The Case Against the Fed

After the failure of the first drive toward central banking with the defeat of the Fowler Bill in 1902, and the collapse of Secretary Shaw’s efforts to use the Treasury as a surrogate central bank, the bank reform forces decided to put their cards on the table and push frankly for a Central Bank for the United States.

The revived campaign was kicked off by a fateful speech in January 1906 by the powerful Jacob H. Schiff, head of the Wall Street investment banking firm of Kuhn, Loeb & Company before the New York Chamber of Commerce. Schiff complained that the country had “needed money” in the autumn of 1905, and couldn’t obtain it from the Treasury. An “elastic currency” for the nation was therefore imperative, and Schiff urged the New York Chamber’s Committee on Finance to draw up a comprehensive plan for a new modern banking system to provide for a comprehensive plan for a new modern banking system to provide for an elastic currency. A Kuhn, Loeb partner and kinsman of Schiff who had agitated behind the scenes for a central bank was Paul Moritz Warburg, who had suggested the idea to Schiff as early as 1903. Warburg had emigrated in 1897 from the German investment banking firm of M. M. Warburg & Company and was devoted to the central banking model that had developed in Germany.

When the Finance Committee of the New York Chamber proved reluctant, Frank A. Vanderlip reported this unwelcome development to his boss, James Stillman, head of the National City Bank, and Stillman suggested that a new five-man special commission be set up by the New York Chamber to report on a plan for currency reform. The important thing was to secure a commission predisposed to be friendly, and Vanderlip managed to secure a commission totally loaded in favor of a central bank. This special commission of the New York Chamber consisted of Vanderlip, a Rockefeller man; Schiff’s close friend Isidore Straus, a director of R. H. Macy & Company; two Morgan men: Dumont Clarke, president of the American Exchange National Bank and a personal adviser to J. P. Morgan, and our old friend Charles A. Conant, treasurer of Morton Trust Company. The fifth member was John Claflin, of H. B. Claflin & Company, a large wholesaling firm, who was a veteran of the Indianapolis Monetary Convention. Coming on board as secretary of the new currency commission was Vanderlip’s friend Professor Joseph French Johnson, now of New York University.

The commission revived the old Indianapolis questionnaire technique: acquiring legitimacy by sending out a detailed questionnaire on currency to a number of financial leaders. While Johnson mailed and collated the questionnaires, Conant visited and interviewed the heads of the central banks of Europe.

The special commission delivered its “Currency Report” to the New York Chamber in October, 1906. To eliminate instability and the danger of an inelastic currency, the commission called for the creation of a “central bank of issue under the control of the government.” The following January, Paul Warburg went public with his agitation for a central bank, publishing two articles on its behalf. The big bankers recognized, however, that ever since the defeat of the Fowler Bill, a prime task would be to convert the large number of small bankers in the nation to the cause of a central bank.

The Panic of 1907 struck in October, the result of an inflation stimulated by Secretary of the Treasury Leslie Shaw in the previous two years. The Panic galvanized the big bankers to put on a concerted putsch for a Lender of Last Resort in the shape of a central bank. The big bankers realized that one of the first steps in the march to a central bank was to win the support of the nation’s economists, academics, and financial experts. Fortunately for the reformers, two useful organizations for the mobilization of academics were near at hand: the American Academy of Political and Social Science (AAPSS) of Philadelphia, and the Academy of Political Science of Columbia University (APS), both of which comprised leading corporate liberal businessmen, financiers, and corporate attorneys, as well as academics. Each of these organizations, along with the American Association for the Advancement of Science (AAAS), held symposia on monetary affairs during the winter of 1907-1908, and each called for the establishment of a central bank. The Columbia conference was organized by the distinguished Columbia economist E. R. A. Seligman, who not coincidentally was a member of the family of the prominent Wall Street investment bank of J. & W. Seligman and Company. Seligman was grateful that the university was able to provide a platform for leading bankers and financial journalists to promote a central bank, especially because “it is proverbially difficult in a democracy to secure a hearing for the conclusions of experts.” Emphasizing the importance of a central bank at the meetings, in addition to Seligman, was National City Bank’s Frank Vanderlip, Morgan’s Chase National Bank’s A. Barton Hepburn, and Kuhn, Loeb’s Paul M. Warburg.

At the American Academy of Political and Social Science symposium in Philadelphia, several leading investment bankers as well as Comptroller of the Currency William B. Ridgely came out for a central bank. Members of the AAPSS’s advisory committee on currency included Hepburn; Morgan personal attorney and statesman Elihu Root; Morgan’s long-time personal attorney Francis Lynde Stetson; and J. P. Morgan himself. In the meanwhile, the AAAS symposium in January, 1908 was organized by none other than Charles A. Conant himself, who happened to be chairman of the AASS’s social and economic section that year. Speakers favoring a central bank included Conant, Columbia economist J. B. Clark, Vanderlip, and Vander-lip’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.

The task of the bank reformers was well summarized 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.”

During the same month, the legislative lead in banking reform was taken by Senator Nelson W. 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. Aldrich’s Aldrich-Vreeland Act passed Congress that year, its most prominent provision the increased amount of emergency currency that national banks could issue. A more important if widely neglected provision, however, established a National Monetary Commission (NMC) that would investigate the currency question and suggest proposals for comprehensive banking reform. The underlying purpose of the NMC was revealed by two admirers who hailed this new proposal. Seren S. Pratt of the Wall Street Journal conceded that the real purpose of the NMC was to swamp the public with supposed expertise, thereby “educating” them into accepting banking reform. Pratt pointed out that “in no other way can such education be effected more thoroughly and rapidly than by ... a commission.” Another function of a commission, noted Festus J. Wade, a 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 carefully selected “experts.” The Indianapolis Monetary Commission was now being recreated on a national scale.

Senator Aldrich lost no time in launching the NMC, in June 1908. The Commission consisted of an equal number of Senators and Representatives, but these members of Congress were mere window-dressing to the advisors and staff who did the real work of the Commission. From the beginning, Aldrich envisioned the NMC, and the banking reform movement generally, to be run as an alliance of Rockefeller, Morgan, and Kuhn, Loeb people. Aldrich chose as the leading experts advising or joining the Commission two men suggested by Morgan leaders. As his top adviser, Aldrich chose, on the suggestion of J. P. Morgan, seconded by Jacob Schiff, probably the most powerful of the Morgan partners, Henry P. Davison. For leading technical economic expert and director of research, Aldrich accepted the recommendation of Roosevelt’s close friend and fellow Morgan man, Harvard University President Charles Eliot, who had urged the appointment of Harvard economist Abram Piatt Andrew. An-drew commissioned and supervised numerous reports and studies on all relevant aspects of banking and finance. In December, Aldrich hired the inevitable Charles A. Conant for research, public relations, and agitprop for the NMC. Meanwhile, Aldrich gathered around him inner circles of influential advisers, who included Warburg and Vanderlip. Warburg gathered around him subcircles who included Irving T. Bush, head of the Currency Committee of the New York Merchants Association, and men from the top ranks of the American Economic Association, to which Warburg delivered an address advocating central banking in December, 1908. Warburg met and corresponded frequently with leading academic economists who favored banking reform, including Seligman; Davis R. Dewey, historian of banking at M.I.T., long-time secretary-treasurer of the American Economic Association and brother of the progressive philosopher and educator John Dewey; Frank W. Taussig; Irving Fisher of Yale; and Oliver M. W. Sprague, Professor of Banking at Harvard, of the Morgan-oriented Sprague family.

In the month of September, 1909, the reformers accelerated their drive for a central bank into high gear. Morgan-oriented Chicago banker George M. Reynolds delivered a presidential address to the American Bankers Association flatly calling for a central bank for America. Almost simultaneously on September 14, President William Howard Taft, speaking in Boston, suggested that the country seriously consider a central bank. Taft had been close to the reformers, especially to his Rockefeller-oriented friend Nelson Aldrich, since 1900. The Wall Street Journal understood the importance of this public address, as “removing the subject from the realm of theory to that of practical politics.”

One week later, the bank reformers organized a virtual government-bank-media complex to drive through a central bank. On September 22, the Wall Street Journal began an unprecedented front-page, fourteen-part series of editorials entitled “A Central Bank of Issue.” These unsigned editorials were actually written by the ubiquitous Charles A. Conant, from his vantage point as salaried chief propagandist of the U. S. government’s National Monetary Commission. Building on his experience in 1898, Conant, aided by Aldrich’s secretary, prepared abstracts of commission materials and distributed them to newspapers in early 1910. }. P. Gavitt, head of the Washington bureau of the Associated Press, was recruited by the NMC to extract “newsy paragraphs” for newspaper editors out of commission abstracts, articles, and forthcoming books. And two ostensibly disinterested academic organizations lent their coloration to the NMC: the Academy of Political Science, publishing a special volume of its Proceedings in collaboration with the NMC, “to popularize, in the best sense, some of the valuable work of the Commission.” In the meanwhile, the Academy of Political and Social Science published its own special volume in 1910, Banking Problems, introduced by Andrew, and including articles by veteran bank reformers, including Johnson, Horace White, and Morgan Bankers Trust official Fred I. Kent, as well as by a number of high officials of Rockefeller’s National City Bank of New York.

Meanwhile, Paul M. Warburg capped his lengthy and intensive campaign for a central bank in a famous speech to the New York YMCA on March 23, 1910, on “A United Reserve Bank for the United States.” Warburg outlined the structure of his beloved German Reichsbank, but he was careful to allay the fears of Wall Street by insisting that the central bank would not be “controlled by ‘Wall Street’ or any monopolistic interest.” Therefore, Warburg insisted that the new Reserve Bank must not be called a “central bank,” and that the Reserve Bank’s governing board be chosen by government officials, merchants and bankers; bankers, of course, were to dominant the selections.

One of the great cheerleaders for the Warburg Plan, and the man who introduced the volume on banking reform featuring Warburg’s speech and published by the Academy of Political Science (H. R. Mussey, ed., The Reform of the Currency, New York, 1911), was kinsman and Seligman investment banking family economist, E. R. A. Seligman. So delighted, too, with Warburg’s speech was the Merchants’ Association of New York that it distributed thirty thousand copies of the speech during the spring of 1910. Warburg had carefully paved the way for this action by the Merchants’ Association by regularly meeting with the Currency Committee of the Merchants Association since the fall of 1908. Warburg’s efforts were aided by the fact that the resident expert for that committee was Joseph French Johnson.

During the same spring of 1910, the NMC’s numerous research volumes on various aspects of banking poured forth onto the market. The object was to swamp public opinion with a parade of impressive analytic and historical scholarship, all allegedly “scientific” and “value-free,” but all designed to further the agenda of a central bank.