Cronyism

CHAPTER 6

WALL STREET’S CENTRAL BANK

“Something radical is going to be necessary in order to meet the banking competition that we are facing,” wrote National City Bank’s vice president Frank Vanderlip to his superior, James Stillman, in 1907.True to his word, three years later Vanderlip, like-minded Wall Street bankers, and allied economists did concoct a radical corporatist proposal at a secluded resort in Georgia: a central bank that would protect their cartel in bankers’ balances from midwestern competitors and propel New York City and the dollar into worldwide financial hegemony. This regulatory agency has perceptively been called “the Creature from Jekyll Island” and was the defining achievement of the corporatist state.More than the trusts’ trade commission, the enhanced Interstate Commerce Commission, and new agencies that regulated food and drugs, the central bank was the prime example of how a progressive policy that was purportedly designed to combat big business actually provided special privileges to that group. The reason was personnel: Wall Street succeeded in making sure that one of its men would serve as the dominant and lasting influence, seizing control of monetary policy for Wall Street’s benefit.

The Creature from Jekyll Island

By the twentieth century, the Wall Street power elite centered around John Pierpont Morgan’s J. P. Morgan & Co., Jacob Schiff ’s Kuhn, Loeb & Co., George Baker’s First National Bank of New York, and James Stillman’s National City Bank. These institutions informally allied through shared investments in corporate securities and interlocking directorates. For example, Schiff and Morgan partners Robert Bacon and George Perkins sat on the board of directors of National City Bank, which had grown immensely profitable, leading in government deposits and bankers’ balances as well as becoming a large recipient of corporate deposits. Thanks to a merger and portfolio acquisitions, its assets jumped from $37 million in 1896 to $194 million by 1901. Stillman’s institution turned into the signature commercial-bank titan on Wall Street.

Wall Street continually experienced harsh criticism from Populists, culminating in an attack on an omnipresent “Money Trust” by the early 1910s.However, like US Steel, various railroad communities of interest, and other corporate mergers Wall Street created in the early 1900s, the Money Trust never achieved a monopoly. Instead, central reserve city banks in Chicago and St. Louis continued to erode New York City’s market share. Between 1897 and 1912 Wall Street’s share of central reserve city deposits slipped from 77 percent to 72.7 percent. More drastic was the change in its share of bankers’ balances, the highly desired accounts where other banks kept some of their reserves in central reserve city banks: they dropped from 73 percent to 57.5 percent. More banks were choosing to keep their reserves in Chicago and St. Louis, reducing New York City banks’ control of the credit expansion process and thus their ability to act as quasi-central banks. Wall Street was facing more, not less, competition.

On the international front, Wall Street had defended the gold dollar against the Populists, but New York City still played a distant fiddle to British finance. US trade with Great Britain and other countries was largely financed through British acceptances, a type of financial instrument where banks guaranteed payment to exporters so importers could purchase goods. The National Banking Acts prohibited national banks from participating in the acceptance business. Moreover, between 1899 and 1913, as a share of foreign exchange reserves held by foreign governments and private banks, the dollar was not on the same map as the British pound sterling or even the German mark or the French franc. Wall Street had to pay commissions to European bankers, had to sell securities denominated in a currency that was not in high demand, and failed to get dollar-denominated banknotes and deposits to serve as reserves for credit expansion abroad.

Wall Street desperately sought to stem the erosion in its competitive position domestically and ascend to unquestioned supremacy internationally. It decided to accomplish this not by becoming more efficient compared to rivals in a deregulated market, but through the time-honored method of acquiring new privileging regulations from Congress. In other words, Wall Street financiers demanded corporatist regulations that cartelized the banking industry and aggressively promoted New York finance around the world.

Three important developments during the late 1890s solidified Wall Street’s relationship with the McKinley administration and the Republican Party. First, the resumption of foreign confidence in the American monetary system, new gold production, and an increase in exports to Europe caused the amount of gold in the United States to increase 85 percent between 1895 and 1900. The Treasury, now overflowing with gold from tariff revenue, stored its revenue surpluses in national bank depositories. This reserve subsidy enabled Wall Street to further expand credit, for National City Bank was one of the primary recipients and held more than 10 percent of the government’s balances in the early 1900s.

Second, Republican imperialists, back in power, embarked upon Caribbean and Pacific empire building. In 1898 they annexed Hawaii and invaded the Philippines and Cuba. Initially, Morgan and other Wall Street bankers hesitated about the Spanish-American War for fear that the imperialism would jeopardize the country’s credit and require silver inflation to finance the expenditures. But large gold inflows and higher taxes assuaged their worries, and the Morgans and National City Bank agreed to underwrite any portion of the $200 million bond issue not taken by the public. In this way, Wall Street helped finance the new imperialist order. By the war’s end the ten largest banks in New York City held nearly $400 million of the nation’s $1 billion in national debt. A key government official managing the transactions was Assistant Secretary of the Treasury Frank Vanderlip, who did such a good job that Stillman appointed him vice president of National City in 1901.

Third, in 1898 the plutocratic Nelson Aldrich ascended to the chairmanship of the Senate Finance Committee. Aldrich personified the cozy relationship between wealthy financiers and political elites—the senator played cards with Morgan, and his daughter married John D. Rockefeller Jr. in 1901. The Rhode Island senator, who had previously devoted most of his efforts to tariff legislation, increasingly shifted into financial matters. As the new chair of the Senate’s foremost committee on monetary and banking issues, Aldrich was in a position to exert significant influence on the relevant legislation. According to one contemporary, “No financial measure can pass the Senate without Senator Aldrich’s consent.”This put Wall Street in a commanding position to advance bills furthering their own cronyism and to block Chicago bankers’ deregulatory reform efforts.

Early on, midwestern bankers put Aldrich and Wall Street on the defensive. Led by the president of the First National Bank of Chicago, James Forgan, and the president of the Commercial National Bank of Chicago, James Eckels, the American Bankers Association (ABA) lobbied for Canadian-style deregulations that relaxed the government bond-backing requirement for national banknotes and enabled national banks to engage in interstate branching. Chicago bankers enlisted the support of J. Laurence Laughlin, a free-market economics professor at the new University of Chicago. If adopted, these proposals would have gone a long way toward increasing the stability of the United States banking system. Interstate branching would have increased competition and led to more well-diversified and efficient banks in rural America. Asset currency reforms that allowed banks to freely issue notes in response to customers’ changing cash-holding preferences would have let banks satisfy demands for currency without drawing down their specie reserves.

Wall Street did not support either proposal. Asset currency reforms would decrease demand for the federal debt Wall Street had accumulated, while branching deregulation would enable greater portfolio diversification by smaller banks and reduce their desire to keep bankers’ balances in New York City. Wall Street’s only exception to relaxing branching regulations concerned establishing foreign branches. National City Bank wanted to promote the dollar-denominated commerce of Standard Oil, the American Sugar Refining Company, the meatpacker Armour & Co., the House of Morgan’s new behemoth International Harvester, and other large exporters whose leaders sat on its board. Even here, Wall Street envisioned only allowing the largest banks to establish foreign branches—a blatant grant of monopolistic privilege. Joining Wall Street in opposing deregulation of domestic branching were the numerous country bankers, including Andrew Frame, president of the Waukesha National Bank in Wisconsin. Rural banks worried that the removal of barriers to branching would encourage competition in their communities from larger and more efficient financial intermediaries.

Aldrich and Wall Street supported the Gold Standard Act of 1900 because it weakened silver at the cost of only slightly decreasing barriers to entry and bond-backing requirements. They resisted the subsequent asset currency and branch banking reforms proposed by New Jersey Republican Charles Fowler, who chaired the House Banking and Currency Committee and allied with the ABA. Aldrich cut a deal with the new president, Theodore Roosevelt, who initially supported the ABA’s reforms, by persuading him to stick to regulating the trusts and to other legislation the public more easily understood. With the added opposition of the Wisconsin, Iowa, Minnesota, Kansas, and other state-level banking associations that represented smaller country banks, Wall Street and Aldrich killed the Chicago-backed Fowler bills of 1902 and 1903.

Wall Street then schemed how to further its anticompetitive interests. Enter Paul Warburg. A German immigrant and close relative of Schiff, Warburg became a Kuhn, Loeb & Co. partner in 1902, and Morgan personally considered him one of the “coming financiers of the country.”Warburg believed that free-market advocates “were preaching unsound doctrines” and America needed a central bank like the great European countries.In essence, under the guise of stopping bank panics, Warburg’s central bank would strengthen Wall Street’s cartel and promote its services abroad. It would reduce competition from rival cities through granting selective credit expansion subsidies: disproportionate lending to Wall Street banks during growing economies and in downturns would make New York City banks more attractive destinations for other banks’ balances relative to institutions in Chicago and St. Louis. The central bank’s credit expansion would also promote global use of the dollar and American trade abroad. Through the purchases of acceptances to boost bank reserves, the central bank would subsidize both the market in acceptances and the Wall Street banks that would now be able to grant them. This would stop the “annual tribute to Europe,” paid in the form of commissions on British acceptances—tribute that could instead be demanded from Europe in a future dollar-based international order.

In 1902, Warburg articulated his central bank in a paper presented to Schiff. The head of Kuhn, Loeb & Co. approved, but cautioned his fellow German cartelist that Americans remembered the Jacksonians’ fight against the monopolistic Second Bank of the United States and would not accept another central bank.

Wall Street hunkered down, waiting for the perfect time to strike. New York’s banking pyramid, flush with Treasury money and gold inflows, once again engineered a mighty burst of credit expansion. From 1897 to 1907 the total money supply, including deposits at national banks, state banks, mutual savings banks, and the new savings and loan associations, soared by 118 percent (8 percent per annum). The inflationary bank credit percolated down in the form of loans to the nation’s new corporate and railroad monoliths. The Treasury added extra fuel in 1906 when it allowed national banks to increase their reserves by borrowing against the Treasury’s expected gold inflows. The Chicago Banker attacked this policy once it discovered that Treasury Secretary Leslie Shaw had secretly made a $10 million loan to National City Bank and already allowed it to count future gold imports in its reserves. However, Shaw’s expansionary policy could not last, because it depended on continued gold inflows. When the Bank of England raised rates in the fall to reverse its own gold outflows, the stage was set for yet another banking crisis.

Wall Street knew what it wanted. Thanks to Schiff, in early 1906 the New York Chamber of Commerce formed a committee on banking reform. The chief members were Vanderlip and economist Charles Conant, the treasurer of the Morgan-affiliated Morton Trust Company. In the early 1900s Conant and other economists partnered with Wall Street, one of the many alliances between big business and intellectuals during the Corporatist Era. While working in the War Department economists pressured Caribbean and Pacific vassals to replace their silver reserves with dollars, which furthered Wall Street’s banking pyramid and global use of the dollar. For example, thanks to Conant, the Philippines government deposited their dollar reserves in Morton Trust. Conant also induced the new protectorate of Panama to do the same. Wall Street, especially the corporate attorney William Nelson Cromwell of Sullivan & Cromwell, played an important role in the imperialist creation of Panama. In 1900 Cromwell, Morgan, and others had secretly bought the French Panama Canal Company for $5 million. They then engineered a revolution in Colombia in 1903 to create an independent Panama so the US government would purchase the abortive Panama Canal for $40 million, allowing them to pocket a net gain, after other costs, of $25 million. Panama holding dollar reserves was simply icing on the canal cake.

At his job on the New York committee, Conant continued working for New York City banks by researching and visiting European central banks. Vanderlip and Conant’s report called for the “centralization of financial responsibility” through the “creation of a central bank.”The proposal clashed with James Forgan’s concurrent efforts at the annual ABA meeting. Despite their best efforts, Stillman and Vanderlip failed to convince the Chicago banker to change his mind on asset currency reform. Fortunately for them, country bankers preferred a different plan of emergency currency distributed through their local clearing houses. As a result, Representative Fowler’s new ABA-backed bill died in the House.

While banking reform ideas were ruminating, the Panic of 1907 erupted after a run on New York’s Knickerbocker Trust Company in October. When it commenced, Morgan, Baker, and Stillman decided which financial institutions to save. The trio was assisted by Morgan’s young guns: Benjamin Strong, secretary of the Morgan-affiliated Bankers Trust Company; Thomas Lamont, vice president of the Bankers Trust Company; and Henry P. Davison, vice president of Baker’s First National. Notably, the trio received bailout funds from the Treasury, which deposited $25 million in National City, First National, and other Wall Street banks. This kind of assistance incurred the wrath of country-bank stalwart Senator Robert La Follette of Wisconsin and caused him to denounce the Money Trust.

Wall Street recognized that the crisis presented an excellent opportunity. On the intellectual front, in early 1908 Edwin Seligman organized a conference on the currency question. A former president of the American Economic Association (AEA) and a current economics professor at Columbia University in New York, Seligman wanted to elevate the role of the intellectual, believing that the new century would “put us in a position to control . . . and mold” society.Seligman knew that such budding philosopher kings needed wealthy financial backers: he was a relative of Warburg’s, and his brother Isaac was a prominent banker at J. W. Seligman & Co. At the conference, Seligman and Warburg, along with Vanderlip, spoke about the disadvantages of bank competition. Seligman started, announcing that the worst part of “our note issue is its decentralization” (i.e., competition).Vanderlip followed by criticizing each bank’s “endeavor to pile up reserves” instead of pyramiding together, and Warburg concluded that “small banks constitute a danger.” The solution to such competition, they stated, was a central bank that monopolized note issuance and could pump reserves into banks. Later in the year, Warburg delivered another pro-central-banking speech, this time to the attentive AEA, and began corresponding with Professor Irving Fisher of Yale University and other intellectual heavyweights.

In terms of the political picture, Morgan, Warburg, and others met with Aldrich to devise legislation that could lay the foundation for a central bank. Thanks to Aldrich’s efforts Congress passed the Aldrich-Vreeland Act in May 1908. The important feature of this law was its establishment of a commission to investigate banking reform.

George Selgin perceptively describes the National Monetary Commission as “a Trojan Horse for Wall Street.”Upon the law’s passage Morgan and Schiff recommended that Aldrich, the chair of the commission, choose Davison as his advisor. This Morgan satrap expected a central bank to introduce a “level playing field” by reducing the competitiveness of nonnational banks.According to Morgan partner George Perkins, “It is understood that Davison is to represent our views and will be particularly close to Senator Aldrich.”Davison certainly made sure: he subsequently sold the politician $50,000 worth of Bankers Trust Company stock for only $40,000. Furthermore, when Aldrich traveled to Europe, Morgan and Teddy Grenfell, a director of the Bank of England since 1905 and a partner in Morgan, Grenfell & Co. (the successor to the British-based J. S. Morgan & Co.), arranged meetings for him with central bankers and economists.

Wall Street enhanced its domination of the commission with corporatist intellectuals. Conant worked as a researcher on the commission’s payroll and studied European central banks. A. Piatt Andrew, an assistant professor of economics at Harvard who staunchly opposed branch banking, also supported Wall Street on the commission. In fact, over the next two decades J. P. Morgan & Co. became quite friendly with Harvard as its partners and George Baker donated millions to endow the university’s new business school. With such banker and intellectual influence, it should come as no surprise that Aldrich steered the National Monetary Commission toward a pro-central-banking position and away from contemporary proposals for elastic note issuance and branch banking.

Wall Street needed to turn recommendations into legislation soon, given the outcome of the 1910 midterms. Early in that year Senator Aldrich, sensing the political winds, had decided that he would not run for reelection; he saved himself the potential embarrassment in the fall, when William Jennings Bryan and his Populist Democrats flipped the House. The small-town bankers they represented had no use for a central bank, recognizing that Wall Street would inexorably dominate it. In contrast to Wall Street’s central bank proposal and Chicago bankers’ asset currency reforms, Populists championed deposit insurance cronyism for state banks (the federal comptroller of the currency prohibited national banks from joining state-level insurance systems, meaning they could only participate if they converted to a state charter). Oklahoma, Kansas, Nebraska, and Texas had created such systems from 1907 to 1909. These state-level programs encouraged depositors and banks to engage in risky behavior because both groups knew their activities would be subsidized by taxes on the state’s banking community. Deposit insurance subsidies were a perfect way to justify the continued prohibitions on interstate branching because depositors would be more willing to put their money in inefficient rural banks if they knew the state taxpayer would bail the institutions out.

Wall Street decided to articulate its thoughts in a concrete proposal. In late November 1910, after Morgan, Aldrich, and other heavyweights attended an Academy of Political Science conference that included pro-central-banking papers by Warburg and Conant, they organized a clandestine excursion to the luxurious Jekyll Island Club in Georgia. The meeting had to be a secret to minimize public uproar—a conspiracy admitted to only after several decades. No minutes were recorded, and some facts are not completely known. Most likely, the new Morgan partner Davison came up with the idea, and Morgan made the necessary arrangements because he was a member and a founder of the club. Aldrich, Assistant Secretary of the Treasury A. Piatt Andrew, Davison, the new president of National City Bank Frank Vanderlip, and Kuhn, Loeb & Co. star Paul Warburg attended the meeting. There is circumstantial evidence that Benjamin Strong, the new vice president of the Bankers Trust Company, attended as well.

Roger Lowenstein argues that the attendees “were conspirators, but patriotic conspirators,” because they wanted to benefit themselves through a public-interested reform.Murray Rothbard is more accurate: “There is no clearer physical embodiment of the cartelizing coalition of top financial and banking interests.”If the attendees wanted in fact to improve the public welfare by preventing bank panics they would have proposed the curatives of branch banking and asset currency reforms. Instead, Wall Street devised a regulatory commission that would enhance its cartel, diminish other banking regions’ influence, and leave in place the underlying fragilities that harmed the public with frequent panics. “The bankers at Jekyll Island,” explains Richard McCulley, “regarded laissez-faire and competition in banking as the problem and believed that a central banking arrangement based upon cooperation and banker self-regulation was the solution.”

The Aldrich Plan, as it later became known to those without knowledge of its Jekyll Island origins, proposed to create a single central bank in Washington, DC. National banks, state banks, and trust companies could choose to participate and obtain subsidies by becoming members. The central bank and its fifteen branches could issue gold-backed currency and increase the reserves of member banks, especially those on Wall Street, through loans at the discount window and the purchase of acceptances and other assets. Critically, member banks would own stock in the central bank, appoint the lion’s share of bank directors and commissioners, and be able to continue to hold other banks’ reserves in the form of bankers’ balances. The conclusion is inescapable: Wall Street elites traveled to Jekyll Island to devise a banker-run and banker-owned corporatism that funneled cheap credit to their financial institutions and protected their bankers’ balances. This was no public-interest proposal; it was cronyism.

Aldrich presented his plan to the National Monetary Commission in January 1911. But creating the groundwork for a pro– Wall Street central bank and getting Congress to pass legislation on it were two very different things, for Congress was now split between Republicans and Democrats. Populists vehemently hated Wall Street, and there was a very real chance they could pass threatening legislation if the Democrats won the White House in 1912.

Wall Street’s Central Banker

Over the next few years Aldrich, Morgan, and Wall Street slowly but surely came to the ugly realization that Congress would not pass their cherished cartelizing bank bill but instead pass a curious hybrid, a “decentralized” central bank that assisted the country bankers. Not all hope was lost. Just like the railroads with the Interstate Commerce Commission, Wall Street could still accomplish its goals by influencing the selection of the decentralized central bank’s personnel. In Aldrich’s words, everything would depend “entirely . . . upon the character and wisdom of the men who will control the various organizations” in the central bank.With the right personnel in charge, Wall Street could get the new central bank to do its bidding.

At the beginning of 1911, Wall Street moved to convince a suspicious public of the blessings of central banking. In doing so, New York City bankers forged a tenuous alliance with James Forgan and other asset currency–minded Chicago bankers by establishing the National Citizens’ League for the Promotion of a Sound Banking System. Wall Street, which was to provide $300,000 of the total $500,000 in financing costs, designed the organization as a front to convince the public that central banking had grass-roots support. Forgan and economist J. Laurence Laughlin remained hesitant, however, because of the Aldrich Plan’s centralizing tendencies and the senator’s insistence that his politically unpalatable name be on the future congressional bill. Even so, Aldrich and his banking allies made enough minor concessions and persuasive speeches to receive the warm endorsement of the American Bankers Association in November.

Victory was fleeting, however, because it coincided with the deteriorating fortunes of Wall Street at the hands of insurgent Populists. After Senator Aldrich retired in early 1911, western Republicans like Congressman Charles Lindbergh of Minnesota, a notable director of and stockholder in the First National Bank of Little Falls, blasted Wall Street’s domination of the Aldrich Plan for inviting “capture by Wall Street.”They worked with Democrats to pass a law in August 1911 requiring the commission to issue a report by January 1912 and disband. By the end of 1911 President William Howard Taft, previously supportive of the Aldrich Plan, began to waver as he worried about his upcoming reelection bid.

The National Monetary Commission faced tough sledding in early 1912 when it submitted the Aldrich Plan to Congress. Even though the public did not know that Wall Street bankers had schemed at Jekyll Island, the mere mention of Aldrich’s name convinced voters that the Morgans and other banking elites were not far behind. The bill’s chance further crumbled when the Republican National Convention declined to endorse it. Compounding the difficulties, when Taft secured the Republican nomination over Roosevelt, the former president bolted and formed the Progressive Party. Although ex-Morgan partner and preeminent corporatist George Perkins provided $130,000 for Roosevelt’s campaign and the former president had previously told Warburg he supported the Aldrich Plan, his desperation to return to the halls of power led him to denounce the bill.

The Democrats moved in for the kill. The House Committee on Banking and Currency not only rejected the Aldrich Plan but set up a special inquisitorial committee to investigate the Money Trust in April. The investigation, cheered on as a progressive attack against big business, was just a country-banker counterattack: the House committee’s chair Arsène Pujo of Louisiana, a previous president of his state’s First National Bank of Welsh, chaired the subcommittee. He sicced on Wall Street Samuel Untermyer, a politically ambitious New York corporate lawyer and multimillionaire. Untermyer had previously clashed with the Morgan and Rockefeller interests and failed to receive their financial support for a prospective Senate candidacy. With an axe to grind, he attacked Wall Street with vituperative cross-examinations. The Pujo Committee, combined with the Chicago bankers’ realization that Wall Street intended to control the proposed central bank, led to the collapse of the National Citizens’ League and the ABA’s withdrawal of support for the Aldrich Plan.

It became increasingly apparent to Wall Street that the seismic breakdown in the Republican Party meant that the Democratic candidate, Woodrow Wilson, would win the 1912 election. Wilson was of a rare breed, the scholar turned politician. A former academic who praised the Second Bank of the United States as “a great commanding bank,” Wilson spent most of his career at Princeton University, first as a professor of political science and then its president.He became good friends with Frank Vanderlip and secured a $20,000 donation to the university from J. P. Morgan. But some of Wilson’s actions alienated prominent trustees of Princeton, including Moses Taylor Pyne, a director of National City Bank, so Wilson shifted into politics and became governor of New Jersey. He soon eyed the presidency and hoped to become the nation’s first court intellectual turned commander-in-chief.

Wilson was also of a very common breed: the consummate politician who desired power and frequently rotated between special interests whenever it best served him. While he maintained connections with many important big bankers, the politically astute Wilson realized it was time to move on and look more progressive. He split with his friend Vanderlip and refused to endorse the Aldrich Plan. Wilson then catered to the Populists by coming out against a central bank and supporting the work of the Pujo Committee. Even with this volte-face, Wilson’s presidential campaign still received donations from Warburg and Schiff, who perceived that they might be able to reduce the Populist threat by contributing to the Democrats’ coffers.

At first, it appeared as if Kuhn, Loeb & Co.’s efforts would not pay off. President Wilson chose for his secretary of state William Jennings Bryan, leader of the Populist wing of the Democratic Party. For Treasury secretary, Wilson picked his future son-in-law, William McAdoo. McAdoo detested Wall Street: as the former president of the Hudson & Manhattan Railroad he had watched J. P. Morgan & Co.’s lines push his company to the brink of bankruptcy. His assistant secretary, John Skelton Williams, was a former Richmond banker and railroad operator who had lost his fortune to a railroad morganization. These appointments did not exude warm feelings toward Wall Street.

The Pujo Committee’s Money Trust investigations convinced Democrats of the need for banking reform. Rather than offer their own reforms, however, they chose to revise the hated Aldrich Plan by changing the name, weakening Wall Street’s dominance, and making the structure more decentralized to appeal to country bankers. Virginia’s Carter Glass, who would become the chair of the House Committee on Banking and Currency, got to work before Wilson’s inauguration. Glass turned to the intellectual class, soliciting the help of Washington and Lee economics professor H. Parker Willis. The Glass Plan called for regional central banks—rather than a single central bank with branches—that issued a gold-backed currency and pumped in reserves to banks across the nation. Member banks still owned the regional central banks but had to keep their required reserves at these institutions and not at bankers’ banks. Lastly, the comptroller of the currency supervised the entire structure.

When Glass presented his plan to Wilson in December, the president-elect recommended adding a board in Washington to monitor all the regional central banks. Wilson’s recommendation stemmed from two sources. First, Wilson, an academic planner par excellence, wanted to increase his own influence through presidential appointments. Second, Warburg and other bankers had lobbied Wilson for a centralized board. Warburg realized that he should appease the Democrats and support a decentralized central bank so long as a banker-appointed board ensured Wall Street dominance. The main conduit between Wilson and Wall Street was Colonel Edward House, the president’s politico and advisor on personnel matters.

Wilson and Glass were willing to tolerate some banker representation on the Washington-based board; the same could not be said about Bryan and McAdoo. Wilson, eager to strengthen the Populists’ support and further enhance his control over the system, changed his mind. The Glass-Owen bill of mid-1913 mandated that the secretary of the Treasury and the comptroller sit on the board and presidential appointments fill the remainder. This mortified Wall Street and Chicago bankers. Strong stated that “supervisory power . . . should be exercised by bankers of great skill and experience, and not by a body of political appointees and government officials.”Warburg worried that the commission would become “a hopelessly political Board” and recklessly pump in new money before elections.More to the point: this credit expansion would benefit special-interest groups besides Wall Street. Warburg and Strong only wanted commissioners who were apolitical (a code word for personnel responsive to different special interests) to serve as the nation’s central bankers. Wall Street’s premier intellectuals concurred, and A. Piatt Andrew blasted the proposed legislation as a “Bryanized Banking Bill.”Warburg, Vanderlip, Davison, and Strong spent the rest of the year attempting to get banker-appointed representation on the board. They wrote letters to congressmen and tried to meet with Wilson. They were unsuccessful.

On December 23, 1913, Wilson signed the canonical example of progressivism and one of the most consequential bills ever passed by Congress: the Federal Reserve Act. This legislation created a system of regional Federal Reserve Banks that could increase member bank reserves through loans and purchases of securities. The presidentially appointed Federal Reserve Board in Washington would monitor and oversee the Fed banks, though the specific relationship between them and their mandate was not clearly delineated. To quote Allan Meltzer, “The act says very little about the broader purposes of the legislation. . . . The act speaks of setting discount rates ‘with a view of accommodating commerce and business’ but mentions no other objectives. . . . [There was] no clear division of authority between” the Federal Reserve Board and the regional central banks.

This opened the door for Wall Street to implement its corporatist schemes. Quite significantly, through election of their share of its directors, Wall Street bankers could appoint the head, called the governor, of the Federal Reserve Bank of New York. This individual could liberally lend to Wall Street through the discount window, which would convince other banks that Wall Street would never suspend payments on bankers’ balances. It is true that the Federal Reserve Act required all member banks, which automatically included national banks, to store required reserves directly at the regional central banks. But the law also incentivized member banks to park excess reserves on Wall Street because it continued to prohibit branch banking and decreased average reserve requirements from 21 percent to 12 percent, which freed up reserves. Furthermore, the law allowed nonmember state banks to convert deposits at member banks into Federal Reserve Notes, which incentivized them to keep reserves on Wall Street. Thus, with the right governor of the New York Fed, the new central-banking system could strengthen the bankers’ balances of the Wall Street cartel.

On the international front, the governor of the New York Fed could spur the acceptance market in the United States by purchasing acceptances from Wall Street, as member banks could now engage in the practice. Encouraging US banks to issue acceptances to finance international trade would promote the dollar. New York City would accumulate most of the benefits from promoting financial services abroad because the legislation limited foreign branches to member banks with a capitalization of $1 million or more—fewer than 3 percent of all national banks in 1909. This enabled New York City banks to monopolize the new business of foreign branches and in turn acquire a greater business in the acceptance market.

But the Federal Reserve Act would only promote Wall Street’s bankers’ balances and its financial services abroad if Wall Street elites controlled the levers. They were not entirely convinced this would happen. Vanderlip was actually worried that the law would reduce National City Bank’s bankers’ balances, and briefly contemplated keeping the bank out of the Federal Reserve System by converting it into a state-chartered bank. The stakes were especially high for the commercial banks associated with J. P. Morgan & Co., whose own return slumped from a $9 million profit in 1911 to a $6 million loss in 1913 after a downturn began that year. Hostile government policy made matters worse. Jack Morgan, heir to the empire after his father died in the spring of 1913, watched the New Haven Railroad and other lines teeter on the edge of bankruptcy because shippers had captured the Interstate Commerce Commission. International Harvester and the Morgans’ even larger creation, US Steel, faced antitrust lawsuits, and the Populists’ contemporary antitrust proposals threatened to ban interlocking directorates between corporate boards. Jack summarized Wall Street’s headaches with the Democrats: “The Mexicans are far better off, because their various bosses only murder and rape.”

For the Federal Reserve to become the panacea for Wall Street’s woes, the directors of the Federal Reserve Bank of New York needed to elect an elite banker to serve as governor. Such a governor, if forceful and energetic, could essentially become a oneman commission that maneuvered around the Federal Reserve Board in Washington and turn the regional central bank into the single central bank New York bankers had always wanted.

Wall Street only needed the directors of the New York Fed to elect their man; the Federal Reserve Board did not need to approve the decision. But Wall Street received an unexpected gift in DC: thanks to Colonel House’s recommendation, Wilson offered Warburg a spot on the Federal Reserve Board. The investment banker was both surprised and delighted—contributing to Wilson’s campaign had paid off! Even though Warburg would have to resign his partnership at Kuhn, Loeb & Co. and suffer a massive salary drop from $500,000 to $12,000, his acceptance ensured Wall Street representation in Washington. Wilson’s rationale was quite simple: after bludgeoning Wall Street, the president, in his characteristic fashion, extended an olive branch in preparation for the upcoming midterms and his future reelection bid. He pressured the hesitant Senate Banking Committee to confirm Warburg in the summer of 1914.

The stage then shifted to New York, the real center of action. By May of that year, the city’s leading banks had bought stock in the New York Fed. For example, George Baker’s First National purchased $600,000. Once Wall Street invested, the bankers elected their portion of the New York Fed’s directors, who then promptly nominated the only man they had in mind for the exalted position of governor: Benjamin Strong, the new president of the Bankers Trust Company. This prodigious banker was currently following the career paths of his friends Davison and Lamont, both of whom had been involved with Bankers Trust before becoming Morgan partners. Jack Morgan later reminisced that he “saw Strong often. He was a personal friend certainly.”Strong seemed destined for a Morgan partnership, but Wall Street needed him elsewhere.

Strong initially did not want the job, believing that the Federal Reserve failed to grant big bankers enough power and would “restrict the development and usefulness of our National banks.”Warburg, Jack Morgan, and Davison told him that he could have the central bank Wall Street wanted if he forcefully took control. As Warburg counseled, he could “frame the bylaws so as to give [him]self sufficient power as Governor.”To put it more pointedly, Strong could interpret the vague authorities of his governorship in a way that enhanced his power relative to the Federal Reserve Board. Convinced, Strong accepted the position and was elected governor in October. A certified Morgan man thus became head of the New York Fed, an extremely powerful position. The Money Trust, the object of public wrath, had snuck into the Populists’ cherished central bank creation.

By the end of the year, against all odds and the intentions of the Democrats, the Creature from Jekyll Island had become a reality. At least one (Warburg), and possibly two (Strong) of the Jekyll attendees now held crucial offices in the machinery. The Morgans had erected their central bank infrastructure by installing the right personnel, namely their central banker in New York. As Ron Chernow sardonically observes, “The Morgan-Strong friendship would mock any notion of the new Federal Reserve System as a curb on private banking power.”

With Strong ensconced, it was now time for Wall Street to use the New York Fed to realize its ambitions. The cartel desperately wanted the regional central bank’s credit expansion to strengthen its bankers’ balances and deposits vis-à-vis Chicago. More than that: the New York Fed must make the city a world financial power. In July 1914, Warburg had forcefully argued before economists in the Academy of Political Science for the dollar to rival the British pound sterling as the world’s medium of exchange. A new global financial empire was within Wall Street’s grasp.

The worldwide financial order that Wall Street and the New York Fed would develop over the next two decades was the most significant victory for big business during the Corporatist Era. But it was not the only one. Corporations, railroads, and food and drug interests, led by financial elites, also cartelized their industries through regulatory commissions and favorable administrators. None would be as inextricably ingrained in the whole working of the economy as the Federal Reserve, but in these areas, too, the corporatist state would become firmly established. Beginning in the McKinley administration, corporate interests busily moved away from protective tariffs to disclosure requirements and a trade commission of their own to reduce competitive pressures.

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Frank Vanderlip to James Stillman, February 1, 1907, quoted in Harold van B. Cleveland and Thomas F. Huertas, Citibank, 1812–1970 (Cambridge, MA: Harvard University Press, 1985), 59.

G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve, 4th ed. (Westlake Village, CA: American Media, 2002).

Larry Schweikart, “Frank Arthur Vanderlip,” in Encyclopedia of American Business History and Biography: Banking and Finance to 1913, ed. Larry Schweikart (New York: Facts on File, 1990), 471–72, 477.

Charles A. Lindbergh, Banking and Currency and the Money Trust (Washington, DC: National Capital Press, 1913).

Philip H. Burch Jr., Elites in American History, vol. 2, The Civil War to the New Deal (New York: Holmes and Meier, 1981), 182–83; Vincent P. Carosso, Investment Banking in America: A History (Cambridge, MA: Harvard University Press, 1970), 151–52; Vincent P. Carosso, The Morgans: Private International Bankers, 1854–1913 (Cambridge, MA: Harvard University Press, 1987), 452; Cleveland and Huertas, Citibank, 48–49, 56, 314–15; James Freeman and Vern McKinley, Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi (New York: Harper Collins, 2018), 65–70; Richard T. McCulley, Banks and Politics during the Progressive Era: The Origins of the Federal Reserve System, 1897–1913 (New York: Garland, 1992), 91; Margaret G. Myers, The New York Money Market, vol. 1, Origins and Development (New York: Columbia University Press, 1931), 246; and Ross M. Robertson, “St. Louis: Central Reserve City, 1887–1922,” Federal Reserve Bank of St. Louis Monthly Review 36, no. 8 (August 1954): 89.

J. Lawrence Broz, The International Origins of the Federal Reserve System (Ithaca, NY: Cornell University Press, 1997), 36–45, 66–85, 105–14; and Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (New York: Oxford University Press, 2011), 32.

Cleveland and Huertas, Citibank, 48–49; McCulley, Banks, 55–58; and Richard Sutch and Susan B. Carter, eds., Historical Statistics of the United States, vol. 3, Economic Structure and Performance (New York: Cambridge University Press, 2006), 596.

Carosso, Morgans, 452; Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Simon and Schuster, 1990), 80; Jonathan Kirshner, Appeasing Bankers: Financial Caution on the Road to War (Princeton, NJ: Princeton University Press, 2007), 45–55; McCulley, Banks, 55–58, 65, 91; Walter Nugent, Habits of Empire: A History of American Expansion (New York: Vintage Books, 2008), 263–64, 278–79; and Schweikart, “Vanderlip,” 471–72.

Leslie Shaw to Theodore Roosevelt, July 28, 1903, quoted in Horace Samuel Merrill and Marion Galbraith Merrill, The Republican Command, 1897–1913 (Lexington: University Press of Kentucky, 1971), 151.

Roger Lowenstein, America’s Bank: The Epic Struggle to Create the Federal Reserve (New York: Penguin Press, 2015), 37, 42–43; and George Selgin, “New York’s Bank: The National Monetary Commission and the Founding of the Fed,” Cato Policy Analysis no. 793 (June 2016): 10.

Broz, International, 137–39, 168–69; Cleveland and Huertas, Citibank, 41–42, 56, 77; Benjamin J. Klebaner, “Nelson W. Aldrich,” in Schweikart, Encyclopedia of American Business History and Biography: Banking and Finance to 1913, 7; McCulley, Banks, 39, 43, 65, 75, 92–94, 96, 103–7; George Selgin, “New York’s Bank: The National Monetary Commission and the Founding of the Fed,” in Money: Free and Unfree (Washington, DC: Cato Institute, 2017), 131–38; Eugene Nelson White, The Regulation and Reform of the American Banking System, 1900–1929 (Princeton, NJ: Princeton University Press, 1983), 85–86; and Robert H. Wiebe, Businessmen and Reform: A Study of the Progressive Movement (Cambridge, MA: Harvard University Press, 1962), 62–64.

J. P. Morgan, quoted in Benjamin J. Klebaner, “Paul M. Warburg,” in Encyclopedia of American Business History and Biography: Banking and Finance, 1913–1989, ed. Larry Schweikart (New York: Facts on File, 1990), 438.

Paul M. Warburg, The Federal Reserve System: Its Origin and Growth (New York: Macmillan, 1930), 1:19.

Paul M. Warburg, “The Discount System in Europe,” in The Federal Reserve System, Its Origin and Growth, vol. 2, Addresses and Essays (New York: Macmillan, 1930), 188.

Broz, International, 142–52; Ron Chernow, The Warburgs: The TwentiethCentury Odyssey of a Remarkable Jewish Family (New York: Random House, 1993), 87–90, 130–31; Lowenstein, Bank, 31–33; Merrill and Merrill, Republican, 62; and Richard A. Naclerio, The Federal Reserve and Its Founders: Money, Politics, and Power (Newcastle upon Tyne, UK: Agenda, 2018), 64–66.

Milton Friedman and Anna Jacobson Schwartz, Monetary Statistics of the United States: Estimates, Sources, Methods (New York: National Bureau of Economic Research, 1970), 7–9; McCulley, Banks, 120–26; and Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Washington, DC: Cato Institute, 1982), 120–21.

Carosso, Morgans, 619–20; Jeremiah D. Lambert and Geoffrey S. Stewart, The Anointed: New York’s White-Shoe Law Firms (Guilford, CT: Lyons Press, 2021), 57–65; McCulley, Banks, 126–27; and Murray N. Rothbard, “The Origins of the Federal Reserve,” in A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2005), 219, 222–26, 230–33, 235–39.

The Currency: Report of the Special Committee of the Chamber of Commerce of the State of New York (New York, 1906), 9–11, quoted in James Livingston, The Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890–1913 (Ithaca, NY: Cornell University Press, 1986), 161.

McCulley, Banks, 126–30; Selgin, “Bank,” in Money, 140; and Wiebe, Businessmen, 64–65.

Edwin Seligman, “Economics and Social Progress,” Publications of the American Economic Association, 3rd Series, 4 (February 1903): 70.

Edwin Seligman, “Introduction: The Crisis of 1907 in the Light of History,” in The Currency Problem and the Present Financial Situation: A Series of Addresses Delivered at Columbia University, 1907–1908 (New York: Columbia University Press, 1968), xxvii.

Frank Vanderlip, “The Modern Bank,” in Currency, 14; and Paul M. Warburg, “American and European Banking Methods and Bank Legislation Compared,” in Currency, 134.

Carosso, Morgans, 537, 625; Chernow, Warburgs, 132–33; Livingston, Origins, 190; McCulley, Banks, 146–55; Rothbard, “Origins,” 215, 218, 239–43, 246; and Wiebe, Businessmen, 72–73.

Selgin, “Bank,” in Money, 147.

Henry P. Davison, quoted in Chernow, Morgan, 129.

George Perkins to J. P. Morgan, July 23, 1908, quoted in Chernow, Morgan, 129.

Kathleen Burk, “The House of Morgan in Financial Diplomacy, 1920–1930,” in Anglo-American Relations in the 1920s: The Struggle for Supremacy, ed. B. J. C. McKercher (London: Macmillan Press, 1991), 127; Carosso, Morgans, 445–50, 548; Lowenstein, Bank, 96; Rothbard, “Origins,” 245; and Selgin, “Bank,” in Money, 323n20; Jean Strouse, Morgan: American Financier (New York: Harper Perennial, 2000), 539, 594–95.

Chernow, Morgan, 151; Edward M. Lamont, The Ambassador from Wall Street: The Story of Thomas W. Lamont, J. P. Morgan’s Chief Executive (Lanham, MD: Madison Books, 1994), 85, 141–42; Livingston, Origins, 189; Rothbard, “Origins,” 245–46; Selgin, “Bank,” in Money, 151–52; and Elmus Wicker, The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed (Columbus: Ohio State University Press, 2005), 33, 64.

Broz, International, 178; McCulley, Banks, 155–62, 226–27.

Lowenstein, Bank, 119.

Murray N. Rothbard, “The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930,” in The Progressive Era, ed. Patrick Newman (Auburn, AL: Mises Institute, 2017), 474.

McCulley, Banks, 232.

Chernow, Morgan, 143; Susan Hoffmann, Politics and Banking: Ideas, Public Policy, and the Creation of Financial Institutions (Baltimore: Johns Hopkins University Press, 2001), 116–17; Lamont, Ambassador, 190; McCulley, Banks, 222, 227, 230–32, 234–35; Rothbard, “Cartelization,” 474–75; Rothbard, “Origins,” 251–54; and Selgin, “Bank,” in Money, 149–51, 323n21.

Nelson Aldrich to John Sleicher, February 7, 1914, quoted in Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900–1916 (New York: Free Press, 1963), 248.

Congressional Record, 62nd Congress, 1st session, June 13, 1911, 1992.

Broz, International, 183–84, 188, 192; Kolko, Triumph, 188–89; McCulley, Banks, 227–28, 241–44, 256–59; Rothbard, “Origins,” 254–56; Harry A. Wheeler, “The National Citizens’ League: A Movement for a Sound Banking System,” Annals of the American Academy of Political and Social Science 99 (January 1922): 27; and Wiebe, Businessmen, 75–78.

Broz, International, 191–93; Carosso, Morgans, 626; Chernow, Morgan, 143; Chernow, Warburgs, 134–35; John Allen Gable, The Bull Moose Years: Theodore Roosevelt and the Progressive Party (Port Washington, NY: Kennikat Press, 1978), 118; McCulley, Banks, 259–60, 263, 265–66; and Wiebe, Businessmen, 78–79.

Woodrow Wilson, A History of the American People, vol. 7, Critical Changes and Civil War (New York: Harper and Brothers, 1906), 47.

W. Elliot Brownlee, “William Gibbs McAdoo,” in Schweikart, Encyclopedia of American Business History and Biography: Banking and Finance, 1913–1989, 240–41; Burch, Elites, 2:195, 205, 207; Chernow, Warburgs, 140; Thomas Ferguson, “Party Realignment and American Industrial Structure: The Investment Theory of Political Parties in Historical Perspective,” in Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems (Chicago: University of Chicago Press, 1995), 17–20; McCulley, Banks, 269–74, 293–94; Patrick Newman, “Personnel Is Policy: Regulatory Capture at the Federal Trade Commission, 1914–1929,” Journal of Institutional Economics 15, no. 6 (December 2019): 1043; Nomi Prins, All the Presidents’ Bankers: The Hidden Alliances That Drive American Power (New York: Nation Books, 2014), 14–15, 28–30; and Strouse, Morgan, 617.

Hoffman, Politics, 119–23; McCulley, Banks, 292; and Rothbard, “Origins,” 257.

Benjamin Strong to William Calder, July 14, 1913, quoted in Lester V. Chandler, Benjamin Strong, Central Banker (Washington, DC: Brookings Institution, 1958), 35.

Paul M. Warburg, “First Drafts of the Glass Bill,” in Warburg, Federal Reserve System, 1:99.

A. Piatt Andrew, “The Bryanized Banking Bill,” 1913, quoted in McCulley, Banks, 299.

Broz, International, 198–201; Chandler, Strong, 33–35; Chernow, Warburgs, 135–36; Robert Higgs, “Who Was Edward M. House?” in Delusions of Power: New Explorations of the State, War, and Economy (Oakland, CA: Independent Institute, 2012), 117–18; Hoffman, Politics, 123–25; and McCulley, Banks, 298–300, 305.

Allan Meltzer, A History of the Federal Reserve, vol. 1, 1913–1951 (Chicago: University of Chicago Press, 2003), 65, 67.

Broz, International, 35–36, 52–53, 139, 200, 202; Chernow, Morgan, 156; Meltzer, History, 1:65–67; Rothbard, “Cartelization,” 478, 502; Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 236–38; and Selgin, “Bank,” in Money, 164–65.

J. P. Morgan Jr. to Henry White, June 5, 1914, quoted in Charles Callan Tansill, America Goes to War (Boston: Little, Brown, 1938), 69.

Carosso, Investment, 177–80; Carosso, Morgans, 608–12, 614–15, 623; Cleveland and Huertas, Citibank, 361–62; Rothbard, “Cartelization,” 483, 488; Rothbard, Progressive, 87, 234; and Tansill, America, 53–55.

Burch, Elites, 2:214–15; Chernow, Warburgs, 137–40; Arthur S. Link, Wilson: The New Freedom (Princeton, NJ: Princeton University Press, 1956), 445–57; Meltzer, History, 1:475, 484; and Newman, “Personnel,” 1044.

Jack Morgan, January 9, 1936, quoted in US Senate, Hearings before the Special Committee Investigating the Munitions Industry (Washington, DC: Government Printing Office, 1937), 7862.

Benjamin Strong to William Calder, July 14, 1913, quoted in Chandler, Strong, 36.

Paul Warburg to Benjamin Strong, October 2, 1914, quoted in Chandler, Strong, 67.

Chandler, Strong, 38–41; Lawrence E. Clark, Central Banking under the Federal Reserve: With Special Consideration of the Federal Reserve Bank of New York (New York: Macmillan, 1935), 64–65, 70–73; David M. Fitzsimons, “Thomas W. Lamont,” in Schweikart, Encyclopedia of American Business History and Biography: Banking and Finance, 1913–1989, 207–8; Martin Horn, J. P. Morgan & Co. and the Crisis of Capitalism: From the Wall Street Crash to World War II (New York: Cambridge University Press, 2022), 45; Sheridan A. Logan, George F. Baker and His Bank, 1840–1955 (Stinehour Press and Meriden Gravure, 1981), 164; Priscilla Roberts, “‘Quis Custodiet Ipsos Custodes?’: The Federal Reserve System’s Founding Fathers and Allied Finances in the First World War,” Business History Review 72, no. 4 (Winter 1998): 590; Rothbard, “Cartelization,” 483–84; and Anna Jacobson Schwartz, “Benjamin Strong,” in Schweikart, Encyclopedia of American Business History and Biography: Banking and Finance, 1913–1989, 401–3.

Chernow, Morgan, 244.

Priscilla Roberts, “Benjamin Strong, the Federal Reserve, and the Limits to Interwar American Nationalism Part I: Intellectual Profile of a Central Banker,” Federal Reserve Bank of Richmond Economic Quarterly 86, no. 2 (Spring 2000): 64–65, 68–69; Roberts, “Founding,” 593; and Selgin, “Bank,” in Money, 162–65.