The Origins of the Federal Reserve System: Part Three

Continued from Part One and Part Two.

Aldrich’s visits to Europe to study their central banking systems had a profound impact on him. Originally opposed to the idea of a central system, he returned from Europe an advocate for the same. However, the political climate was not one to accept such a system. American bankers did not want government interference, and politicians thought that the US was too large with too many diverse business practices to have the same set up (Whitehouse, 1989).  E.R. Francher goes so far as to say that “throughout the history of the country, it is apparent that the people have been opposed to placing in one single institution the financial power which a central bank might exercise” (p 137). Aldrich’s conviction that the United States would benefit from a single central bank would be a tough sell.

On a personal level, Aldrich faced additional difficulties: with such a partisan Congress, no Democrat would vote for anything he proposed and, as discussed in Part Two, his personal connections to bankers could be strained if they didn’t like his proposal. Even Paul Warburg, a fervent advocate for reform and a central banking expert, thought Aldrich’s plan for central banking based on the European model would be defeated unless it could be crafted delicately and with modifications.

The Jekyll Island Club

To help digest his observations from Europe and draft a bill that could pass through Congress, Aldrich took a trip to Jekyll Island, off the coast of Georgia, in November of 1910.  He claimed he was going hunting, but really he was attending a meeting so secret that no one at the meeting admitted they were there until decades later (Ahamed, 2009). In attendance were a small group of prominent New York City bankers, including Paul Warburg, and Senator Aldrich’s right-hand man on the National Monetary Commission, A. Piatt Andrew.

They were not without comforts while they worked. They were toiling away in a millionaire's clubhouse, after all.
They were not without comforts while they worked. They were toiling away in a millionaire’s clubhouse, after all.

The preparations for the clandestine rendez-vous were elaborate – almost comically so. The participants waited until nightfall to boarded a rail car owned by Aldrich, each dining alone and using a false name lest they be found out.  One could almost expect to see Poirot lurking around the corner. When the train arrived in Georgia, the participants were taken by boat to the deserted Jekyll Island Club, a private club for the wealthy elite. For ten days, they worked and debated around the clock.

Though the debate at the meeting was sometimes tense – Aldrich and Warburg in particular had diverging views about what the central banking system should look like –  by the end, the group had drafted a plan that was “a banking scheme that rested upon a consensus of opinion representing the best-informed bankers of this country” (Whitehouse, 1989). Now they just needed Congress to approve the plan.  Spoiler: that did not happen.

The Aldrich Plan

The plan from Jekyll Island, named the Aldrich Plan, called for the creation of the National Reserve Association. The National Reserve Association would essentially be a central bank, but the words “central bank” were so politically toxic they were best left out of the legislation. The National Reserve Association would have 15 branches strategically located around the country and would be a lender of last resort in times of crisis.

A. Piatt Andrew (1912) wrote that “one of the merits of the Reserve Association plan is that it contemplates the complete withdrawal of the federal government of the banking business” (p. 1). He argued that the government would be ill-suited to be its own banker. The bill was essentially proposing an association run by bankers with minimal federal oversight. This is where the bill had trouble.

The Federal Reserve Act

By the time the National Monetary Commission officially presented the Aldrich Plan to Congress in 1912 , the power in the Senate shifted from Republicans to Democrats, and they refused to consider the bill. Instead, they wrote their own, one that created a Federal Reserve System with twelve regional banks that would be individually controlled and operated. The Federal Reserve Act stressed “local control of banking, local application of resources to necessities, combined with Federal supervision” (Willis 1914, p. 7). The Federal Reserve Board would oversee the twelve banks and its governors would be appointed by the President.

 William Dewald (1972) claims that the bill that went to the President in December of 1913, the Glass-Owen bill, was the same as the Aldrich bill and that it was an “accident of history” that Aldrich did not get credit (p. 931).  Willis (1914) writes that many believed the new law was a “partial copy” of the Aldrich plan (p. 14).

In technical areas, the bills are similar; the  Democrats kept many of the same banking techniques and concepts that the Aldrich plan proposed.  Yet, the two bills differ greatly in one important area: governance of the system. Aldrich wanted the National Reserve Association to be governed by bankers. Furthermore, the individual branches that Aldrich proposed would not have individual control over their funds. This would have drastically changed the dynamic of the Federal Reserve as we know it today. I would argue that, though Aldrich played a large role in laying the technical foundations, the Federal Reserve System does not represent his vision.

In the end, Paul Warburg is given much of the credit for the creation of the Federal Reserve.  As a participant at Jekyll Island, he is said to have shaped much of the debate for the Aldrich Plan, and it is Warburg who continued to work on legislation when the Democrats began to write their own bill. Aldrich publicly and harshly opposed the Democrats’ plan on principle, and essentially removed himself from the conversation (though as such a divisive character, it is hard to say whether he would have been invited to join the conversation). Warburg went on to become a member of the Federal Reserve Board.  For a great essay on Paul Warburg’s involvement, I recommend the piece “Paul Warburg’s Crusade to Establish a Central Bank in the United States,” by Michael A. Whitehouse.

Further Reading

Includes all sources for Parts 1 – 3 of this series.  

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

Andrew, A. Piatt. “The Relation of the National Reserve Association to the Treasury.” Journal of Political Economy. Vol. 20, No. 1 (January, 1912), pp. 1 – 11.

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.

Whitehouse, Michael A. “Paul Warburg’s Crusade to Establish a Central Bank in the United States.”  The Region. May, 1989.

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.

Willis, H. Parker. “The Federal Reserve Act.” The American Economic Review. Vol. 4, No. 1 (March, 1914), pp. 1 – 24.Image: “Clubhouse on Jekyll Island, Georgia.” Photographer: Carol M. Highsmith. Date unknown.  Accessed through the Library of Congress.

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