The Origins of the Federal Reserve System: Part Two

Part One of the series ended with the formation of the National Monetary Commission after the Panic of 1907  left the country’s banking system shaken up and in need of restructuring.

National Monetary Commission

Comprised of legislators from the House and Senate, the National Monetary Commission’s primary goal was to study central banking systems and make recommendations on banking reform for the United States. The commission is credited by many as  guiding the US to the Federal Reserve Act of 1913.  However, the connection between the commission and the final bill is not as clear-cut as one might imagine.

While the National Monetary Commission produced a lot of research, they took so long – their bill went to Congress four years after the commission’s creation – that “memories of how close the system came to imploding progressively dimmed and the momentum for reform stalled” (Ahamed, 2009).

There were a few factors that limited the success of the National Monetary Commission. At the time, the American political system was fraught with disagreement about what a central banking system should look like, if there even needed to be one at all.  The leftover contempt for a central bank from the Jackson era still persisted, so a first step would be to convince legislators and the public that such a system was needed. There was contempt too, for the Republican party and especially for the Chairman of the National Monetary Commission,  Republican Senator Nelson W. Aldrich.

Controversial Leadership

A wealthy man, and well-known supporter of the banking industry, Senator Aldrich had become political cartoon fodder for his close associations with wealthy elite such as J.P. Morgan and for favoritism shown by President Roosevelt.  Liaquat Ahamed notes in his book The Lords of Finance that “Nelson Aldrich may have been the most knowledgeable member of the Senate about finance, but the cause of central banking in the United States could not have found a worse champion” (p. 56).

"The Making of a Senator" (Keppler, 1905) featuring Nelson W. Aldrich being held up by Rockefeller, Big Business, and further down, the Senate. Lastly the People are at the bottom being crushed.
“The Making of a Senator” (Keppler, 1905) featuring Nelson W. Aldrich being held up by Rockefeller, big business, and other legislators. The People are at the bottom, crushed by the weight of special interests.

As the head of the Senate Finance Committee, Aldrich’s anti-regulation preferences were clear.  Prior to the Aldrich-Vreeland Act, he rarely sent banking legislation up for a vote (Willis, 1912).

A paper by H. Parker Willis, a financial expert who later became the first Secretary of the Federal Reserve Board, can barely contain the disdain he felt for Aldrich. Willis (1912) identifies Aldrich as a leader of the ‘Republican machine organization’ that suppressed banking legislation, and, only when absolutely necessary, would hastily cobble together flawed legislation without consulting experts.  He writes, “From 1897 – 1908, the Senate Finance Committee gradually became more powerful than ever before, and through it a little coterie of leaders almost completely dominated the Senate itself” (p. 875). Willis goes so far as to insinuate that Aldrich’s refusal to consider banking legislation was partially to blame for the Panic of 1907. (This harsh critique leaves me imagining Willis as a 1913 version of the brutally honest financial journalist Matt Taibbi.)

Some historians give Aldrich more credit. William Dewald (1972) notes that the work of the National Monetary Commission was carried out in earnest by Aldrich.  Aldrich was positively influenced by what he saw in Europe on research trips. He became convinced that a similar system would work in the United States, and he leveraged his powerful connections to bring a workable bill to Congress.

It is worth noting that the Panic of 1907 affected his big banking friends: J.P. Morgan and others had injected their personal funds into banks to save the system from complete collapse. It’s fair to say that Aldrich genuinely wanted to create a more stable system. It’s just that an Aldrich proposal for a central banking system would certainly benefit the banking industry with a close eye on profitability and perhaps less regulation than other proposals. Indeed, Aldrich turned to high-powered bankers before submitting his plan to Congress. The National Monetary Commission’s ultimate proposal to Congress in 1912, the Aldrich Plan, was produced only after Aldrich attended a secret multi-day meeting  with a few select influential bankers – a meeting so secret that it didn’t come to light for another twenty years.

Continue to Part Three, the final installment of the series. 

Further Reading

Ahamed, Liaquat. Lords of Finance: Bankers Who Broke the World. New York, Penguin Books (2009).

Dewald, William. “The National Monetary Commission – A Look Back.” Journal of Money, Credit and Banking. Vol. 4, No. 4 (November, 1972), pp. 930-956.

Fancher, E. R. “The Establishment and Scope of Branches of Federal Reserve Banks – Its Purpose and Work.” Annals of the American Academy of Political and Social Science. Vol. 99 ( January, 1922), pp. 135 – 142.

Wicker, Elmus. The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed. Columbus, Oh.: Ohio State University Press (2005).

Willis, H. Parker. “The Banking Question in Congress.” Journal of Political Economy. Vol. 20, No. 9 (November, 1912), pp. 869 -885.

Image, “The Making of a Senator,” by Udo J. Keppler. First published in: Puck, v. 58, no. 1498 (1905 November 15), centerfold. Accessed through the Library of Congress.

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