance Committee, and, as the father-in-law of John D. Rockefeller, Jr., Rockefeller’s man in the U.S. Senate. He introduced the Aldrich Bill, which focused on a relatively minor interbank dispute about whether and on what basis the national banks could issue special emergency currency. A compromise was finally hammered out and passed, as the Aldrich-Vreeland Act, in 1908.63 But the important part of the Aldrich-Vreeland Act, which got very little public attention, but was perceptively hailed by the bank reformers, was the establishment of a National Monetary Commission that would investigate the currency question and suggest proposals for comprehensive banking reform. Two enthusiastic comments on the monetary commission were particularly perceptive and prophetic. One was that of Sereno S.

Pratt of the
Wall Street Journal
. Pratt virtually conceded that the purpose of the commission was to swamp the public with supposed expertise and thereby “educate” them into supporting banking reform:

Reform can only be brought about by educating the people up to it, and such education must necessarily take much time. In no other way can such education be effected more thoroughly and rapidly than by means of a commission . . .

[that] would make an international study of the subject and present an exhaustive report, which could be made the basis for an intelligent agitation.

The results of the “study” were of course predetermined, as would be the membership of the allegedly impartial study commission.

Another function of the commission, as stated by Festus J.

Wade, St. Louis banker and member of the currency commission of the American Bankers Association, was to “keep the financial issue out of politics” and put it squarely in the safe custody of 63The emergency currency provision was only used once, shortly before the provision expired, in 1914, and after the establishment of the Federal Reserve System.

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carefully selected “experts.”64 Thus, the National Monetary Commission (NMC) was the apotheosis of the clever commission concept, launched in Indianapolis a decade earlier.

Aldrich lost no time setting up the NMC, which was launched in June 1908. The official members were an equal number of senators and representatives, but these were mere window dressing. The real work would be done by the copious staff, appointed and directed by Aldrich, who told his counterpart in the House, Cleveland Republican Theodore Burton:

“My idea is, of course, that everything shall be done in the most quiet manner possible, and without any public announcement.” From the beginning, Aldrich determined that the NMC

would be run as an alliance of Rockefeller, Morgan, and Kuhn, Loeb people. The two top expert posts advising or joining the commission were both suggested by Morgan leaders. On the advice of J.P. Morgan, seconded by Jacob Schiff, Aldrich picked as his top adviser the formidable Henry P. Davison, Morgan partner, founder of Morgan’s Bankers Trust Company, and vice president of George F. Baker’s First National Bank of New York.

It would be Davison who, on the outbreak of World War I, would rush to England to cement J.P. Morgan and Company’s close ties with the Bank of England, and to receive an appointment as monopoly underwriter for all British and French government bonds to be floated in the United States for the duration of the war. For technical economic expertise, Aldrich accepted the recommendation of President Roosevelt’s close friend and fellow Morgan man, Charles Eliot, president of Harvard University, who urged the appointment of Harvard economist A. Piatt Andrew. And an ex officio commission member chosen by Aldrich himself was George M. Reynolds, president of the Rockefeller-oriented Continental National Bank of Chicago.

The NMC spent the fall touring Europe and conferring on information and strategy with heads of large European banks 64Livingston,
Origins
, pp. 182–83.

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

and central banks. As director of research, A. Piatt Andrew began to organize American banking experts and to commission reports and studies. The National City Bank’s foreign exchange department was commissioned to write papers on bankers’

acceptances and foreign debt, while Warburg and Bankers Trust official Fred Kent wrote on the European discount market.

Having gathered information and advice in Europe in the fall of 1908, the NMC was ready to go into high gear by the end of the year. In December, the commission hired the inevitable Charles A. Conant for research, public relations, and agitprop.

Behind the façade of the congressmen and senators on the commission, Senator Aldrich began to form and expand his inner circle, which soon included Warburg and Vanderlip. Warburg formed around him a subcircle of friends and acquaintances from the currency committee of the New York Merchants’

Association, headed by Irving T. Bush, and from the top ranks of the American Economic Association, to whom he had delivered an address advocating central banking in December 1908.

Warburg met and corresponded frequently with leading academic economists advocating banking reform, including E.R.A.

Seligman; Thomas Nixon Carver of Harvard; Henry R. Seager of Columbia; Davis R. Dewey, historian of banking at MIT, longtime secretary-treasurer of the AEA and brother of the progressive philosopher John Dewey; Oliver M.W. Sprague, professor of banking at Harvard, of the Morgan-connected Sprague family; Frank W. Taussig of Harvard; and Irving Fisher of Yale.

During 1909, however, the reformers faced an important problem: they had to bring such leading bankers as James B.

Forgan, head of the Rockefeller-oriented First National Bank of Chicago, solidly into line in support of a central bank. It was not that Forgan objected to centralized reserves or a lender of last resort—quite the contrary. It was rather that Forgan recognized that, under the national banking system, large banks such as his own were already performing quasi–central banking functions with their own country bank depositors; and he didn’t want his bank deprived of such functions by a new central bank.

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The bank reformers therefore went out of their way to bring such men as Forgan into enthusiastic support for the new scheme. In his presidential address to the powerful American Bankers Association in mid-September 1909, George M.

Reynolds not only came out flatly in favor of a central bank in America, to be modeled after the German Reichsbank; he also assured Forgan and others that such a central bank would act as depository of reserves only for the large national banks in the central reserve cities, while the national banks would continue to hold deposits for the country banks. Mollified, Forgan held a private conference with Aldrich’s inner circle and came fully on board for the central bank. As an outgrowth of Forgan’s concerns, the reformers decided to cloak their new central bank in a spurious veil of “regionalism” and “decentral-ism” through establishing regional reserve centers, that would provide the appearance of virtually independent regional central banks to cover the reality of an orthodox European central bank monolith. As a result, noted railroad attorney Victor Morawetz made his famous speech in November 1909, calling for regional banking districts under the ultimate direction of one central control board. Thus, reserves and note issue would be supposedly decentralized in the hands of the regional reserve banks, while they would really be centralized and coordinated by the central control board. This, of course, was the scheme eventually adopted in the Federal Reserve System.65