America’s Money Machine

10.

The Bill Considered

IN COMMENTING UPON THE DIRECTION of currency reform under the new Democratic Administration, the New York Times pointed out that William Jennings Bryan, whom Wilson had named Secretary of State, would exercise an important influence upon the shape of coming legislation, and analyzed for its readers the essentials of Bryan’s monetary philosophy:

Under Mr. Bryan’s leadership the doctrines of the Democratic Party in respect to banking and currency have been perfectly well understood. The Party has insisted upon cheap and unsound money, the cheapest and unsoundest it could get the country to accept. In 1896, the year of Mr. Bryan’s first candidacy, the Party demanded the free, unlimited and independent coinage of silver, denounced gold monometallism, condemned the issue of circulating notes by banks, insisted that all currencies should be issued by the government, and it further demanded that United States bonds be paid in silver or gold at the option of the Treasury. The country’s opinion of these Democratic banking and currency doctrines was expressed in the electoral vote, McKinley 271, Bryan 176.

In 1900 Mr. Bryan was again the candidate, and his platform denounced the Act of March, 1900, establishing the gold standard, condemned the issue of notes by national banks, demanded their retirement as fast as the government could redeem them in gold or silver certificates, and again declared that the government should issue all currency. Once more the country expressed its opinion of the Bryan money doctrines in the electoral vote, McKinley 292, Bryan 155.

In 1908, Mr. Bryan once more presented himself as the candidate. His platform belabored Wall Street, the stock gamblers, and the banks, and pledged the Party to enact a law for the guarantee of bank deposits. The country was still unconvinced, as shown by the electoral vote, Taft 321, Bryan 162. At length in 1912, the Party on quite other issues came into power, upon a platform making no very definite declaration of banking principles, but condemning the Aldrich Bill, and promising such a revision of banking laws as would give temporary relief where it was needed, “with protection from control or domination by what is known as the money trust.”

Following the passage of power to the Democratic Administration, the principal protagonists of currency legislation the Congress were Carter Glass, chairman of the House Banking and Currency Committee, and Robert L. Owen, chairman of the corresponding Senate committee, along with academic figures like H. Parker Willis (who served as an assistant to Glass) and A. Piatt Andrew, who had served as special assistant to the National Monetary Commission.1 William Gibbs McAdoo, a New York lawyer, had been named Secretary of the Treasury and the spokesman of the Administration on monetary matters.

Despite the urgency of currency legislation, despite the importance given to it by the new Administration, it was not until three and a half months after Wilson’s inauguration that the Administration’s proposals were presented to the country. Congress had been called into special session for two limited purposes—revision of the tariff and currency legislation. While the Administration debated among themselves the form of the currency bill they could agree on, Congress devoted its time to the tariff.

On June 18, 1913, after numerous White House conferences, the Ad-ministration released the text of its proposed bill. The Bryan influence was evident. Instead of a currency based upon commercial paper, fluctuating with commercial demand, and controlled by bankers, as proposed by the National Monetary Commission, the bill provided for a currency that rested almost entirely on government fiat. That is, while it proposed a Federal Board of Reserve of nine members, six of the members would be government appointees and only three would represent the banking system; moreover, notes would be issued by the U. S. Treasury to banks against the deposit of acceptable collateral, but the notes would be obligations of the U. S. Government. In addition, the bill would terminate the national bank note issue and the circulation privilege which national banks had enjoyed since 1864.

The news provoked an immediate reaction in the banking community, sufficient to cause a number of modifications before the bill was formally introduced in the two houses on June 26. The opposition now became an uproar, with a threat from banks of wholesale surrenders of their national charters and transfer to state charter if the bill were enacted.

The immediate objection of the banks, of course, was to the termination of the circulation privilege. Banks were principal holders of the government two per cent bonds outstanding, eligible for security of notes. Of the $731 million outstanding, $700 million were held to secure circulation and deposits. The demand for these obligations by banks served to keep the bonds at par despite the low interest rate they carried. The proposal to abolish the circulation privilege promptly caused a drop in the quotations and threatened loss to the holders.

Faced with this unexpected development, the Administration gave assurances that the bill would be amended to continue the circulation privilege for twenty years. Before the end of July the banking bill had come under the influence of more temperate views and a number of suggestions of the American Bankers Association relating mainly to technicalities of the note issue were incorporated in the draft bill. Chief among these was the provision that the notes issued by any reserve bank would bear their own distinctive letter and serial number, and when these notes were paid into any other reserve bank they would not be again paid out but would be returned to the issuing bank. A Federal Reserve note would thus be treated exactly like a bank check, which always returns to the bank upon which it is drawn. This was an anti-inflation deterrent since the note would automatically disappear when it had done its work.

Another amendment accepted by the Administration was one to provide for 33 1/3 per cent reserve against the note issue, to be kept entirely in gold rather than in gold and lawful money as was provided in the draft of the bill. The question of the political control of the institution remained in contention. Meantime, the idea of a currency based upon trade rather than monetization of the public debt began to acquire new respect and one of the proposals that gained some attention was for three kinds of money—$300 million to be called “commercial currency”—a generous nod to the commercial interest; $200 million to be called “industrial currency,” to be issued to States and Territories on the security of their bonds and to be used for building roads, bridges, and paying the costs of other public improvements; and a third class called “agricultural currency” in the amount of $200 million, which would rest upon the security of farmers’ warehouse receipts for their cotton, wheat, and corn.

In the Senate Banking and Currency Committee Senator Owen carried on a running battle with banking opinion. He introduced a bill, which he described as a supplement to the existing bill rather than a substitute for it, which would have defied the bankers by basing the proposed note issue almost entirely upon government bonds. Banking opinion now became more vocal and at a banking conference in Chicago towards the end of August strong resolutions were adopted in opposition to the proposed bill. A good deal of the merchant sentiment of the country rallied to the bankers, provoking the Committee to agree to a wider exchange of views on the proposed measures.

On August 29, Carter Glass introduced a new version of the bill. It was reported from his committee on September 9, and passed the House September 19.

In the Senate, the bill languished in the Senate Banking and Currency Committee. The Administration could not muster more than half the members of the Committee to report a bill. Wilson, though he frequently pleaded his ignorance of monetary questions, threatened to carry the question to the public, and the Committee continued to hold hearings in a well nigh futile attempt to resolve its differences. The American Bankers Association convened in Boston that year on October 8, but the day before the formal opening a pre-convention conference of small bankers—banks with less than $250,000 capitalization—was held with about six hundred country banks represented, and this conference adopted resolutions of protest against the bill. These protests were seconded by the full convention, representing some two thousand banks, and the Currency Commission of the Association brought in a resolution “that the bill in its present form imposes unwise hardships upon the banks and equally unwise hardships upon the general public.” In his opening address the acting president of the Association, Arthur M. Reynolds of Des Moines, declared:

The Times in an editorial stated the case:

It was now apparent to the Administration that further changes would be necessary. Among those demanded by the banking community were: a reduction of the proposed regional reserve banks from twelve to not more than five; the note issue to be an obligation of the banks rather than of the government and the notes to be redeemable in gold rather than in “gold or lawful money”; finally, that small banks should be relieved of compulsory subscription to the capital stock of the reserve banks.

The Administration had counted largely on the support of the country banks and their antipathy to “Wall Street” to carry the currency bill, but as it stood the Administration no longer dominated the Senate on this question, and in the Banking and Currency Committee the division was even and the Committee unable to report out a bill. At this juncture William Jennings Bryan, whose job as Secretary of State did not cover monetary matters, took the ball from McAdoo by writing a letter to Carter Glass, declaring the Administration position that on two “triumphs of the people” there could be no surrender now: (a) government issue of notes and (b) government control of the issue.

As we shall see later, neither of these provisions was accepted in the final legislation, but the advocates of government control have never conceded the case, and the pressure persists for government control over the Federal Reserve System.

Congress, as we have noted, had been summoned to extra session limited to consideration of a tariff bill and the currency bill. So firmly was the Democratic Party in control, that one hundred and fifty new Congressmen with portfolios full of private bills had found themselves facing an unscalable wall in the Party caucus, and a sphinx in their appeals to the President. Especially after the off-year elections that November had demonstrated renewed strength with the electorate, Wilson began to display the indifference toward politicians that was later to defeat him and to reduce him to a helpless paralytic in the great crisis of his career six years later

Congress meantime had completed its action on a tariff bill. The Payne-Aldrich Tariff of 1909 had recognized the public demand for freer trade by scaling down the rates set in the Dingley Tariff of 1897 (averaging 57 per cent) to around 38 per cent. The Underwood Tariff now reduced duties another 8 points to an average of 30 per cent. It put iron, steel, raw wool and sugar on the free list. The bill was signed October 3.

Finally, on October 20, President Wilson was compelled to agree to a recess until the bill could be reported out, but for not later than November 15. At the same time he let it be known that he would not oppose amendments to reduce the number of reserve banks and to remove the Secretary of Agriculture and the Comptroller of the Currency from the Federal Reserve Board. His Republican opposition, nettled at the long delay, now announced that they would oppose any recess.

At this point Frank A. Vanderlip appeared before the Senate Banking and Currency Committee with a draft of the plan he had enunciated earlier. The proposal threw the debate into even greater confusion. Here was a Wall Streeter cutting the ground from under the radicals by proposing even greater government control, and exclusion of banker influence, than the most radical member of the Committee had ever contemplated. He had gotten his ideas, he admitted, from Senators Bristow of Kansas, Reed of Missouri, Hitchcock of Nebraska, and O’Gorman of New York.

At the same time, his proposal for a single central bank, instead of twelve or more, was the very item that the Democratic platform of the previous year had blasted as the invention of the arch-conservative, Nelson Aldrich, and was the thing that the Democratic Party had opposed since Andrew Jackson had killed the second Bank of the United States in 1832, when he vetoed the renewal of its charter.

Nine of the twelve Committee members indicated their approval of the Vanderlip plan, but as the House was effectively under Presidential domination, enthusiasm cooled when Wilson issued a statement reiterating his warm endorsement of the pending bill. At the same time he declined to receive Vanderlip and Henry P. Davison at the White House, on the ground that banking was a subject with which he was not familiar.2

Meantime, Senator Owen, smarting no doubt under the loss of prestige from his inability to control his Committee, began to feel the need of accommodating his Wall Street antipathies for the sake of action. He now showed a refreshing willingness to accept amendments suggested by bankers, and within the next few days the Committee made a number of changes to mollify their opposition. Among them was one to open the regional reserve banks to public ownership—though not at the expense of government control. There was still no agreement on the main issues of the composition of the governing board—whether government or banker controlled—and the character of the note issue.

On November 7 a major concession was made to banking opinion when the words, “or lawful money” were deleted from the references to redemption of the note issue. The effect of this was to require that whether the notes were issued, redeemed, or guaranteed by the banks or by the Treasury, they would be redeemable in gold, and hence would be a gold backed currency. This was a major defeat for the Bryan wing of the Democratic Party.

In waving the editorial flag over this triumph the New York Times, which in those days was pretty much the spokesman for Wall Street, fell into the error of disputing the popular view that “government money” was better than “bank money.”

It was the view of the Times that a currency backed by gold, even to the extent of only one-third, along with commercial assets was intrinsically sounder than a currency backed by government bonds, since the latter reduced the currency to the status of a fiat money, the value of which rested entirely on the good faith and credit of the government. The deeper issue eluded discussion—namely, the quality of the commercial assets and the quality of the government promises to pay. Neither possesses an intrinsic value above the other, but the value of each depends upon factors deep in the economic and moral structure of society.

As we shall note further on, the matter of the price level was to become the preoccupation of the Federal Reserve authorities to the reduction, if not actual exclusion, of almost every other issue.

By the end of November, the Senate was showing restiveness and also threatening to recess, and only by making it an issue was Wilson able to hold the body in session. There were now before that body three different currency bills—the Glass version (the bill reported out by the House committee of which he was chairman and passed by the House); the Owen bill, being the version which he and five of his colleagues on the Senate Banking and Currency Committee favored; and a bill drafted by Senator Gilbert M. Hitchcock, Democrat of Nebraska, and supported by the Republican members of the Committee. The principal feature of the Hitch-cock bill was its elimination of the “lawful money” provision and a stipulation for note redemption in gold. The Hitchcock bill also provided for public ownership but government control of the regional reserve banks. The Democratic caucuses continued to favor the Owen version.

Finally, on Sunday night, November 30, the Democratic caucus reached agreement on the text of the bill, and the following day it was presented to the Senate.

The bill, now on the Senate floor, was again subject to debate, and it was not for two weeks, until December 15, that any vote was taken. This was on an amendment by Senator Hitchcock to provide for popular subscription to the capital stock of the proposed regional reserve banks, rather than compulsory subscription as directed by the Owen bill, and to reduce to four the number of regional reserve banks from the eight to twelve fixed in the bill under debate. The amendment was tabled by a vote of 40 to 35, the result indicating the sharpness of the division.

The bill now came under a devastating attack by Senator Elihu Root of New York the effect of which, either because of the Senator’s logic or his influence, compelled a major retreat on the part of the Administration. Senator Root had attacked Senator Owen’s claim that the notes issued under the pending bill would be amply guaranteed, since there were at least twelve different kinds of security supporting them. Root pointed out that it was not a question of the security, but the volume of the note issue. A note issue based on gold and commercial paper, he argued, had natural limits, since the supply of basic collateral would be the exact measure of the needs of business. In a note issue secured by government bonds, there was no limit to the volume, since the appetite of a government for funds is voracious, money being a form of power, and, since legislatures are reluctant to tax, a constantly available market for the promissory notes of the government is a convenience of unimaginable possibilities.

Root objected not only to the nature of the reserve under the bill, but also to the reduction in the required reserves to be held by the member banks. He cited the case of a bank with, say, $100 million of deposits. The current requirement as to cash on hand was 25 per cent, or $25 million. Under the Owen bill this required reserve would be reduced to $18 million, but of this amount the bank need keep only a part in its own vault, with the effect of reducing required reserves by about a half from the previous standard. The end result would be a release of new credit into the market with temptations to expansion greater than the business community could resist, and an inflationary push greater than human pru-dence and banking judgment could withstand. Root demanded, in conclusion, that a gold reserve of at least 50 per cent be stipulated.

Alarmed at the breach caused by the Root assault, the Democratic leaders hastily reconvened a Party caucus and agreement was reached to meet Root’s views, at least to raise the gold requirement from one-third to 40 per cent, and to impose a progressive tax upon any deficiency in the reserve.

On December 19, 1913, the amended Owen bill passed the Senate, 54 to 34 with the support of six Republicans, and went to conference with the House over the amendments made by the Senate.

The conference moved with speed under White House pressure. Most of the Senate changes were accepted, but one important decision was to eliminate the provision for the guarantee of bank deposits which had been a pet project of the liberals, particularly Bryan and Owen. The Senate provision for a number of regional reserve banks between eight and twelve prevailed over the House minimum of twelve. On December 22, the conference report was accepted by both House and Senate, and on the 23rd the bill was signed by President Wilson and the Federal Reserve Act came into effect.

The public acceptance, between relief and enthusiasm, of the resolution of the currency question was reflected in the full page advertisement in the Times run by the United Cigar Co., at the time one of the leading retail store chains of the country and one of the larger users of credit for expansion. The advertisement was headlined: THE NEW CURRENCY LAW A FORERUNNER OF BETTER TIMES.

Probably the best summary of current opinion was that offered by Paul M. Warburg in an interview given the following day:

 

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3Owen, as noted, had been a member of the Senate only since the admission of Oklahoma to statehood in 1907. His appointment to a position of such rank is partly due to his previous membership on the Senate Committee on Committees. Following the Democratic victory at the polls, this Committee divided the Committee on Finance into two committees (one being the new Committee on Banking and Currency) with Owen named as chairman of the new committee. Owen, of course, had eminent qualifications for the post.

4New York Times, Oct. 24-26, 1913. There may have been an element of pique in Wilson’s reluctance to see Vanderlip. As a trustee of the Carnegie Foundation, Vanderlip had been one of a committee that had rejected Wilson’s application for a pension, and though Vanderlip had been in favor of the grant, he was accused of having gossiped about the matter to Wilson’s discredit.

• 1About the same time rumors drifted in another region of Manhattan of a falling out between Harriman and his long-time associate Stuyvesant Fish. Tongues wagged that Marian Fish had declined to sponsor the debut of Harriman’s daughter Mary, known more for her fondness for fox hunting in Virginia than for the Virginia reel in the ballrooms of New York.
• 2*New York Times, Oct. 24-26, 1913. There may have been an element of pique in Wilson’s reluctance to see Vanderlip. As a trustee of the Carnegie Foundation, Vanderlip had been one of a committee that had rejected Wilson’s application for a pension, and though Vanderlip had been in favor of the grant, he was accused of having gossiped about the matter to Wilson’s discredit.
• 3Following the passage of power to the Democratic Administration, the principal protagonists of currency legislation the Congress were Carter Glass, chairman of the House Banking and Currency Committee, and Robert L. Owen, chairman of the corresponding Senate committee, along with academic figures like H. Parker Willis (who served as an assistant to Glass) and A. Piatt Andrew, who had served as special assistant to the National Monetary Commission.* William Gibbs McAdoo, a New York lawyer, had been named Secretary of the Treasury and the spokesman of the Administration on monetary matters.
• 4Nine of the twelve Committee members indicated their approval of the Vanderlip plan, but as the House was effectively under Presidential domination, enthusiasm cooled when Wilson issued a statement reiterating his warm endorsement of the pending bill. At the same time he declined to receive Vanderlip and Henry P. Davison at the White House, on the ground that banking was a subject with which he was not familiar.*