article originally appeared in Quarterly
Journal of Austrian Economics, Vol. 2, No. 3 (Fall 1999), pp.
3–51. It is also reprinted in A
History of Money and Banking in the United States and as
Reserve Act of December 23, 1913, was part and parcel of the wave
of Progressive legislation on local, state, and federal levels of
government that began about 1900. Progressivism was a bipartisan
movement that, in the course of the first two decades of the 20th
century, transformed the American economy and society from one of
roughly laissez-faire to one of centralized statism.
Until the 1960s,
historians had established the myth that Progressivism was a virtual
uprising of workers and farmers who, guided by a new generation
of altruistic experts and intellectuals, surmounted fierce big business
opposition in order to curb, regulate, and control what had been
a system of accelerating monopoly in the late 19th century. A generation
of research and scholarship, however, has now exploded that myth
for all parts of the American polity, and it has become all too
clear that the truth is the reverse of this well-worn fable.
what actually happened was that business became increasingly competitive
during the late 19th century, and that various big-business interests,
led by the powerful financial house of J. P. Morgan and Company,
tried desperately to establish successful cartels on the free market.
The first wave of such cartels was in the first large-scale business
— railroads. In every case, the attempt to increase profits — by
cutting sales with a quota system — and thereby to raise prices
or rates, collapsed quickly from internal competition within the
cartel and from external competition by new competitors eager to
undercut the cartel.
1890s, in the new field of large-scale industrial corporations,
big-business interests tried to establish high prices and reduced
production via mergers, and again, in every case, the merger collapsed
from the winds of new competition. In both sets of cartel attempts,
J. P. Morgan and Company had taken the lead, and in both sets of
cases, the market, hampered though it was by high protective-tariff
walls, managed to nullify these attempts at voluntary cartelization.
It then became
clear to these big-business interests that the only way to establish
a cartelized economy, an economy that would ensure their continued
economic dominance and high profits, would be to use the powers
of government to establish and maintain cartels by coercion; in
other words, to transform the economy from roughly laissez-faire
to centralized, coordinated statism. But how could the American
people, steeped in a long tradition of fierce opposition to government-imposed
monopoly, go along with this program? How could the public’s consent
to the New Order be engineered?
for the cartelists, a solution to this vexing problem lay at hand.
Monopoly could be put over in the name of opposition to monopoly!
In that way, using the rhetoric beloved by Americans, the form of
the political economy could be maintained, while the content could
be totally reversed.
always been defined, in the popular parlance and among economists,
as “grants of exclusive privilege” by the government. It was now
simply redefined as “big business” or business competitive practices,
such as price-cutting, so that regulatory commissions, from the
Interstate Commerce Commission (ICC) to the Federal Trade Commission
(FTC) to state insurance commissions, were lobbied for and staffed
with big-business men from the regulated industry, all done in the
name of curbing “big-business monopoly” on the free market.
In that way,
the regulatory commissions could subsidize, restrict, and cartelize
in the name of “opposing monopoly,” as well as promoting the general
welfare and national security. Once again, it was railroad monopoly
that paved the way.
For this intellectual
shell game, the cartelists needed the support of the nation’s intellectuals,
the class of professional opinion molders in society. The Morgans
needed a smokescreen of ideology, setting forth the rationale and
the apologetics for the New Order. Again, fortunately for them,
the intellectuals were ready and eager for the new alliance.
growth of intellectuals, academics, social scientists, technocrats,
engineers, social workers, physicians, and occupational “guilds”
of all types in the late 19th century led most of these groups to
organize for a far greater share of the pie than they could possibly
achieve on the free market. These intellectuals needed the State
to license, restrict, and cartelize their occupations, so as to
raise the incomes for the fortunate people already in these fields.
In return for
their serving as apologists for the new statism, the State was prepared
to offer not only cartelized occupations, but also ever-increasing
and cushier jobs in the bureaucracy to plan and propagandize for
the newly statized society. And the intellectuals were ready for
it, having learned in graduate schools in Germany the glories of
statism and organicist socialism, of a harmonious “middle way” between
dog-eat-dog laissez-faire on the one hand and proletarian Marxism
on the other. Big government, staffed by intellectuals and technocrats,
steered by big business, and aided by unions organizing a subservient
labor force, would impose a cooperative commonwealth for the alleged
benefit of all.
with the National-Banking System
big push for statism in America had occurred during the Civil War,
when the virtual one-party Congress after secession of the South
emboldened the Republicans to enact their cherished statist program
under cover of the war. The alliance of big business and big government
with the Republican party drove through an income tax, heavy excise
taxes on such sinful products as tobacco and alcohol, high protective
tariffs, and huge land grants and other subsidies to transcontinental
of railroads led directly to Morgan’s failed attempts at railroad
pools, and finally to the creation, promoted by Morgan and Morgan-controlled
railroads, of the Interstate Commerce Commission in 1887. The result
of that was the long secular decline of the railroads, beginning
before 1900. The income tax was annulled by Supreme Court action,
but was reinstated during the Progressive period.
The most interventionist
of the Civil War actions was in the vital field of money and banking.
The approach toward hard money and free banking that had been achieved
during the 1840s and 1850s was swept away by two pernicious inflationist
measures of the wartime Republican administration. One was fiat
money greenbacks, which depreciated by half by the middle of the
Civil War. These were finally replaced by the gold standard after
urgent pressure by hard-money Democrats, but not until 1879, 14
full years after the end of the war.
A second, and
more lasting, intervention was the National Banking Acts of 1863,
1864, and 1865, which destroyed the issue of bank notes by state-chartered
(or “state”) banks by a prohibitory tax, and then monopolized the
issue of bank notes in the hands of a few large, federally chartered
“national banks,” mainly centered on Wall Street. In a typical cartelization,
national banks were compelled by law to accept each other’s notes
and demand deposits at par, negating the process by which the free
market had previously been discounting the notes and deposits of
shaky and inflationary banks.
In this way,
the Wall Street–federal government establishment was able to control
the banking system, and inflate the supply of notes and deposits
in a coordinated manner.
But there were
still problems. The national-banking system provided only a halfway
house between free banking and government central banking, and by
the end of the 19th century, the Wall Street banks were becoming
increasingly unhappy with the status quo.
was only limited, and, above all, there was no governmental central
bank to coordinate inflation, and to act as a lender of last resort,
bailing out banks in trouble. As soon as bank credit generated booms,
then they got into trouble; bank-created booms turned into recessions,
with banks forced to contract their loans and assets and to deflate
in order to save themselves.
Not only that,
but after the initial shock of the National Banking Acts, state
banks had grown rapidly by pyramiding their loans and demand deposits
on top of national-bank notes. These state banks, free of the high
legal-capital requirements that kept entry restricted in national
banking, flourished during the 1880s and 1890s and provided stiff
competition for the national banks themselves.
St. Louis and Chicago, after the 1880s, provided increasingly severe
competition to Wall Street. Thus, St. Louis and Chicago bank deposits,
which had been only 16 percent of the St. Louis, Chicago, and New
York City total in 1880, rose to 33 percent of that total by 1912.
All in all, bank clearings outside of New York City, which were
24 percent of the national total in 1882, had risen to 43 percent
of the big banks were summed up in one word: “inelasticity.” The
national-banking system, they charged, did not provide for the proper
“elasticity” of the money supply; that is, the banks were not able
to expand money and credit as much as they wished, particularly
in times of recession. In short, the national-banking system did
not provide sufficient room for inflationary expansions of credit
by the nation’s banks.
By the turn
of the century, the political economy of the United States was dominated
by two generally clashing financial aggregations: the previously
dominant Morgan group, which began in investment banking and then
expanded into commercial banking, railroads, and mergers of manufacturing
firms; and the Rockefeller forces, which began in oil refining and
then moved into commercial banking, finally forming an alliance
with the Kuhn, Loeb Company in investment banking and the Harriman
interests in railroads.
two financial blocs usually clashed with each other, they were as
one on the need for a central bank. Even though the eventual major
role in forming and dominating the Federal Reserve System was taken
by the Morgans, the Rockefeller and Kuhn, Loeb forces were equally
enthusiastic in pushing, and collaborating on, what they all considered
to be an essential monetary reform.
Beginnings of the “Reform” Movement: The Indianapolis Monetary Convention
election of 1896 was a great national referendum on the gold standard.
The Democratic party had been captured, at its 1896 convention,
by the populist, ultrainflationist antigold forces, headed by William
Jennings Bryan. The older Democrats, who had been fiercely devoted
to hard money and the gold standard, either stayed home on election
day or voted, for the first time in their lives, for the hated Republicans.
had long been the party of prohibition and of greenback inflation
and opposition to gold. But since the early 1890s, the Rockefeller
forces, dominant in their home state of Ohio and nationally in the
Republican party, had decided to quietly ditch prohibition as a
political embarrassment and as a grave deterrent to obtaining votes
from the increasingly powerful bloc of German-American voters.
In the summer
of 1896, anticipating the defeat of the gold forces at the Democratic
convention, the Morgans, previously dominant in the Democratic party,
approached the McKinley–Mark Hanna–Rockefeller forces through their
rising young satrap, Congressman Henry Cabot Lodge of Massachusetts.
Lodge offered the Rockefeller forces a deal: the Morgans would support
McKinley for president, and neither sit home nor back a third, Gold
Democrat party, provided that McKinley pledged himself to a gold
standard. The deal was struck, and many previously hard-money Democrats
shifted to the Republicans.
of the American political-party system was now drastically changed:
what was previously a tightly fought struggle between hard-money,
free-trade, laissez-faire Democrats on the one hand, and inflationist,
protectionist, statist Republicans on the other, with the Democrats
slowly but surely gaining ascendancy by the early 1890s, was now
a party system dominated by the Republicans until the depression
election of 1932.
were strongly opposed to Bryanism, which was not only populist and
inflationist, but also anti–Wall Street bank; the Bryanites, much
like populists of the present day, preferred Congressional, greenback
inflationism to the more subtle, and more privileged, big bank–controlled
variety. The Morgans, in contrast, favored a gold standard.
But, once gold
was secured by the McKinley victory of 1896, they wanted to press
on to use the gold standard as a hard-money camouflage behind which
they could change the system into one less nakedly inflationist
than populism but far more effectively controlled by the big-banker
elites. In the long run, a controlled Morgan-Rockefeller gold standard
was far more pernicious to the cause of genuine hard-money than
a candid free-silver or greenback Bryanism.
As soon as
McKinley was safely elected, the Morgan-Rockefeller forces began
to organize a “reform” movement to cure the “inelasticity” of money
in the existing gold standard and to move slowly toward the establishment
of a central bank. To do so, they decided to use the techniques
they had successfully employed in establishing a pro–gold standard
movement during 1895 and 1896.
point was to avoid the public suspicion of Wall Street and banker
control by acquiring the patina of a broad-based grassroots movement.
The movement, therefore, was deliberately focused in the Middle
West, the heartland of America, and organizations developed that
included not only bankers, but also businessmen, economists, and
other academics, who supplied respectability, persuasiveness, and
technical expertise to the reform cause.
the reform drive began just after the 1896 elections in authentic
Midwest country. Hugh Henry Hanna, president of the Atlas Engine
Works of Indianapolis, who had learned organizing tactics during
the year with the pro–gold standard Union for Sound Money, sent
a memorandum, in November, to the Indianapolis Board of Trade, urging
a grassroots, Midwestern state like Indiana to take the lead in
the reformers moved fast. Answering the call of the Indianapolis
Board of Trade, delegates from boards of trade from 12 Midwestern
cities met in Indianapolis on December 1, 1896. The conference called
for a large monetary convention of businessmen, which accordingly
met in Indianapolis on January 12, 1897. Representatives from 26
states and the District of Columbia were present. The monetary reform
movement was now officially underway.
Yale Review commended the convention for averting the danger
of arousing popular hostility to bankers. It reported that “the
conference was a gathering of businessmen in general rather than
bankers in particular” (quoted in Livingston 1986, p. 105).
may have been businessmen, but they were certainly not very grassrootsy.
Presiding at the Indianapolis Monetary Convention of 1897 was C.
Stuart Patterson, dean of the University of Pennsylvania Law School
and a member of the finance committee of the powerful, Morgan-oriented
Pennsylvania Railroad. The day after the convention opened, Hugh
Hanna was named chairman of an executive committee, which he would
appoint. The committee was empowered to act for the convention after
committee consisted of the following influential corporate and financial
- John J.
Mitchell of Chicago, president of the Illinois Trust and Savings
Bank, and a director of the Chicago and Alton Railroad; the Pittsburgh,
Fort Wayne, and Chicago Railroad; and the Pullman Company, was
named treasurer of the executive committee.
- H. H. Kohlsaat,
editor and publisher of the Chicago Times Herald and the Chicago
Ocean Herald, trustee of the Chicago Art Institute, and a friend
and advisor of Rockefeller’s main man in politics, President William
Custis Harrison, provost of the University of Pennsylvania, who
had made a fortune as a sugar refiner in partnership with the
powerful Havemeyer (“Sugar Trust”) interests.
E. Orr, a New York City banker in the Morgan ambit, who was a
director of the Morgan-run Erie and Chicago, Rock Island and Pacific
railroads, the National Bank of Commerce, and the influential
publishing house of Harper Brothers. Orr was also a partner in
the country’s largest grain-merchandising firm and a director
of several life-insurance companies.
- Edwin O.
Stanard, St. Louis grain merchant, former governor of Missouri,
and former vice president of the National Board of Trade and Transportation.
- E. B. Stahlman,
owner of the Nashville Banner, commissioner of the cartelist Southern
Railway and Steamship Association, and former vice president of
the Louisville, New Albany, and Chicago Railroad.
- A. E. Willson,
influential attorney from Louisville and future governor of Kentucky.
But the two
most interesting and powerful executive committee members of the
Monetary Convention were Henry C. Payne and George Foster Peabody.
Henry Payne was a Republican party leader from Milwaukee, and president
of the Morgan-dominated Wisconsin Telephone Company, long associated
with the railroad-oriented Spooner-Sawyer Republican machine in
Wisconsin politics. Payne was also heavily involved in Milwaukee
utility and banking interests, in particular as a long-time director
of the North American Company, a large public utility–holding company
headed by New York City financier Charles W. Wetmore.
So close was
North American Company to the Morgan interests that its board included
two top Morgan financiers. One was Edmund C. Converse, president
of Morgan-run Liberty National Bank of New York City, and soon to
be founding president of Morgan’s Bankers’ Trust Company. The other
was Robert Bacon, a partner in J. P. Morgan and Company, and one
of Theodore Roosevelt’s closest friends, whom Roosevelt would later
make assistant secretary of state.
when Theodore Roosevelt became president as the result of the assassination
of William McKinley, he replaced Rockefeller’s top political operative,
Mark Hanna of Ohio, with Henry C. Payne as Postmaster General of
the United States. Payne, a leading Morgan lieutenant, was reportedly
appointed to what was then the major political post in the Cabinet
specifically to break Hanna’s hold over the national Republican
party. It seems clear that replacing Hanna with Payne was part of
the savage assault that Theodore Roosevelt would soon launch against
Standard Oil as part of the open warfare about to break out between
the Rockefeller–Harriman–Kuhn, Loeb, and the Morgan camps (Burch
1981, p. 189, n. 55).
Even more powerful
in the Morgan ambit was the secretary of the Indianapolis Monetary
Convention’s executive committee, George Foster Peabody. The entire
Peabody family of Boston Brahmins had long been personally and financially
closely associated with the Morgans. A member of the Peabody clan
had even served as best man at J. P. Morgan’s wedding in 1865.
had long ago established an international banking firm of which
J. P. Morgan’s father, Junius, had been one of the senior partners.
George Foster Peabody was an eminent New York investment banker
with extensive holdings in Mexico. He helped reorganize General
Electric for the Morgans, and was later offered the job of secretary
of the treasury during the Wilson administration. He would function
throughout that administration as a “statesman without portfolio”
(ibid., pp. 231, 233; Ware 1951, pp. 161–67).
Let the masses
be hoodwinked into regarding the Indianapolis Monetary Convention
as a spontaneous, grassroots outpouring of small Midwestern businessmen.
To the cognoscenti, any organization featuring Henry Payne, Alexander
Orr, and especially George Foster Peabody meant but one thing: J.
Monetary Convention quickly resolved to urge President McKinley
to (1) continue the gold standard and (2) create a new system of
“elastic” bank credit. To that end, the convention urged the president
to appoint a new Monetary Commission to prepare legislation for
a new, revised monetary system. McKinley was very much in favor
of the proposal, signaling Rockefeller agreement, and on July 24
he sent a message to Congress urging the creation of a special monetary
commission. The bill for a national monetary commission passed the
House of Representatives but died in the Senate (Kolko 1983, pp.
but intrepid, the executive committee, failing a presidentially
appointed commission, decided in August 1897 to go ahead and select
its own. The leading role in appointing this commission was played
by George Foster Peabody, who served as liaison between the Indianapolis
members and the New York financial community. To select the commission
members, Peabody arranged for the executive committee to meet in
the Saratoga Springs summer home of his investment-banking partner,
Spencer Trask. By September, the executive committee had selected
the members of the Indianapolis Monetary Commission.
of the new Indianapolis Monetary Commission were as follows (Livingston
1986, pp. 106–07):
was former senator George F. Edmunds, Republican of Vermont,
attorney, and former director of several railroads.
Patterson was dean of the University of Pennsylvania Law School,
and a top official of the Morgan-controlled Pennsylvania Railroad.
S. Fairchild, a leading New York banker, president of the New
York Security and Trust Company, was a former partner in the
Boston Brahmin investment banking firm of Lee, Higginson, and
Company, and executive and director of two major railroads.
Fairchild, a leader in New York state politics, had been secretary
of the treasury in the first Cleveland Administration. In addition,
Fairchild’s father, Sidney T. Fairchild, had been a leading
attorney for the Morgan-controlled New York Central Railroad.
Fish, scion of two long-time aristocratic New York families,
was a partner of the Morgan-dominated New York investment bank
of Morton, Bliss, and Company, and then president of Illinois
Central Railroad and a trustee of Mutual Life. Fish’s father
had been a senator, governor, and secretary of state.
Garnett was a leading San Francisco businessman.
G. Bush of Alabama was a director of the Mobile and Birmingham
J. W. Fries
was a leading cotton manufacturer of North Carolina.
B. Dean, merchant from St. Paul, Minnesota, and a director of
the St. Paul–based, transcontinental Great Northern Railroad,
owned by James J. Hill, ally with Morgan in the titanic struggle
over the Northern Pacific Railroad with Harriman, Rockefeller,
and Kuhn, Loeb.
Leighton of St. Louis was an attorney for the Missouri Pacific
S. Taylor was an Indiana patent attorney for the Morgan-controlled
General Electric Company.
most important working member of the commission was James Laurence
Laughlin, head professor of political economy at the new Rockefeller-founded
University of Chicago, and editor of its prestigious Journal
of Political Economy. It was Laughlin who supervised the
operations of the Commission’s staff and the writing of the
reports. Indeed, the two staff assistants to the Commission
who wrote reports were both students of Laughlin at Chicago:
former student L. Carroll Root, and his then-current graduate
student Henry Parker Willis.
sum of $50,000 was raised throughout the nation’s banking and corporate
community to finance the work of the Indianapolis Monetary Commission.
New York City’s large quota was raised by Morgan bankers Peabody
and Orr, and heavy contributions to fill the quota came promptly
from mining magnate William E. Dodge, cotton and coffee trader Henry
Hentz, a director of the Mechanics National Bank, and J. P. Morgan
With the money
in hand, the executive committee rented office space in Washington,
DC in mid-September and set the staff to sending out and collating
the replies to a detailed monetary questionnaire, sent to several
hundred selected experts. The Monetary Commission sat from late
September into December 1897, sifting through the replies to the
questionnaire collated by Root and Willis. The purpose of the questionnaire
was to mobilize a broad base of support for the Commission’s recommendations,
which they could claim represented hundreds of expert views.
questionnaire served as an important public-relations device, making
the Commission and its work highly visible to the public, to the
business community throughout the country, and to members of Congress.
Furthermore, through this device, the Commission could be seen as
speaking for the business community throughout the country.
To this end,
the original idea was to publish the Monetary Commission’s preliminary
report, adopted in mid-December, as well as the questionnaire replies
in a companion volume. Plans for the questionnaire volume fell through,
although it was later published as part of a series of publications
on political economy and public law by the University of Pennsylvania
(Livingston 1986, pp. 107–08).
the slight setback, the executive committee developed new methods
of molding public opinion using the questionnaire replies as an
organizing tool. In November, Hugh Hanna hired as his Washington
assistant financial journalist Charles A. Conant, whose task was
to propagandize and organize public opinion for the recommendations
of the Commission.
to beat the drums for the forthcoming Commission report was launched
when Conant published an article in the December 1 issue of Sound
Currency magazine, taking an advanced line on the Commission
report, and bolstering the conclusions not only with his own knowledge
of monetary and banking history, but also with frequent statements
from the as-yet-unpublished replies to the staff questionnaire.
Over the next
several months, Conant worked closely with Jules Guthridge, the
general secretary of the Commission; they first induced newspapers
throughout the country to print abstracts of the questionnaire replies.
As Guthridge wrote some Commission members, he thereby stimulated
“public curiosity” about the forthcoming report, and he boasted
that by “careful manipulation” he was able to get the preliminary
report “printed in whole or in part — principally in part — in nearly
7,500 newspapers, large and small.”
In the meantime,
Guthridge and Conant orchestrated letters of support from prominent
men across the country. When the preliminary report was published
on January 3, 1898, Guthridge and Conant made these letters available
to the daily newspapers. Quickly, the two built up a distribution
system to spread the gospel of the report, organizing nearly 100,000
correspondents “dedicated to the enactment of the commission’s plan
for banking and currency reform” (Livingston 1986, pp. 109–10).
The prime and
immediate emphasis of the preliminary report of the Monetary Commission
was to complete the promise of the McKinley victory by codifying
and enacting what was already in place de facto: a single gold standard,
with silver reduced to the status of subsidiary token currency.
Completing the victory over Bryanism and free silver, however, was
just a mopping-up operation; more important in the long run was
the call raised by the report for banking reform to allow greater
could then be increased in recessions and whenever seasonal pressure
for redemption by agricultural country banks forced the large central
reserve banks to contract their loans. The actual measures called
for by the Commission were of marginal importance. More important
was that the question of banking reform had been raised at all.
Since the public
had been aroused by the preliminary report, the executive committee
decided to organize the second and final meeting of the Indianapolis
Monetary Convention, which duly met at Indianapolis on January 25,
1898. The second convention was a far grander affair than the first,
bringing together 496 delegates from 31 states.
the gathering was a cross-section of America’s top corporate leaders.
While the state of Indiana naturally had the largest delegation,
of 85 representatives of boards of trade and chambers of commerce,
New York sent 74, including many from the city’s Board of Trade
and Transportation, Merchant’s Association, and Chamber of Commerce.
leaders as Cleveland iron manufacturer Alfred A. Pope, president
of the National Malleable Castings Company, attended; as did Virgil
P. Cline, legal counsel to Rockefeller’s Standard Oil Company of
Ohio; and C.A. Pillsbury, of Minneapolis–St. Paul, organizer of
the world’s largest flour mills. From Chicago came such business
notables as Marshall Field and Albert A. Sprague, a director of
the Chicago Telephone Company, subsidiary of the Morgan-controlled
telephone monopoly, American Telephone and Telegraph Company.
Not to be overlooked
is delegate Franklin MacVeagh, a wholesale grocer from Chicago,
an uncle of a senior partner in the Wall Street law firm of Bangs,
Stetson, Tracy, and MacVeagh, counsel to J. P. Morgan and Company.
MacVeagh, who was later to become secretary of the treasury in the
Taft administration, was wholly in the Morgan ambit. His father-in-law,
Henry F. Eames, was the founder of the Commercial National Bank
of Chicago, and his brother Wayne was soon to become a trustee of
the Morgan-dominated Mutual Life Insurance Company.
of the second convention, as former Secretary of the Treasury Charles
S. Fairchild candidly explained in his address to the gathering,
was to mobilize the nation’s leading businessmen into a mighty and
influential reform movement. As he put it, “if men of business give
serious attention and study to these subjects, they will substantially
agree upon legislation, and thus agreeing, their influence will
be prevailing.” He concluded that “My word to you is, pull all together.”
of the convention, Iowa’s Governor Leslie M. Shaw, was however,
a bit disingenuous when he told the gathering, “You represent today
not the banks, for there are few bankers on this floor. You represent
the business industries and the financial interests of the country.”
There were plenty of bankers there, too (Livingston 1986, pp. 113–15).
later to be secretary of the treasury under Theodore Roosevelt,
was a small-town banker in Iowa, and president of the Bank of Denison
throughout his term as governor. More important in Shaw’s outlook
and career was the fact that he was a long-time close friend and
loyal supporter of the Des Moines Regency, the Iowa Republican machine
headed by the powerful Senator William Boyd Allison.
was to obtain the Treasury post for his friend, was in turn tied
closely to Charles E. Perkins, a close Morgan ally, president of
the Chicago, Burlington, and Quincy Railroad, and kinsman of the
powerful Forbes financial group of Boston, long tied in with the
Morgan interests (Rothbard 1984, pp. 95–96).
as delegates to the second convention were several eminent economists,
each of whom, however, came not as academic observers but as representatives
of elements of the business community. Professor Jeremiah W. Jenks
of Cornell, a proponent of trust cartelization by government and
soon to become a friend and advisor of Theodore Roosevelt as governor,
came as delegate from the Ithaca Business Men’s Association.
Frank W. Taussig
of Harvard University represented the Cambridge Merchants’ Association.
Yale’s Arthur Twining Hadley, soon to be the president of Yale,
represented the New Haven Chamber of Commerce, and Frank M. Taylor
of the University of Michigan came as representative of the Ann
Arbor Business Men’s Association.
Each of these
men held powerful posts in the organized economics profession, Jenks,
Taussig, and Taylor serving on the currency committee of the American
Economic Association. Hadley, a leading railroad economist, also
served on the board of directors of Morgan’s New York, New Haven,
and Hartford; and Atchison, Topeka, and Santa Fe Railroads.
and Taylor were monetary theorists who, while committed to a gold
standard, urged reform that would make the money supply more elastic.
Taussig called for an expansion of national bank notes, which would
inflate in response to the “needs of business.” As Taussig (quoted
in Dorfman 1949, p. xxxvii; Parrini and Sklar 1983, p. 269) put
it, the currency would then “grow without trammels as the needs
of the community spontaneously call for increase.”
as one historian puts it, wanted the gold standard to be modified
by “a conscious control of the movement of money” by government
“in order to maintain the stability of the credit system.” Taylor
justified governmental suspensions of specie payment to “protect
the gold reserve” (Dorfman 1949, pp. 392–93).
26, the convention delegates duly endorsed the preliminary report
with virtual unanimity, after which Professor J. Laurence Laughlin
was assigned the task of drawing up a more elaborate final report,
which was published and distributed a few months later. Laughlin’s
— and the convention’s — final report not only came out in favor
of a broadened asset base for a greatly increased amount of national-bank
notes, but also called explicitly for a central bank that would
enjoy a monopoly of the issue of bank notes.
the convention delegates took the gospel of banking reform to the
length and breadth of the corporate and financial communities. In
April 1898, for example, A. Barton Hepburn, president of the Chase
National Bank of New York (at that time a flagship commercial bank
for the Morgan interests), and a man who would play a large role
in the drive to establish a central bank, invited Monetary Commissioner
Robert S. Taylor to address the New York State Bankers’ Association
on the currency question, since “bankers, like other people, need
instruction upon this subject.” All the monetary commissioners,
especially Taylor, were active during the first half of 1898 in
exhorting groups of businessmen throughout the nation for monetary
in Washington, the lobbying team of Hanna and Conant were extremely
active. A bill embodying the suggestions of the Monetary Commission
was introduced by Indiana Congressman Jesse Overstreet in January,
and was reported out by the House Banking and Currency Committee
in May. In the meantime, Conant met almost continuously with the
banking committee members. At each stage of the legislative process,
Hanna sent circular letters to the convention delegates and to the
public, urging a letter-writing campaign in support of the bill.
In this agitation,
McKinley’s Secretary of the Treasury Lyman J. Gage worked closely
with Hanna and his staff. Gage sponsored similar bills, and several
bills along the same lines were introduced in the House in 1898
and 1899. Gage, a friend of several of the monetary commissioners,
was one of the top leaders of the Rockefeller interests in the banking
field. His appointment as secretary of the treasury had been gained
for him by Ohio’s Mark Hanna, political mastermind and financial
backer of President McKinley, and old friend, high-school classmate,
and business associate of John D. Rockefeller, Sr.
appointment to the Cabinet, Gage was president of the powerful First
National Bank of Chicago, one of the major commercial banks in the
Rockefeller ambit. During his term in office, Gage tried to operate
the Treasury as a central bank, pumping in money during recessions
by purchasing government bonds on the open market, and depositing
large funds with pet commercial banks. In 1900, Gage called vainly
for the establishment of regional central banks.
his last annual report as secretary of the treasury in 1901, Lyman
Gage let the cat completely out of the bag, calling outright for
a government central bank. Without such a central bank, he declared
in alarm, “individual banks stand isolated and apart, separated
units, with no tie of mutuality between them.” Unless a central
bank establishes such ties, Gage warned, the Panic of 1893 would
be repeated (Livingston 1986, p. 153). When he left office early
the next year, Lyman Gage took up his post as president of the Rockefeller-controlled
US Trust Company in New York City (Rothbard 1984, pp. 94–95).
Gold Standard Act of 1900 and After
legislation had to wait until after the elections of 1898, for the
gold forces were not yet in control of Congress. In the autumn,
the executive committee of the Indianapolis Monetary Convention
mobilized its forces, calling on no less than 97,000 correspondents
throughout the country, through whom it had distributed the preliminary
report. The executive committee urged its constituency to elect
a gold-standard Congress; when the gold forces routed the silverites
in November, the results of the election were hailed by Hanna as
The decks were
now cleared for the McKinley administration to submit its bill,
and the Congress that met in December 1899 quickly passed the measure;
Congress then passed the conference report of the Gold Standard
Act in March 1900.
reformers had gotten their way. It is well known that the Gold Standard
Act provided for a single gold standard, with no retention of silver
money except as tokens. Less well known are the clauses that began
the march toward a more “elastic” currency. As Lyman Gage had suggested
in 1897, national banks, previously confined to large cities, were
now made possible with a small amount of capital in small towns
and rural areas.
And it was
made far easier for national banks to issue notes. The object of
these clauses, as one historian put it, was to satisfy an “increased
demand for money at crop-moving time, and to meet popular cries
for ‘more money’ by encouraging the organization of national banks
in comparatively undeveloped regions” (Livingston 1986, p. 123).
exulted over the passage of the Gold Standard Act, but took the
line that this was only the first step on the much-needed path to
fundamental banking reform. Thus, Professor Frank W. Taussig of
Harvard praised the act, and greeted the emergence of a new social
and ideological alignment, caused by “strong pressure from the business
community” through the Indianapolis Monetary Convention. He particularly
welcomed the fact that the Gold Standard Act “treats the national
banks not as grasping and dangerous corporations but as useful institutions
deserving the fostering care of the legislature.”
But such tender
legislative care was not enough; fundamental banking reform was
needed. For, Taussig declared, “the changes in banking legislation
are not such as to make possible any considerable expansion of the
national system or to enable it to render the community the full
service of which it is capable.” In short, the changes allowed for
more and greater expansion of bank credit and the supply of money.
Therefore, Taussig (1990, p. 415) concluded, “It is well-nigh certain
that eventually Congress will have to consider once more the further
remodeling of the national bank system.”
In fact, the
Gold Standard Act of 1900 was only the opening gun of the banking
reform movement. Three friends and financial journalists, two from
Chicago, were to play a large role in the development of that movement.
Massachusetts-born Charles A. Conant (1861–1915), a leading historian
of banking, wrote his A History of Modern Banks of Issue
in 1896, while still a Washington correspondent for the New
York Journal of Commerce and an editor of Bankers Magazine.
After his stint of public relations work and lobbying for the Indianapolis
Convention, Conant moved to New York in 1902 to become treasurer
of the Morgan-oriented Morton Trust Company.
The two Chicagoans,
both friends of Lyman Gage, were, along with Gage, in the Rockefeller
ambit: Frank A. Vanderlip was picked by Gage as his assistant secretary
of the treasury, and when Gage left office, Vanderlip came to New
York as a top executive at the flagship commercial bank of the Rockefeller
interests, the National City Bank of New York.
Vanderlip’s close friend and former mentor at the Chicago Tribune,
Joseph French Johnson, had also moved east to become professor of
finance at the Wharton School of the University of Pennsylvania.
But no sooner had the Gold Standard Act been passed when Joseph
Johnson sounded the trumpet by calling for more-fundamental reform.
stated flatly that the existing bank note system was weak in not
“responding to the needs of the money market,” i.e., not supplying
a sufficient amount of money. Since the national banking system
was incapable of supplying those needs, Johnson opined, there was
no reason to continue it. Johnson deplored the US banking system
as the worst in the world, and pointed to the glorious central banking
system as existed in Britain and France.
But no such
centralized banking system yet existed in the United States: “In
the United States, however, there is no single business institution,
and no group of large institutions, in which self-interest, responsibility,
and power naturally unite and conspire for the protection of the
monetary system against twists and strains.”
In short, there
was far too much freedom and decentralization in the system. In
consequence, our massive deposit credit system “trembles whenever
the foundations are disturbed,” i.e., whenever the chickens of inflationary
credit expansion came home to roost in demands for cash or gold.
The result of the inelasticity of money, and of the impossibility
of interbank cooperation, Johnson opined, was that we were in danger
of losing gold abroad just at the time when gold was needed to sustain
confidence in the nation’s banking system (Johnson 1900, pp. 497f).
the banking community was split on the question of reform, the small
and rural bankers preferring the status quo. But the large bankers
were headed by A. Barton Hepburn of Morgan’s Chase National Bank,
who drew up a bill as head of a commission of the American Bankers
Association, and presented it in late 1901 to Representative Charles
N. Fowler of New Jersey, chairman of the House Banking and Currency
Committee, who had introduced one of the bills that had led to the
Gold Standard Act. The Hepburn proposal was reported out of committee
in April 1902 as the Fowler Bill (Kolko 1983, pp. 149–50).
Bill contained three basic clauses. The first allowed the further
expansion of national bank notes based on broader assets than government
a favorite of the big banks, was to allow national banks to establish
branches at home and abroad, a step illegal under the existing system
due to fierce opposition by the small country bankers. While branch
banking is consonant with a free market and provides a sound and
efficient system for calling on other banks for redemption, the
big banks had little interest in branch banking unless accompanied
by centralization of the banking system.
Fowler Bill proposed to create a three-member board of control within
the Treasury Department to supervise the creation of the new bank
notes and to establish clearinghouse associations under its aegis.
This provision was designed to be the first step toward the establishment
of a full-fledged central bank (Livingston 1986, pp. 150–54).
could not control the American Bankers Association, the multitude
of country bankers, up in arms against the proposed competition
of big banks in the form of branch banking, put fierce pressure
upon Congress and managed to kill the Fowler Bill in the House during
1902, despite the agitation of the executive committee and staff
of the Indianapolis Monetary Convention.
With the defeat
of the Fowler Bill, the big bankers decided to settle for more modest
goals for the time being. Senator Nelson W. Aldrich of Rhode Island,
perennial Republican leader of the US Senate and Rockefeller’s man
submitted the Aldrich Bill the following year, allowing the large
national banks in New York to issue “emergency currency” based on
municipal and railroad bonds. But even this bill was defeated.
in Congress, the big bankers decided to regroup and turn temporarily
to the executive branch. Foreshadowing a later, more elaborate collaboration,
two powerful representatives each from the Morgan and Rockefeller
banking interests met with Comptroller of the Currency William B.
Ridgely in January 1903, to try to persuade him, by administrative
fiat, to restrict the volume of loans made by the country banks
in the New York money market.
The two Morgan
men at the meeting were J. P. Morgan himself and George F. Baker,
Morgan’s closest friend and associate in the banking business.
The two Rockefeller men were Frank Vanderlip and James Stillman,
long-time chairman of the board of the National City Bank.
The close Rockefeller-Stillman alliance was cemented by the marriage
of the two daughters of Stillman to the two sons of William Rockefeller,
brother of John D. Rockefeller, Sr., and long-time board member
of the National City Bank (Burch 1981, pp. 134–35).
with the comptroller did not bear fruit, but the lead instead was
taken by the secretary of the treasury himself, Leslie Shaw, formerly
presiding officer at the second Indianapolis Monetary Convention,
whom President Roosevelt appointed to replace Lyman Gage. The unexpected
and sudden shift from McKinley to Roosevelt in the presidency meant
more than just a turnover of personnel; it meant a fundamental shift
from a Rockefeller-dominated to a Morgan-dominated administration.
The shift from Gage to Shaw was one of the many Rockefeller-to-Morgan
and banking matters, however, the Rockefeller and Morgan camps were
as one. Secretary Shaw attempted to continue and expand Gage’s experiments
in trying to make the Treasury function like a central bank, particularly
in making open-market purchases in recessions, and in using Treasury
deposits to bolster the banks and expand the money supply.
the statutory institution of the independent Treasury, which had
tried to confine government revenues and expenditures to its own
coffers. Instead, he expanded the practice of depositing Treasury
funds in favored, big national banks. Indeed, even banking reformers
denounced the deposit of Treasury funds to pet banks as artificially
lowering interest rates and leading to artificial expansion of credit.
Furthermore, any government deficit would obviously throw a system
dependent on a flow of new government revenues into chaos.
All in all,
the reformers agreed increasingly with the verdict of economist
Alexander Purves, that “the uncertainty as to the Secretary’s power
to control the banks by arbitrary decisions and orders, and the
fact that at some future time the country may be unfortunate in
its chief Treasury official [has] … led many to doubt the wisdom”
of using the Treasury as a form of central bank (Livingston 1986,
156; Burch 1981, pp. 161–62).
In his last
annual report of 1906, Secretary Shaw urged that he be given total
power to regulate all the nation’s banks. But the game was up, and
by then it was clear to the reformers that Shaw’s as well as Gage’s
proto–central bank manipulations had failed. It was time to undertake
a struggle for a fundamental legislative overhaul of the American
banking system, to bring it under central-banking control.
A. Conant: Surplus Capital and Economic Imperialism
The years shortly
before and after 1900 proved to be the beginnings of the drive toward
the establishment of a Federal Reserve System. It was also the origin
of the gold-exchange standard, the fateful system imposed upon the
world by the British in the 1920s and by the United States after
World War II at Bretton Woods. Even more than the case of a gold
standard with a central bank, the gold-exchange standard establishes
a system, in the name of gold, which in reality manages to install
coordinated, international, inflationary, paper money.
The idea was
to replace a genuine gold standard, in which each country (or, domestically,
each bank) maintains its reserves in gold, by a pseudo–gold standard
in which the central bank of the client country maintains its reserves
in some key or base currency, say pounds, or dollars. Thus, during
the 1920s, most countries maintained their reserves in pounds, and
only Britain purported to redeem pounds in gold.
that these other countries were really on a pound rather than a
gold standard, although they were able, at least temporarily, to
acquire the prestige of gold. It also meant that when Britain inflated
pounds, there was no danger of losing gold to these other countries,
who, quite the contrary, happily inflated their own currencies on
top of their expanding balances in pounds sterling.
was generated an unstable, inflationary system — all in the name
of gold — in which client states pyramided their own inflation on
top of Great Britain’s. The system was eventually bound to collapse,
as did the gold-exchange standard in the Great Depression, and Bretton
Woods by the late 1960s. In addition, the close ties based on pounds
and then dollars meant that the key or base country was able to
exert a form of economic imperialism, joined by their common paper
and pseudogold inflation, upon the client states using the key money.
By the late
1890s, groups of theoreticians in the United States were working
on what would later be called the “Leninist” theory of capitalist
imperialism. The theory was originated, not by Lenin but by advocates
of imperialism, centering around such Morgan-oriented friends and
brain-trusters of Theodore Roosevelt as Henry Adams, Brooks Adams,
Admiral Alfred T. Mahan, and Massachusetts Senator Henry Cabot Lodge.
The idea was
that capitalism in the developed countries was “overproducing,”
not simply in the sense that more purchasing power was needed in
recessions, but more deeply in that the rate of profit was therefore
inevitably falling. The ever-lower rate of profit from the “surplus
capital” was in danger of crippling capitalism, except that salvation
loomed in the form of foreign markets and especially foreign investments.
New and expanded
foreign markets would increase profits, at least temporarily, while
investments in undeveloped countries would be bound to bring a high
rate of profit. Hence, to save advanced capitalism, it was necessary
for Western governments to engage in outright imperialist or neoimperialist
ventures, which would force other countries to open their markets
for American products and would force open investment opportunities
doctrine — based on the fallacious Ricardian view that the rate
of profit is determined by the stock of capital investment, instead
of by the time preferences of everyone in society — there was little
for Lenin to change except to give an implicit moral condemnation
instead of approval and to emphasize the necessarily temporary nature
of the respite imperialism could furnish for capitalists.
set forth the theory of surplus capital in his A History of
Modern Banks of Issue (1896) and developed it in subsequent
essays. The existence of fixed capital and modern technology, Conant
claimed, invalidated Say’s Law and the concept of equilibrium, and
led to chronic “oversavings,” which he defined as savings in excess
of profitable investment outlets, in the developed Western capitalist
claimed Conant, were inherent in the unregulated activity of modern
industrial capitalism. Hence the importance of government-encouraged
monopolies and cartels to stabilize markets and the business cycle,
and in particular the necessity of economic imperialism to force
open profitable outlets abroad for American and other Western surplus
States’ bold venture into an imperialist war against Spain in 1898
galvanized the energies of Conant and other theoreticians of imperialism.
Conant responded with his call for imperialism in “The Economic
Basis of Imperialism” in the September 1898 North American Review,
and in other essays collected in The United States in the Orient:
The Nature of the Economic Problem and published in 1900.
S. J. Chapman
(1901, p. 78), a distinguished British economist, accurately summarized
Conant’s argument as follows: (1) “In all advanced countries there
has been such excessive saving that no profitable investment for
capital remains.” (2) Since all countries do not practice a policy
of commercial freedom, “America must be prepared to use force if
necessary” to open up profitable investment outlets abroad, and
(3) the United States possesses an advantage in the coming struggle,
since the organization of many of its industries “in the form of
trusts will assist it greatly in the fight for commercial supremacy.”
The war successfully
won, Conant was particularly enthusiastic about the United States
keeping the Philippines, the gateway to the great potential Asian
market. The United States, he opined, should not be held back by
“an abstract theory” to adopt “extreme conclusions” on applying
the doctrines of the Founding Fathers on the importance of the consent
of the governed.
Fathers, he declared, surely meant that self-government could only
apply to those competent to exercise it, a requirement that clearly
did not apply to the backward people of the Philippines. After all,
Conant wrote, “Only by the firm hand of the responsible governing
races … can the assurance of uninterrupted progress be conveyed
to the tropical and undeveloped countries” (Healy 1970, pp. 200–01).
was bold enough to derive important domestic conclusions from his
enthusiasm for imperialism. Domestic society, he claimed, would
have to be transformed to make the nation as “efficient” as possible.
Efficiency, in particular, meant centralized concentration of power.
“Concentration of power, in order to permit prompt and efficient
action, will be an almost essential factor in the struggle for world
it was important for the United States to learn from the magnificent
centralization of power and purpose in Czarist Russia. The government
of the United States would require “a degree of harmony and symmetry
which will permit the direction of the whole power of the state
toward definite and intelligent policies.” The US Constitution would
have to be amended to permit a form of Czarist absolutism, or at
the very least an enormously expanded executive power in foreign
affairs (Healy, pp. 202–03).
case study of business opinion energized and converted by the lure
of imperialism was the Boston weekly, The US Investor.
Before the outbreak of war with Spain in 1898, the US Investor
denounced the idea of war as a disaster to business. But after the
United States launched its war, and Commodore Dewey seized Manila
Bay, the Investor totally changed its tune. Now it hailed
the war as excellent for business, and as bringing about recovery
from the previous recession.
Soon the Investor
was happily advocating a policy of “imperialism” to make US prosperity
permanent. Imperialism conveyed marvelous benefits to the country.
At home, a big army and navy would be valuable in curbing the tendency
of democracy to enjoy “a too great freedom from restraint, both
of action and of thought.” The Investor added that “European
experience demonstrates that the army and navy are admirably adopted
to inculcate orderly habits of thought and action.”
But an even
more important benefit from a policy of permanent imperialism would
be economic. To keep “capital … at work,” stern necessity requires
that “an enlarged field for its product must be discovered.” Specifically,
“a new field” had to be found for selling the growing flood of goods
produced by the advanced nations, and for investment of their savings
at profitable rates. The Investor exulted in the fact that
this new “field lies ready for occupancy. It is to be found among
the semicivilized and barbarian races,” in particular the beckoning
country of China.
interesting is the colloquy that ensued between the Investor,
and the Springfield (Mass.) Republican, which still propounded
the older theory of free trade and laissez-faire. The Republican
asked why trade with undeveloped countries is not sufficient without
burdening US taxpayers with administrative and military overhead.
The Republican also attacked the new theory of surplus capital,
pointing out that only two or three years earlier, businessmen had
been loudly calling for more European capital to be invested in
To the first
charge, the Investor fell back on “the experience of the
race for, perhaps ninety centuries, [which] has been in the direction
of foreign acquisitions as a means of national prosperity.” But,
more practically, the Investor delighted over the goodies
that imperialism would bring to American business in the way of
government contracts and the governmental development of what would
now be called the “infrastructure” of the colonies. Furthermore,
as in Britain, a greatly expanded diplomatic service would provide
“a new calling for our young men of education and ability.”
To the Republican’s
second charge, on surplus capital, the Investor, like Conant,
developed the idea of a new age that had just arrived in American
affairs: an age of large-scale manufacture and hence overproduction,
an age of a low rate of profit, and consequent formation of trusts
in a quest for higher profits through suppression of competition.
As the Investor
put it, “The excess of capital has resulted in an unprofitable competition.
To employ Franklin’s witticism, the owners of capital are of the
opinion they must hang together or else they will all hang separately.”
But while trusts may solve the problem of specific industries, they
do not solve the great problem of a general “congestion of capital.”
Indeed, wrote the Investor, “finding employment for capital
… is now the greatest of all economic problems that confront us.”
To the Investor,
the way out was clear:
path to be pursued is that of the development of the natural
riches of the tropical countries. These countries are now peopled
by races incapable on their own initiative of extracting its
full riches from their own soil…. This will be attained in some
cases by the mere stimulus of government and direction by men
of the temperate zones; but it will be attained also by the
application of modern machinery and methods of culture to the
agricultural and mineral resources of the undeveloped countries.
(Quoted in Etherington 1984, p. 17)
By the spring
of 1901, even the eminent economic theorist John Bates Clark, of
Columbia University, was able to embrace the new creed. Reviewing
proimperialist works by Conant, Brooks Adams, and the Reverend Josiah
Strong in a single celebratory review in March 1901 in the Political
Science Quarterly, Clark emphasized the importance of opening
foreign markets and particularly of investing American capital “with
an even larger and more permanent profit” (Parrini and Sklar 1983,
p. 565, n. 16).
J. B. Clark
was not the only economist ready to join in apologia for the strong
state. Throughout the land by the turn of the 20th century, a legion
of economists and other social scientists had arisen, many of them
trained in graduate schools in Germany to learn of the virtues of
the inductive method, the German
Historical School, and a collectivist, organicist state. Eager
for positions and power commensurate with their graduate training,
these new social scientists, in the name of professionalism and
technical expertise, prepared to abandon the old laissez-faire creed
and take their places as apologists and planners in a new, centrally-planned
R. A. Seligman of Columbia University, of the prominent Wall Street
investment banking family of J. and W. Seligman and Company, spoke
for many of these social scientists when, in a presidential address
before the American Economic Association in 1903, he hailed the
“new industrial order.”
Seligman prophesied that in the new, 20th century, the possession
of economic knowledge would grant economists the power “to control
… and mold” the material forces of progress. As the economist proved
able to forecast more accurately, he would be installed as “the
real philosopher of social life,” and the public would pay “deference
to his views.”
In his 1899
presidential address, Arthur Twining Hadley of Yale also saw economists
developing as society’s philosopher kings. The most important application
of economic knowledge, declared Hadley, was leadership in public
life, becoming advisers and leaders of national policy. “I believe,”
[economists’] largest opportunity in the immediate future lies
not in theories but in practice, not with students but with
statesmen, not in the education of individual citizens, however
widespread and salutary, but in the leadership of an organized
body politic. (Silva and Slaughter 1984, p. 103)
saw the executive branch of the government as particularly amenable
to providing access to position and influence for economic advisers
and planners. Previously, executives were hampered in seeking such
expert counsel by the importance of political parties, their ideological
commitments, and their mass base in the voting population.
But now, fortunately,
the growing municipal reform (soon to be called the Progressive)
movement was taking power away from political parties and putting
it into the hands of administrators and experts. The “increased
centralization of administrative power [was giving] … the expert
a fair chance.”
And now, on
the national scene, the new American leap into imperialism in the
Spanish-American War was providing an opportunity for increased
centralization, executive power, and therefore for administrative
and expert planning. Even though Hadley declared himself personally
opposed to imperialism, he urged economists to leap at this great
opportunity for access to power (Silva and Slaughter 1984, pp. 120–21).
economic profession was not slow to grasp this new opportunity.
Quickly, the executive and nominating committees of the American
Economic Association (AEA) created a five-man special committee
to organize and publish a volume on colonial finance. As Silva and
Slaughter put it, this new, rapidly put together volume permitted
the AEA to show the power elite how the new social science could
serve the interests of those who made imperialism a national policy
by offering technical solutions to the immediate fiscal problems
of colonies, as well as providing ideological justifications for
acquiring them. (Silva and Slaughter, p. 133)
of the special committee was Professor Jeremiah W. Jenks of Cornell,
the major economic adviser to Governor Theodore Roosevelt. Another
member was Professor E. R. A. Seligman, another key adviser to Roosevelt.
A third colleague was Dr. Albert Shaw, influential editor of the
Review of Reviews, progressive reformer and social scientist,
and long-time crony of Roosevelt’s. All three were long-time leaders
of the American Economic Association.
The other two,
non-AEA leaders, on the committee were Edward R. Strobel, former
assistant secretary of state and adviser to colonial governments,
and Charles S. Hamlin, wealthy Boston lawyer and assistant secretary
of the treasury, who had long been in the Morgan ambit, and whose
wife was a member of the Pruyn family, longtime investors in two
Morgan-dominated concerns: the New York Central Railroad and the
Mutual Life Insurance Company of New York.
in Colonial Finance (Jenks et al. 1900), the volume quickly
put together by these five leaders, tried to advise the United States
how best to run its newly-acquired empire.
as the British government insisted when the North American states
were its colonies, the colonies should support their imperial government
through taxation, whereas control should be tightly exercised by
the US imperial center. Second, the imperial center should build
and maintain the economic infrastructure of the colony: canals,
railroads, and communications. Third, where — as was clearly anticipated
— native labor is inefficient or incapable of management, the imperial
government should import (white) labor from the imperial center.
And, finally, as Silva and Slaughter put it,
fiscal recommendations strongly intimated that trained economists
were necessary for a successful empire. It was they who must
make a thorough study of local conditions to determine the correct
fiscal system, gather data, create the appropriate administrative
design and perhaps even implement it. In this way, the committee
seconded Hadley’s views in seeing imperialism as an opportunity
for economists by identifying a large number of professional
positions best filled by themselves. (Silva and Slaughter 1984,
With the volume
written, the AEA cast about for financial support for its publication
and distribution. The point was not simply to obtain the financing,
but to do so in such a way as to gain the imprimatur of leading
members of the power elite on this bold move to empower economists
as technocratic expert advisers and administrators in the imperial
Economic Association found five wealthy businessmen to put up two-fifths
the full cost of publishing Essays in Colonial Finance.
By compiling the volume and then accepting corporate sponsors, several
of whom had an economic stake in the new American empire, the AEA
was signaling that the nation’s organized economists were (1) wholeheartedly
in favor of the new American empire; and (2) were willing and eager
to play a strong role in advising and administering the empire,
a role which they promptly and happily filled, as we shall see in
the following section.
In view of
the symbolic as well as practical role for the sponsors, a list
of the five donors for the colonial-finance volume is instructive.
One was Isaac
N. Seligman, head of the investment-banking house of J and W Seligman
and Company, a company with extensive overseas interests, especially
in Latin America. Isaac’s brother E. R. A. Seligman was a member
of the special committee on Colonial Finance and an author of one
of the essays in the volume.
William E. Dodge, a partner of the copper mining firm of Phelps,
Dodge, and Company, and member of a powerful mining family allied
to the Morgans.
A third donor
was Theodore Marburg, an economist who was vice president of the
AEA at the time, and also an ardent advocate of imperialism as well
as heir to a substantial American Tobacco Company fortune.
Thomas Shearman, a single-taxer and an attorney for the powerful
railroad magnate Jay Gould.
And last but
not least, was Stuart Wood, a manufacturer who had a PhD in economics
and had been a vice president of the AEA.
Monetary Imperialism and the Gold-Exchange Standard
The leap into
political imperialism by the United States in the late 1890s was
accompanied by economic imperialism, and one key to economic imperialism
was monetary imperialism. In brief, the developed Western countries
by this time were on the gold standard, while most of the Third
World nations were on the silver standard. For the past several
decades, the value of silver in relation to gold had been steadily
falling, due to
- an increasing
world supply of silver relative to gold, and
- the subsequent
shift of many Western nations from silver or bimetallism to gold,
thereby lowering the world’s demand for silver as a monetary metal.
The fall of
silver values meant monetary depreciation and inflation in the Third
World, and it would have been a reasonable policy to shift from
a silver-coin to a gold-coin standard. But the new imperialists
among US bankers, economists, and politicians were far less interested
in the welfare of Third World countries than in foisting a monetary
imperialism upon them.
For not only
would the economies of the imperial center and the client states
then be tied together, but they would be tied in such a way that
these economies could pyramid their own monetary and bank credit
inflation on top of inflation in the United States. Hence, what
the new imperialists set out to do was pressure or coerce Third
World countries to adopt, not a genuine gold-coin standard, but
a newly conceived “gold-exchange” or dollar standard.
silver currency fluctuating freely in terms of gold, the silver
to gold rate would then be fixed by arbitrary government price-fixing.
The silver countries would be silver in name only; the country’s
monetary reserve would be held, not in silver, but in dollars allegedly
redeemable in gold; and these reserves would be held, not in the
country itself, but as dollars piled up in New York City.
In that way,
if US banks inflated their credit, there would be no danger of losing
gold abroad, as would happen under a genuine gold standard. For
under a true gold standard, no one and no country would be interested
in piling up claims to dollars overseas. Instead, they would demand
payment of dollar claims in gold. So that even though these American
bankers and economists were all too aware, after many decades of
experience, of the fallacies and evils of bimetallism, they were
willing to impose a form of bimetallism upon client states in order
to tie them into US economic imperialism, and to pressure them into
inflating their own money supplies on top of dollar reserves supposedly,
but not de facto, redeemable in gold.
States first confronted the problem of silver currencies in a Third
World country when it seized control of Puerto Rico from Spain in
1898 and occupied it as a permanent colony. Fortunately for the
imperialists, Puerto Rico was already ripe for currency manipulation.
Only three years earlier, in 1895, Spain had destroyed the full-bodied
Mexican silver currency that its colony had previously enjoyed,
and replaced it with a heavily debased silver “dollar,” worth only
41 cents in US currency. The Spanish government had pocketed the
large seigniorage profits from that debasement.
States was therefore easily able to substitute its own debased silver
dollar, worth only 45.6 cents in gold. Thus, the United States’
silver currency replaced an even more debased one, and also the
Puerto Ricans had no tradition of loyalty to a currency only recently
imposed by the Spaniards. There was therefore little or no opposition
in Puerto Rico to the US monetary takeover.
The major controversial
question was what exchange rate the American authorities would fix
between the two debased coins: the old Puerto Rican silver peso
and the US silver dollar. This was the rate at which the US authorities
would compel the Puerto Ricans to exchange their existing coinage
for the new American coins.
in charge of the currency reform for the US government was the prominent
Johns Hopkins economist, Jacob H. Hollander, who had been special
commissioner to revise Puerto Rican tax laws, and who was one of
the new breed of academic economists repudiating laissez-faire for
The heavy debtors
in Puerto Rico — mainly the large sugar planters — naturally wanted
to pay their peso obligations at as cheap a rate as possible; they
lobbied for a peso worth 50 cents American. In contrast, the Puerto
Rican banker-creditors wanted the rate fixed at 75 cents. Since
the exchange rate was arbitrary anyway, Hollander and the other
American officials decided in the time-honored way of governments:
more or less splitting the difference, and fixing a peso equal to
the other Spanish colony grabbed by the United States, posed a far
more difficult problem. As in most of the Far East, the Philippines
was happily using a perfectly sound silver currency, the Mexican
silver dollar. But the United States was anxious for a rapid reform,
because its large armed forces establishment suppressing Filipino
nationalism required heavy expenses in US dollars, which it of course
declared to be legal tender for payments. Since the Mexican silver
coin was also legal tender and was cheaper than the US gold dollar,
the US military occupation found its revenues being paid in unwanted
and cheaper Mexican coins.
required, and in 1901, for the task of currency takeover the Bureau
of Insular Affairs (BIA) of the War Department — the agency running
the US occupation of the Philippines — hired Charles A. Conant for
the task. Secretary of War Elihu Root was a redoubtable Wall Street
lawyer in the Morgan ambit who sometimes served as J. P. Morgan’s
personal attorney. Root took a personal hand in sending Conant to
the Philippines. Conant, fresh from the Indianapolis Monetary Commission
and before going to New York as a leading investment banker, was,
as might be expected, an ardent gold-exchange-standard imperialist
as well as the leading theoretician of economic imperialism.
the Filipino people loved their silver coins, Conant devised a way
to impose a gold US dollar currency upon the country. Under his
cunning plan, the Filipinos would continue to have a silver currency;
but replacing the full-bodied Mexican silver coin would be an American
silver coin tied to gold at a debased value far less than the market
exchange value of silver in terms of gold. In this imposed, debased
bimetallism, since the silver coin was deliberately overvalued in
relation to gold by the US government, Gresham’s
law went inexorably into effect. The overvalued silver would
keep circulating in the Philippines, and undervalued gold would
be kept sharply out of circulation.
profit that the Treasury would reap from the debasement would be
happily deposited at a New York bank, which would then function
as a “reserve” for the US silver currency in the Philippines. Thus,
the New York funds would be used for payment outside the Philippines
instead of as coin or specie. Moreover, the US government could
issue paper dollars based on its new reserve fund.
It should be
noted that Conant originated the gold-exchange scheme as a way of
exploiting and controlling Third World economies based on silver.
At the same time, Great Britain was introducing similar schemes
in its colonial areas in Egypt, the Straits Settlements in Asia,
and particularly in India.
pressured by the silver lobby, balked at the BIA’s plan. And so
the BIA again turned to the seasoned public relations and lobbying
skills of Charles A. Conant. Conant swung into action. Meeting with
editors of the top financial journals, he secured their promises
to write editorials pushing for the Conant plan, many of which he
obligingly wrote himself.
He was already
backed by the American banks of Manila. Recalcitrant US bankers
were warned by Conant that they could no longer expect large government
deposits from the War Department if they continued to oppose the
plan. Furthermore, Conant won the support of the major enemies of
his plan, the American silver companies and prosilver bankers, promising
them that if the Philippine currency reform went through, the federal
government would buy silver for the new US coinage in the Philippines
from these same companies. Finally, the tireless lobbying, and the
mixture of bribery and threats by Conant, paid off. Congress passed
the Philippine Currency Bill in March 1903.
In the Philippines,
however, the United States could not simply duplicate the Puerto
Rican example and coerce the conversion of the old for the new silver
coinage. For the Mexican silver coin was a dominant coin not only
in the Far East but throughout the world, and the coerced conversion
would have been endless.
States tried; it removed the legal tender privilege from the Mexican
coins, and decreed the new US coins to be used for taxes, government
salaries, and other government payments. But this time the Filipinos
happily used the old Mexican coins as money, while the US silver
coins disappeared from circulation into payment of taxes and transactions
to the United States.
The War Department
was beside itself: how could it drive Mexican silver coinage out
of the Philippines? In desperation, it turned to the indefatigable
Conant, but Conant couldn’t join the colonial government in the
Philippines because he had just been appointed to a more far-flung
presidential commission on international exchange for pressuring
Mexico and China to go on a similar gold-exchange standard.
fresh from his Puerto Rican triumph, was ill. Who else? Conant,
Hollander, and several leading bankers told the War Department they
could recommend no one for the job, so new then was the profession
of technical expert in monetary imperialism.
But there was
one more hope, the other procartelist and financial imperialist,
Cornell’s Jeremiah W. Jenks, a fellow member with Conant of President
Roosevelt’s new Commission on International Exchange (CIE). Jenks
had already paved the way for Conant by visiting English and Dutch
colonies in the Far East in 1901 to gain information about running
the Philippines. Jenks finally came up with a name, his former graduate
student at Cornell, Edwin W. Kemmerer.
went to the Philippines from 1903 to 1906, to implement the Conant
plan. Based on the theories of Jenks and Conant, and on his own
experience in the Philippines, Kemmerer went on to teach at Cornell
and then at Princeton, and gained fame throughout the 1920s as the
“money doctor,” busily imposing the gold-exchange standard on country
after country abroad.
Conant’s behind-the-scenes advice, Kemmerer and his associates finally
came out with a successful scheme to drive out the Mexican silver
coins. It was a plan that relied heavily on government coercion.
The United States imposed a legal prohibition on the importation
of the Mexican coins, followed by severe taxes on any private Philippine
transactions daring to use the Mexican currency.
the planners, their scheme was aided by a large-scale demand at
the time for Mexican silver in northern China, which absorbed silver
that was in the Philippines or that would have been smuggled into
the islands. The US success was aided by the fact that the new US
silver coins, perceptively called “conants” by the Filipinos, were
made up to look very much like the cherished old Mexican coins.
By 1905, force, luck, and trickery had prevailed, and the conants
(worth 50 cents in US money) were the dominant currency in the Philippines.
Soon the US authorities were confident enough to add token copper
coins and paper conants as well.
By 1903, the
currency reformers felt emboldened enough to move against the Mexican
silver dollar throughout the world. In Mexico itself, US industrialists
who wanted to invest there pressured the Mexicans to shift from
silver to gold, and they found an ally in powerful finance minister
Jos Limantour. But tackling the Mexican silver peso at home would
not be an easy task, for the coin was known and used throughout
the world, particularly in China, where it formed the bulk of the
three-way talks between US, Mexican, and Chinese officials, the
Mexicans and Chinese were induced to send identical notes to the
US Secretary of State, urging the United States to appoint financial
advisers to bring about a currency reform and stabilized exchange
rates with the gold countries (Parrini and Sklar 1983, pp. 573–77;
Rosenberg 1985, p. 184).
gave President Roosevelt, upon securing Congressional approval,
the excuse to appoint in March 1903 a three-man Commission on International
Exchange to bring about currency reform in Mexico, China, and the
rest of the silver-using world. The aim was “to bring about a fixed
relationship between the moneys of the gold-standard countries and
the present silver-using countries,” in order to foster “export
trade and investment opportunities” in the gold countries and economic
development in the silver countries.
The three members
of the CIE were old friends and like-minded colleagues. The chairman
was Hugh H. Hanna, of the Indianapolis Monetary Commission, the
others were his former chief aide at that Commission, Charles A.
Conant, and Professor Jeremiah W. Jenks. Conant, as usual, was the
major theoretician and finagler. He realized that major opposition
to Mexico and China’s shift to a gold standard would come from the
important Mexican-silver industry, and he devised a scheme to get
European countries to purchase large amounts of Mexican silver to
ease the pain of the shift.
In a trip to
European nations in the summer of 1903, however, Conant and the
CIE found the Europeans less than enthusiastic about making Mexican
silver purchases as well as subsidizing US exports and investments
in China, a land whose market they too were coveting. In the United
States, on the other hand, major newspapers and financial periodicals,
prodded by Conant’s public relations work, warmly endorsed the new
In the meantime,
however, the United States faced similar currency problems in its
two new Caribbean protectorates, Cuba and Panama. Panama was easy.
The United States occupied the Canal Zone, and would be importing
vast amounts of equipment to build the canal, and so it decided
to impose the American gold dollar as the currency in the nominally
independent Republic of Panama.
While the gold
dollar was the official currency of Panama, the United States imposed
as the actual medium of exchange a new debased silver peso worth
50 cents. Fortunately, the new peso was almost the same in value
as the old Colombian silver coin it forcibly displaced, and so,
like Puerto Rico, the takeover could go without a hitch.
Among the US
colonies or protectorates, Cuba proved the toughest nut to crack.
Despite all of Conant’s ministrations, Cuba’s currency remained
unreformed. Spanish gold and silver coins, French coins, and US
currency all circulated side by side, freely fluctuating in response
to supply and demand. Furthermore, similar to the prereformed Philippines,
a fixed bimetallic exchange rate between the cheaper US, and the
more valuable Spanish and French, coins led the Cubans to return
cheaper US coins to the US customs authorities in fees and revenues.
Why then did
Conant fail in Cuba? In the first place, strong Cuban nationalism
resented US plans for seizing control of their currency. Conant’s
repeated request in 1903 for a Cuban invitation for the CIE to visit
the island met stern rejections from the Cuban government. Moreover,
the charismatic US military commander in Cuba, Leonard Wood, wanted
to avoid giving the Cubans the impression that plans were afoot
to reduce Cuba to colonial status.
objection was economic. The powerful sugar industry in Cuba depended
on exports to the United States, and a shift from depreciated silver
to higher-valued gold money would increase the cost of sugar exports,
by an amount Leonard Wood estimated to be about 20 percent.
While the same
problem had existed for the sugar planters in Puerto Rico, American
economic interests, in Puerto Rico and in other countries such as
the Philippines favored forcing formerly silver countries onto a
gold-based standard so as to stimulate US exports into those countries.
In Cuba, on the other hand, there was increasing US investment capital
pouring into the Cuban sugar plantations, so that powerful and even
dominant US economic interests existed on the other side of the
currency reform question. Indeed, by World War I, American investments
in Cuban sugar reached the sum of $95 million.
Charles Conant resumed his pressure for a Cuban gold-exchange standard
in 1907, he was strongly opposed by the US Governor of Cuba, Charles
Magoon, who raised the problem of a gold-based standard crippling
the sugar planters. The CIE never managed to visit Cuba, and ironically,
Charles Conant died in Cuba, in 1915, trying in vain to convince
the Cubans of the virtues of the gold-exchange standard (Rosenberg
1985, pp. 186–88).
shift from silver to gold was more gratifying to Conant, but here
the reform was effected by Foreign Minister Limantour and his indigenous
technicians, with the CIE taking a back seat. However, the success
of this shift, in the Mexican Currency Reform Act of 1905, was assured
by a world rise in the price of silver, starting the following year,
which made gold coins cheaper than silver, with Gresham’s law bringing
about a successful gold coin currency in Mexico.
But the US
silver coinage in the Philippines ran into trouble because of the
rise in the world silver price. Here, the US silver currency in
the Philippines was bailed out by coordinated action by the Mexican
government, which sold silver in the Philippines to lower the value
of silver sufficiently so that the Conants could be brought back
But the big
failure of Conant/CIE monetary imperialism was in China. In 1900,
Britain, Japan, and the United States intervened in China to put
down the Boxer Rebellion. The three countries thereupon forced defeated
China to agree to pay them and all major European powers an indemnity
of $333 million.
States interpreted the treaty as an obligation to pay in gold, but
China, on a depreciated silver standard, began to pay in silver
in 1903, an action that enraged the three treaty powers. The US
minister to China reported that Britain might declare China’s payment
in silver a violation of the treaty, which would presage military
by the United States’ success in the Philippines, Panama, and Mexico,
Secretary of War Root sent Jeremiah W. Jenks on a mission to China
in early 1904 to try to transform China from a silver- to a gold-exchange
standard. Jenks also wrote to President Roosevelt from China urging
that the Chinese indemnity to the United States from the Boxer Rebellion
be used to fund exchange professorships for 30 years.
however, was a total failure. The Chinese understood the CIE currency
scheme all too well. They saw and denounced the seigniorage of the
gold-exchange standard as an irresponsible and immoral debasement
of Chinese currency, an act that would impoverish China while adding
to the profits of US banks where seigniorage reserve funds would
Chinese officials saw that shifting the indemnity from silver to
gold would enrich the European governments at the expense of the
Chinese economy. They also noted that the CIE scheme would establish
a foreign controller of the Chinese currency to impose banking regulations
and economic reforms on the Chinese economy. We need not wonder
at the Chinese outrage. China’s reaction was its own nationalistic
currency reform in 1905 to replace the Mexican silver coin with
a new Chinese silver coin, the tael (Rosenberg 1985, pp. 189–92).
failure in China put an end to any formal role for the Commission
on International Exchange.
An immediately following fiasco blocked the US government’s use
of economic and financial advisers to spread the gold-exchange standard
abroad. In 1905, the State Department hired Jacob Hollander to move
another of its Latin American client states, the Dominican Republic,
onto the gold-exchange standard.
accomplished this task by the end of the year, the State Department
asked the Dominican government to hire Hollander to work out a plan
for financial reform, including a US loan, and a customs service
run by the United States to collect taxes for repayment of the loan.
Hollander, son-in-law of prominent Baltimore merchant Abraham Hutzler,
used his connection with Kuhn, Loeb and Company to place Dominican
bonds with that investment bank.
engaged happily in double dipping for the same work, collecting
fees for the same job from the State Department and from the Dominican
government. When this peccadillo was discovered in 1911, the scandal
made it impossible for the US government to use its own employees
and its own funds to push for gold-exchange experts abroad. From
then on, there was more of a public-private partnership between
the US government and the investment bankers, with the bankers supplying
their own funds, and the State Department supplying good will and
more concrete resources.
Thus, in 1911–1912,
the United States, over great opposition, imposed a gold-exchange
standard on Nicaragua. The State Department formally stepped aside,
but approved Charles Conant’s hiring by the powerful investment-banking
firm of Brown Brothers to bring about a loan and the currency reform.
The State Department lent not only its approval to the project,
but also its official wires, for Conant and Brown Brothers to conduct
the negotiations with the Nicaraguan government.
By the time
he died in Cuba in 1915, Charles Conant had made himself the chief
theoretician and practitioner of the gold-exchange and the economic-imperialist
movements. Aside from his successes in the Philippines, Panama,
and Mexico, and his failures in Cuba and China, Conant led in pushing
for gold-exchange reform and gold-dollar imperialism in Liberia,
Bolivia, Guatemala, and Honduras. His magnum opus in favor of the
gold-exchange standard, the two-volume The Principles of Money
and Banking (1905), as well as his pathbreaking success in
the Philippines, were followed by a myriad of books, articles, pamphlets,
and editorials, always backed up by his personal propaganda efforts.
interesting were Conant’s arguments in favor of a gold-exchange,
rather than a genuine gold-coin, standard. A straight gold-coin
standard, Conant believed, did not provide a sufficient amount of
gold to provide for the world’s monetary needs.
Hence, by tying
the existing silver standards in the undeveloped countries to gold,
the “shortage” of gold could be overcome, and also the economies
of the undeveloped countries could be integrated into those of the
dominant imperial power. All this could only be done if the gold-exchange
standard were “designed and implemented by careful government policy,”
but of course Conant himself and his friends and disciples always
stood ready to advise and provide such implementation (Rosenberg
1985, p. 197).
adopting a government-managed gold-exchange standard was superior
to either genuine gold or bimetallism because it left each state
the flexibility of adapting its currency to local needs. As Conant
each state free to choose the means of exchange which conform
best to its local conditions. Rich nations are free to choose
gold, nations less rich silver, and those whose financial methods
are most advanced are free to choose paper.
It is interesting
that for Conant, paper was the most “advanced” form of money. It
is clear that the devotion to the gold standard of Conant and of
his colleagues was only to a debased and inflationary standard controlled
and manipulated by the US government, with gold really serving as
a faade of allegedly hard money.
And one of
the critical forms of government manipulation and control in Conant’s
proposed system was the existence and active functioning of a central
bank. As a founder of the “science” of financial advising to governments,
Conant, followed by his colleagues and disciples, not only pushed
a gold-exchange standard wherever he could do so, but also a central
bank to manage and control that standard. As Emily Rosenberg points
thus did not neglect … one of the major revolutionary changes
implicit in his system: a new, important role for a central
bank as a currency stabilizer. Conant strongly supported the
American banking reform that culminated in the Federal Reserve
System … and American financial advisers who followed Conant
would spread central banking systems, along with gold-standard
currency reforms, to the countries they advised. (Rosenberg
1985, p. 198)
a managed gold-exchange standard would come, as replacement for
the old free-trade, unmanaged, gold-coin standard, a world of imperial
currency blocs, which “would necessarily come into being as lesser
countries deposited their gold stabilization funds in the banking
systems of more advanced countries” (ibid.). New York and London
banks, in particular, shaped up as the major reserve fundholders
in the developing new world monetary order.
It is no accident
that the United States’ major financial and imperial rival, Great
Britain, which was pioneering in imposing gold-exchange standards
in its own colonial area at this time, built upon this experience
to impose a gold-exchange standard, marked by all European currencies
pyramiding on top of British inflation, during the 1920s. That disastrous
inflationary experiment led straight to the worldwide banking crash
and the general shift to fiat paper moneys in the early 1930s. After
World War II, the United States took up the torch of a world gold-exchange
standard at Bretton Woods, with the dollar replacing the pound sterling
in a worldwide inflationary system that lasted approximately 25
it be thought that Charles A. Conant was the purely disinterested
scientist he claimed to be. His currency reforms directly benefitted
his investment banker employers. Thus, Conant was treasurer, from
1902 to 1906, of the Morgan-run Morton Trust Company of New York,
and it was surely no coincidence that Morton Trust was the bank
that held the reserve funds for the governments of the Philippines,
Panama, and the Dominican Republic, after their respective currency
reforms. In the Nicaragua negotiations, Conant was employed by the
investment bank of Brown Brothers, and in pressuring other countries
he was working for Speyer and Company and other investment bankers.
died in 1915, there were few to pick up the mantle of foreign financial
advising. Hollander was in disgrace after the Dominican debacle.
Jenks was aging, and lived in the shadow of his China failure, but
the State Department did appoint Jenks to serve as a director of
the Nicaraguan National Bank in 1917, and also hired him to study
the Nicaraguan financial picture in 1925.
But the true
successor of Conant was Edwin W. Kemmerer, the “money doctor.” After
his Philippine experience, Kemmerer joined his old Professor Jenks
at Cornell, and then moved to Princeton in 1912, publishing his
book Modern Currency Reforms in 1916. As the leading foreign
financial adviser of the 1920s, Kemmerer not only imposed central
banks and a gold-exchange standard on Third World countries, but
also got them to levy higher taxes.
combined his public employment with service to leading international
bankers. During the 1920s, Kemmerer worked as a banking expert for
the US government’s Dawes Commission, headed special financial advisory
missions to over a dozen countries, and was kept on a handsome retainer
by the distinguished investment banking firm of Dillon and Read
from 1922 to 1929. In that era, Kemmerer and his mentor Jenks were
the only foreign-currency-reform experts available for advising.
In the late 1920s, Kemmerer helped establish a chair of international
economics at Princeton, which he occupied, and from which he could
train students like Arthur N. Young and William W. Cumberland. In
the mid-1920s, the money doctor served as president of the American
Schiff Ignites the Drive for a Central Bank
of the Fowler Bill for broader asset currency and branch banking
in 1902, coupled with the failure of Secretary of Treasury Shaw’s
attempts of 1903–1905 to use the Treasury as a central bank, led
the big bankers and their economist allies to adopt a new solution:
the frank imposition of a central bank in the United States.
for a central bank was kicked off by a fateful speech in January
1906 by the powerful Jacob H. Schiff, head of the Wall Street investment
bank of Kuhn, Loeb and Co., before the New York Chamber of Commerce.
Schiff complained that, in the autumn of 1905, when “the country
needed money,” the Treasury, instead of working to expand the money
supply, reduced government deposits in the national banks, thereby
precipitating a financial crisis, a “disgrace” in which the New
York clearinghouse banks had been forced to contract their loans
drastically, sending interest rates sky-high. 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 modern banking system to provide for an elastic currency (Bankers
Magazine 1906, pp. 114–15).
who had already been agitating behind the scenes for a central bank
was Schiff’s partner, Paul Moritz Warburg, who had suggested the
plan to Schiff as early as 1903. Warburg had emigrated from the
German investment firm of M. M. Warburg and Company in 1897, and
before long his major function at Kuhn, Loeb was to agitate to bring
the blessings of European central banking to the United States.
It took less
than a month for the finance committee of the New York Chamber to
issue its report, but the bank reformers were furious, denouncing
it as remarkably ignorant. When Frank A. Vanderlip, of Rockefeller’s
flagship bank, the National City Bank of New York, reported on this
development, his boss, James Stillman, suggested that a new five-man
special commission be set up by the New York Chamber to come back
with a plan for currency reform.
Vanderlip proposed that the five-man commission consist of himself;
Schiff; J. P. Morgan; George Baker of the First National Bank of
New York, Morgan’s closest and longest associate; and former Secretary
of the Treasury Lyman Gage, now president of the Rockefeller-controlled
US Trust Company. Thus, the commission would consist of two Rockefeller
men (Vanderlip and Gage), two Morgan men (Morgan and Baker), and
one representative from Kuhn, Loeb.
was available to serve, however, so the commission had to be redrawn.
In addition to Vanderlip, beginning in March 1906, there sat, instead
of Schiff, his close friend Isidore Straus, a director of R. H.
Macy and Company. Instead of Morgan and Baker there now served two
Morgan men: Dumont Clarke, president of the American Exchange National
Bank and a personal adviser to J. P. Morgan and Charles A. Conant,
treasurer of Morton and Company. The fifth man was a veteran of
the Indianapolis Monetary Convention, John Claflin, of H. B. Claflin
and Company, a large integrated wholesaling concern. Coming on board
as secretary of the new currency committee was Vanderlip’s old friend
Joseph French Johnson, now of New York University, who had been
calling for a central bank since 1900.
used the old Indianapolis questionnaire technique: acquiring legitimacy
by sending out a detailed questionnaire on currency to a number
of financial leaders. With Johnson in charge of mailing and collating
the questionnaire replies, Conant spent his time visiting and interviewing
the heads of the central banks in Europe.
commission delivered its 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.” In keeping with other bank
reformers, such as Professor Abram Piatt Andrew of Harvard University,
Thomas Nixon Carver of Harvard, and Albert Strauss, partner of J.
P. Morgan and Company, the commission was scornful of Secretary
Shaw’s attempt to use the Treasury as a central bank. Shaw was particularly
obnoxious because he was still insisting, in his last annual report
of 1906, that the Treasury, under his aegis, had constituted a “great
along with the other reformers, denounced the Treasury for overinflating
by keeping interest rates excessively low; a central bank, in contrast,
would have much larger capital and undisputed control over the money
market, and thus would be able to manipulate the discount rate effectively
to keep the economy under proper control. The important point, declared
the committee, is that there be “centralization of financial responsibility.”
In the meantime, short of establishing a central bank, the committee
urged that, at the least, the national bank’s powers to issue notes
be expanded to include being based on general assets as well as
government bonds (Livingston 1986, pp. 159–64).
and publishing this “Currency Report,” the reformers used the report
as the lever for expanding the agitation for a central bank and
broader note-issue powers to other corporate and financial institutions.
The next step was the powerful American Bankers Association (ABA).
In 1905, the executive council of the ABA had appointed a currency
committee which, the following year, recommended an emergency-assets
currency that would be issued by a federal commission, resembling
an embryonic central bank.
In a tumultuous
plenary session of the ABA convention in October, 1906, the ABA
rejected this plan, but agreed to appoint a 15-man currency commission
that was instructed to meet with the New York Chamber currency committee
and attempt to agree on appropriate legislation.
prominent on the ABA currency commission were,
- Arthur Reynolds,
president of the Des Moines National Bank, close to the Morgan-oriented
Des Moines Regency, and brother of the prominent Chicago banker,
George M. Reynolds, formerly of Des Moines and then president
of the Morgan-oriented Continental National Bank of Chicago and
the powerful chairman of the executive council of the ABA.
- James B.
Forgan, president of the Rockefeller-run First National Bank of
Chicago, and close friend of Jacob Schiff of Kuhn, Loeb, as well
as of Vanderlip.
- Joseph T.
Talbert, vice president of the Rockefeller-dominated Commercial
National Bank of Chicago, and soon to become vice president of
Rockefeller’s flagship bank, the National City Bank of New York.
- Myron T.
Herrick, one of the most prominent Rockefeller politicians and
businessmen in the country. Herrick was the head of the Cleveland
Society of Savings, and was one of the small team of close Rockefeller
business allies who, along with Mark Hanna, bailed out Governor
William McKinley from bankruptcy in 1893. Herrick was a previous
president of the ABA, had just finished a two-year stint as Governor
of Ohio, and was later to become Ambassador to France under his
old friend and political ally William Howard Taft as well as later
under President Warren G. Harding, also a recipient of Herrick’s
political support and financial largesse.
the ABA commission was A. Barton Hepburn, president of one of the
leading Morgan commercial banks, the Chase National Bank of New
York, and author of the well-regarded History of Coinage and
Currency in the United States.
with Vanderlip and Conant as the representatives from the New York
Chamber committee, the ABA commission, along with Vanderlip and
Conant, agreed on at least the transition demands of the reformers.
The ABA commission presented proposals to the public, the press,
and the Congress in December 1906, for a broader-asset currency
as well as provisions for emergency issue of banknotes by national
But just as
sentiment for a broader-assets currency became prominent, the bank
reformers began to worry about an uncontrolled adoption of such
a currency. For that would mean that national-bank credit and notes
would expand, and that, in the existing system, small state banks
would be able to pyramid and inflate credit on top of the national
credit, using the expanded national bank notes as their reserves.
wanted a credit inflation controlled by and confined to the large
national banks; they most emphatically did not want uncontrolled
state-bank inflation that would siphon resources to small entrepreneurs
and “speculative” marginal producers. The problem was aggravated
by the accelerated rate of increase in the number of small southern
and western state banks after 1900.
problem for the reformers was that commercial paper was a different
system from that of Europe. In Europe, commercial paper, and hence
bank assets, were two-name notes endorsed by a small group of wealthy
acceptance banks. In contrast to this acceptance paper system, commercial
paper in the United States was unendorsed single-name paper, with
the bank taking a chance on the creditworthiness of the business
borrower. Hence, a decentralized financial system in the United
States was not subject to big-banker control.
the existing system and hence about uncontrolled asset currency
were voiced by the top bank reformers. Thus, Vanderlip expressed
concern that “there are so many state banks that might count these
[national-bank] notes in their reserves.” Schiff warned that “it
will prove unwise, if not dangerous, to clothe six thousand banks
or more with the privilege to issue independently a purely credit
currency.” And, from the Morgan side, a similar concern was voiced
by Victor Morawetz, the powerful chairman of the board of the Atchison,
Topeka and Santa Fe Railroad (Livingston 1986, pp. 168–69).
lead in approaching this problem of small banks and decentralization
was Paul Moritz Warburg, of Kuhn, Loeb, fresh from his banking experience
in Europe. In January 1907, Warburg began years of tireless agitation
for central banking with two articles, “Defects and Needs of our
Banking System,” and “A Plan for a Modified Central Bank.”
for a central bank, Warburg pointed out that one of the important
functions of such a bank would be to restrict the eligibility of
bank assets to be used for expansion of bank deposits. Presumably,
too, the central bank could move to require banks to use acceptance
paper or otherwise try to create an acceptance market in the United
By the summer
of 1907, the Bankers Magazine was reporting a decline in
influential banker support for broadening asset currency and a strong
move toward the “central bank project.” Bankers Magazine
(1907, pp. 314–15) noted as a crucial reason the fact that asset
currency would be expanding bank services to “small producers and
It was surely
no accident that Warburg himself was the principal beneficiary of
this policy. Warburg became Chairman of the Board, from its founding
in 1920, of the International Acceptance Bank, the world’s largest
acceptance bank, as well as director of the Westinghouse Acceptance
Bank and of several other acceptance houses. In 1919, Warburg was
the chief founder and chairman of the executive committee of the
American Acceptance Council, the trade association of acceptance
houses. (See Rothbard 1983, pp. 119–23).
Panic of 1907 and Mobilization for a Central Bank
A severe financial
crisis, the Panic of 1907, struck in early October. Not only was
there a general recession and contraction, but the major banks in
New York and Chicago were, as in most other depressions in American
history, allowed by the government to suspend specie payments; that
is, to continue in operation while being relieved of their contractual
obligation to redeem their notes and deposits in cash or in gold.
While the Treasury
had stimulated inflation during 1905–1907, there was nothing it
could do to prevent suspensions of payment, or to alleviate “the
competitive hoarding of currency” after the panic; that is, the
attempt to demand cash in return for increasingly shaky bank notes
after the panic, banker and business opinion consolidated on behalf
of a central bank, an institution that could regulate the economy
and serve as a lender of last resort to bail banks out of trouble.
The reformers now faced a two-fold task: hammering out details of
a new central bank, and more importantly, mobilizing public opinion
on its behalf.
The first step
in such mobilization was to win the support of the nation’s academics
and experts. The task was made easier by the growing alliance and
symbiosis between academia and the power elite. Two organizations
that proved particularly useful for this mobilization were the American
Academy of Political and Social Science (AAPSS) of Philadelphia,
and the Academy of Political Science (APS) of Columbia University,
both of which included in their ranks leading corporate-liberal
businessmen, financiers, attorneys, and academics.
Butler, the highly influential president of Columbia University,
explained that the Academy of Political Science “is an intermediary
between … the scholars and the men of affairs, those who may perhaps
be said to be amateurs in scholarship.” Here, he pointed out, is
where they “come together” (Livingston 1986, p. 175, n. 30).
It is not surprising,
then, that the American Academy of Political and Social Science,
the American Association for the Advancement of Science (AAAS),
and Columbia University held three symposia during the winter of
1907–1908, each calling for a central bank, and thereby disseminating
the message of a central bank to a carefully selected elite public.
Not surprisingly, too, E. R. A. Seligman was the organizer of the
Columbia conference, gratified that his university was providing
a platform for leading bankers and financial journalists to advocate
a central bank, especially, he added, because “it is proverbially
difficult in a democracy to secure a hearing for the conclusions
of experts.” Then in 1908 Seligman collected the addresses into
a volume, The Currency Problem.
set the tone for the gathering in his opening address. The Panic
of 1907, he alleged, was moderate because its effects had been tempered
by the growth of industrial trusts, which provided a more controlled
and “more correct adjustment of present investment to future needs”
than would a “horde of small competitors.” In that way, Seligman
displayed no comprehension of how competitive markets facilitate
One big problem,
however, still remained for Seligman. The horde of small competitors,
for whom Seligman had so much contempt, still prevailed in the field
of currency and banking. The problem was that the banking system
was still decentralized. As Seligman declared, “Even more important
than the inelasticity of our note issue is its decentralization.
The struggle which has been victoriously fought out everywhere else
[in creating trusts] must be undertaken here in earnest and with
vigor” (Livingston 1986, p. 177).
The next address
was that of Frank Vanderlip. To Vanderlip, in contrast to Seligman,
the Panic of 1907 was “one of the great calamities of history” —
the result of a decentralized, competitive American banking system,
with 15,000 banks all competing vigorously for control of cash reserves.
The terrible thing is that “each institution stands alone, concerned
first with its own safety, and using every endeavor to pile up reserves
without regard” to the effect of such actions on other banking institutions.
system must be changed, to follow the lead of other great nations,
where a central bank is able to mobilize and centralize reserves,
and create an elastic currency system. Putting the situation in
virtually Marxian terms, Vanderlip declared that the alien, external
power of the free and competitive market must be replaced by central
control following modern, allegedly scientific principles of banking.
editor of the Wall Street Journal, then rung the changes
on the common theme by applying it to the volatile call-loan market
in New York. The market is volatile, Wheelock claimed, because the
small country banks are able to lend on that market, and their deposits
in New York banks then rise and fall in uncontrolled fashion. Therefore,
there must be central, corporate control over country-bank money
in the call-loan market.
A. Barton Hepburn,
head of Morgan’s Chase National Bank, came next, and spoke of the
great importance of having a central bank that would issue a monopoly
of bank notes. It was particularly important that the central bank
be able to discount the assets of national banks, and thus supply
an elastic currency.
The last speaker
was Paul Warburg, who lectured his audience on the superiority of
European over American banking, particularly in (1) having a central
bank, as against decentralized American banking; and (2) — his old
hobby horse — enjoying “modern” acceptance paper instead of single-name
promissory notes. Warburg emphasized that these two institutions
must function together. In particular, tight government central-bank
control must replace competition and decentralization: “Small banks
constitute a danger.”
The other two
symposia were very similar. At the AAPSS symposium in Philadelphia,
in December 1907, several leading investment bankers and Comptroller
of the Currency William B. Ridgely came out in favor of a central
bank. It was no accident that members of the AAPSS’s advisory committee
on currency included A. Barton Hepburn; Morgan attorney and statesman
Elihu Root; Morgan’s long-time personal attorney Francis Lynde Stetson;
and J. P. Morgan himself.
the AAAS symposium in January 1908 was organized by none other than
Charles A. Conant, who happened to be chairman of the AAAS’s social
and economic section for the year. Speakers included Columbia economist
J. B. Clark, Frank Vanderlip, Conant, and Vanderlip’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.
All in all,
the task of the bank reformers was well summed up 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.” That strategy was well under way.
same month, the legislative lead in banking reform was taken by
the formidable Senator Nelson W. Aldrich, (Republican, Rhode Island),
head of the Senate Finance Committee, and, as the father-in-law
of John D. Rockefeller, Jr., Rockefeller’s man in the US Senate.
He introduced the Aldrich Bill, which focused on a relatively minor
interbank dispute about whether and on what basis the national banks
could issue special emergency currency. A compromise was finally
hammered out and passed, as the Aldrich-Vreeland Act, in 1908.
But the important
part of the Aldrich-Vreeland Act, which got very little public attention,
but was perceptively hailed by the bank reformers, was the establishment
of a National Monetary Commission that would investigate the currency
question and suggest proposals for comprehensive banking reform.
Two enthusiastic comments on the Monetary Commission were particularly
perceptive and prophetic.
One was that
of Sereno S. Pratt of the Wall Street Journal. Pratt virtually
conceded that the purpose of the commission was to swamp the public
with supposed expertise and thereby “educate” them into supporting
can only be brought about by educating the people up to it,
and such education must necessarily take much time. In no other
way can such education be effected more thoroughly and rapidly
than by means of a commission … [that] would make an international
study of the subject and present an exhaustive report, which
could be made the basis for an intelligent agitation.
of the “study” were of course predetermined, as would be the membership
of the allegedly impartial study commission.
of the commission, as stated by Festus J. Wade, 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” (Livingston
1986, pp. 182–83). Thus the National Monetary Commission was the
apotheosis of the clever commission concept, launched in Indianapolis
a decade earlier.
no time setting up the National Monetary Commission (NMC), which
was launched in June 1908. The official members were an equal number
of Senators and Representatives, but these were mere window dressing.
The real work would be done by the copious staff, appointed and
directed by Aldrich, who told his counterpart in the House, Cleveland
Republican Theodore Burton, “My idea is, of course, that everything
shall be done in the most quiet manner possible, and without any
public announcement.” From the beginning, Aldrich determined that
the NMC would be run as an alliance of Rockefeller, Morgan, and
Kuhn, Loeb people. The two top expert posts advising or joining
the commission were both suggested by Morgan leaders.
On the advice
of J. P. Morgan, seconded by Jacob Schiff, Aldrich picked as his
top adviser the formidable Henry P. Davison, Morgan partner, founder
of Morgan’s Bankers’ Trust Company, and vice president of George
F. Baker’s First National Bank of New York. It would be Davison
who, on the outbreak of World War I, would rush to England to cement
J. P. Morgan and Company’s close ties with the Bank of England,
and to receive an appointment as monopoly underwriter for all British
and French government bonds to be floated in the United States for
the duration of the war.
economic expertise, Aldrich accepted the recommendation of President
Roosevelt’s close friend and fellow Morgan man, Charles Eliot, president
of Harvard University, who urged the appointment of Harvard economist
A. Piatt Andrew. And an ex officio commission member chosen by Aldrich
himself was George M. Reynolds, president of the Rockefeller-oriented
Continental National Bank of Chicago.
The NMC spent
the fall touring Europe and conferring on information and strategy
with heads of large European banks and central banks. As director
of research, A. Piatt Andrew began to organize American banking
experts and to commission reports and studies. The National City
Bank’s foreign exchange department was commissioned to write papers
on bankers’ acceptances and foreign debt, while Warburg and Bankers’
Trust official Fred Kent wrote on the European discount market.
information and advice in Europe in the fall of 1908, the NMC was
ready to go into high gear by the end of the year. In December,
the commission hired the inevitable Charles A. Conant for research,
public relations, and agitprop. Behind the faade of the Congressmen
and Senators on the commission, Senator Aldrich began to form and
expand his inner circle, which soon included Warburg and Vanderlip.
around him a subcircle of friends and acquaintances from the currency
committee of the New York Merchants’ Association, headed by Irving
T. Bush, and from the top ranks of the American Economic Association,
to whom he had delivered an address advocating central banking in
and corresponded frequently with leading academic economists advocating
banking reform, including E. R. A. Seligman; Thomas Nixon Carver
of Harvard; Henry R. Seager of Columbia; Davis R. Dewey, historian
of banking at MIT, long-time secretary-treasurer of the AEA and
brother of the progressive philosopher John Dewey; Oliver M. W.
Sprague, professor of banking at Harvard, of the Morgan-connected
Sprague family; Frank W. Taussig of Harvard; and Irving Fisher of
however, the reformers faced an important problem: they had to bring
such leading bankers as James B. Forgan, head of the Rockefeller-oriented
First National Bank of Chicago, solidly into line in support of
a central bank. It was not that Forgan objected to centralized reserves
or a lender of last resort — quite the contrary. It was rather that
Forgan recognized that, under the National Banking System, large
banks such as his own were already performing quasi-central-banking
functions with their own country-bank depositors; and he didn’t
want his bank deprived of such functions by a new central bank.
The bank reformers
therefore went out of their way to bring such men as Forgan into
enthusiastic support for the new scheme. In his presidential address
to the powerful American Bankers Association in mid-September, 1909,
George M. Reynolds not only came out flatly in favor of a central
bank in America, to be modeled after the German Reichsbank; he also
assured Forgan and others that such a central bank would act as
depository of reserves only for the large national banks in the
central reserve cities, while the national banks would continue
to hold deposits for the country banks.
Forgan held a private conference with Aldrich’s inner circle and
came fully on board for the central bank. As an outgrowth of Forgan’s
concerns, the reformers decided to cloak their new central bank
in a spurious veil of “regionalism” and “decentralism” through establishing
regional reserve centers, which would provide the appearance of
virtually independent regional central banks to cover the reality
of an orthodox, European, central-bank monolith.
As a result,
noted railroad attorney Victor Morawetz made his famous speech in
November 1909, calling for regional banking districts under the
ultimate direction of one central control board. Thus, reserves
and note issue would be supposedly decentralized in the hands of
the regional reserve banks, while they would really be centralized
and coordinated by the central control board. This, of course, was
the scheme eventually adopted in the Federal Reserve System.
14, at the same time as Reynolds’s address to the nation’s bankers,
another significant address took place. President William Howard
Taft, speaking in Boston, suggested that the country seriously consider
establishing a central bank. Taft had been close to the reformers
— especially his Rockefeller-oriented friends Aldrich and Burton
— since 1900. But the business press understood the great significance
of this public address: that it was, as the Wall Street Journal
put it, a crucial step, “towards removing the subject from the realm
of theory to that of practical politics” (quoted in Livingston 1986,
One week later,
a fateful event in American history occurred. The banking reformers
moved to escalate their agitation by creating a virtual government-bank-press
complex to drive through a central bank. On September 22, 1909,
the Wall Street Journal took the lead in this development
by beginning a notable, front-page, 14-part series on “A Central
Bank of Issue.” These were unsigned editorials by the Journal, but
they were actually written by the ubiquitous Charles A. Conant,
from his vantage point as salaried chief propagandist of the US
government’s National Monetary Commission.
was a summary of the reformers’ position, also going out of the
way to assure the Forgans of this world that the new central bank
“would probably deal directly only with the larger national banks,
leaving it for the latter to rediscount for their more remote correspondents”
To the standard
arguments for the central bank: “elasticity” of the money supply,
protecting bank reserves by manipulating the discount rate and the
international flow of gold, and combating crises by bailing out
individual banks, Conant added a Conant twist: the importance of
regulating interest rates and the flow of capital in a world marked
by surplus capital. Government debt would, for Conant, provide the
important function of sopping up surplus capital; that is, providing
profitable outlets for savings by financing government expenditures.
Street Journal series inaugurated a shrewd and successful campaign
by Conant to manipulate the nation’s press and get it behind the
idea of a central bank. Building on his experience in 1898, Conant,
along with Aldrich’s secretary, Arthur B. Shelton, prepared abstracts
of commission materials for the newspapers during February and March
of 1910. Soon Shelton recruited J. P. Gavitt, head of the Washington
bureau of the Associated Press, to scan commission abstracts, articles,
and forthcoming books for “newsy paragraphs” to catch the eye of
organizations proved particularly helpful to the NMC, lending their
cloak of disinterested expertise to the endeavor. In February, Robert
E. Ely, the secretary of the APS, proposed to Aldrich that a special
volume of its Proceedings be devoted to banking and currency
reform, to be published in cooperation with the NMC, in order to
“popularize in the best sense, some of the valuable work of [the]
Commission” (quoted in Livingston 1986, p. 194).
And yet, Ely
had the gall to add that, even though the APS would advertise the
NMC’s arguments and conclusions, it would retain its “objectivity”
by avoiding its own specific policy recommendations. As Ely put
it, “We shall not advocate a central bank, but we shall only give
the best results of your work in condensed form and untechnical
too, weighed in with its own special volume, Banking Problems
(1910), featuring an introduction by A. Piatt Andrew of Harvard
and the NMC, and articles by veteran bank reformers such as Joseph
French Johnson, Horace White, and Morgan Bankers’ Trust official
Fred I. Kent. But most of the articles were from leaders of Rockefeller’s
National City Bank of New York, including George E. Roberts, former
Chicago banker and US Mint official about to join National City.
Paul M. Warburg capped his lengthy campaign for a central bank in
a famous speech to the New York YMCA on March 23, on “A United Reserve
Bank for the United States.” Warburg basically outlined the structure
of his beloved German Reichsbank, but he was careful to begin his
talk by noting a recent poll in the Banking Law Journal that 60
percent of the nation’s bankers favored a central bank provided
it was “not controlled by ‘Wall Street’ or any monopolistic interest.”
To calm this
fear, Warburg insisted that, semantically, the new Reserve Bank
not be called a central bank, and that the Reserve Bank’s governing
board be chosen by government officials, merchants, and bankers
— with bankers, of course, dominating the choices. He also provided
a distinctive Warburg-twist by insisting that the Reserve Bank replace
the hated single-name paper system of commercial credit dominant
in the United States, by the European system whereby a reserve bank
provided a guaranteed and subsidized market for two-named commercial
paper endorsed by acceptance banks. In this way, the United Reserve
Bank would correct the “complete lack of modern bills of exchange
[i.e., acceptances]” in the United States.
that the entire idea of a free and self-regulating market was obsolete,
particularly in the money market. Instead, the action of the market
must be replaced by “the best judgment of the best experts.” And
guess who was slated to be one of the best of those best experts?
cheerleader for the Warburg plan, and the man who introduced Warburg’s
volume on banking reform (1911) was his kinsman and member of the
Seligman investment-banking family, Columbia economist E. R. A.
Seligman (Rothbard 1984, pp. 98–99; Livingston 1986, pp. 194–98).
was the Merchants’ Association of New York with Warburg’s speech
that it distributed 30,000 copies during the spring of 1910. Warburg
had paved the way for this support by regularly meeting with the
currency committee of the Merchants Association since October 1908,
and his efforts were aided by the fact that the resident expert
for the merchants committee was none other than Joseph French Johnson.
At the same
time, in the spring of 1910, the numerous research volumes published
by the NMC poured 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
aid in furthering the common agenda of a central bank.
E. W. Kemmerer’s mammoth statistical study of seasonal variations
in the demand for money. Emphasis was placed on the problem of the
“inelasticity” of the supply of cash, in particular the difficulty
of expanding that supply when needed. While Kemmerer felt precluded
from spelling out the policy implications — establishing a central
bank — in the book, his acknowledgments in the preface to Fred Kent
and the inevitable Charles Conant were a tip-off to the cognoscenti,
and Kemmerer himself disclosed them in his address to the Academy
of Political Science the following November.
Now that the
theoretical and scholarly groundwork had been laid, by the latter
half of 1910 it was time to formulate a concrete practical plan
and put on a mighty putsch on its behalf. In the book on Reform
of the Currency, published by the APS, Warburg made the point
with crystal clarity: “Advance is possible only by outlining a tangible
plan” that would set the terms of the debate from then on (p. 203).
phase of the central-bank movement was launched by the ever-pliant
APS, which held a monetary conference in November 1910, in conjunction
with the New York Chamber of Commerce and the Merchants’ Association
of New York. The members of the NMC were the guests of honor at
this conclave, and delegates were chosen by governors of 22 states,
as well as presidents of 24 chambers of commerce.
were a large number of economists, monetary analysts, and representatives
of most of the top banks in the country. Attendants at the conference
included Frank Vanderlip, Elihu Root, Thomas W. Lamont of the Morgans,
Jacob Schiff, and J. P. Morgan.
sessions of the conference were organized around papers by Kemmerer,
Laughlin, Johnson, Bush, Warburg, and Conant, and the general atmosphere
was that bankers and businessmen were to take their general guidance
from the attendant scholars. As James B. Forgan, the Chicago banker
who was now solidly in the central-banking camp, put it, “Let the
theorists, those who … can study from past history and from present
conditions the effect of what we are doing, lay down principles
for us, and let us help them with the details.”
C. Stuart Patterson
pointed to the great lessons of the Indianapolis Monetary Commission,
and the way in which its proposals triumphed in action because “we
went home and organized an aggressive and active movement.” Patterson
then laid down the marching orders of what this would mean concretely
for the assembled troops: “That is just what you must do in this
case, you must uphold the hands of Senator Aldrich. You have got
to see that the bill which he formulates … obtains the support of
every part of this country” (Livingston 1986, pp. 205–07).
With the New
York monetary conference over, it was now time for Aldrich, surrounded
by a few of the topmost leaders of the financial elite, to go off
in seclusion and hammer out a detailed plan around which all parts
of the central-bank movement could rally. Someone in the Aldrich
inner circle, probably Morgan partner Henry P. Davison, got the
idea of convening a small group of top leaders in a super-secret
conclave to draft the central-bank bill. On November 22, 1910, Senator
Aldrich, with a handful of companions, set forth in a privately
chartered railroad car from Hoboken, New Jersey to the coast of
Georgia, where they sailed to an exclusive retreat, the Jekyll Island
for their meeting were arranged by club member and coowner J. P.
Morgan. The cover story released to the press was that this was
a simple duck-hunting expedition, and the conferees took elaborate
precautions on the trips there and back to preserve their secrecy.
Thus, the attendees addressed each other only by first name, and
the railroad car was kept dark and closed off from reporters or
other travelers on the train. One reporter apparently caught on
to the purpose of the meeting, but was in some way persuaded by
Henry P. Davison to maintain silence.
worked for a solid week at Jekyll Island to hammer out the draft
of the Federal Reserve bill. In addition to Aldrich, the conferees
included Henry P. Davison, Morgan partner; Paul Warburg, whose address
in the spring had greatly impressed Aldrich; Frank A. Vanderlip,
vice president of the National City Bank of New York; and finally,
A. Piatt Andrew, head of the NMC staff, who had recently been made
assistant secretary of the treasury by President Taft.
After a week
of meetings, the six men had forged a plan for a central bank, which
eventually became the Aldrich Bill. Vanderlip acted as secretary
of the meeting and contributed the final writing.
The only substantial
disagreement was tactical, with Aldrich attempting to hold out for
a straightforward central bank on the European model, while Warburg
and the other bankers insisted that the reality of central control
be cloaked in the politically palatable camouflage of “decentralization.”
It is amusing that the bankers were the more politically astute,
while the politician Aldrich wanted to waive political considerations.
Warburg and the bankers won out, and the final draft was basically
the Warburg plan with a decentralized patina taken from Morawetz.
power elite now had themselves a bill. The significance of the composition
of the small meeting must be stressed: two Rockefeller men (Aldrich,
Vanderlip), two Morgans (Davison and Norton), one Kuhn, Loeb person
(Warburg), and one economist friendly to both camps (Andrew) (Rothbard
1984, pp. 99–101; Vanderlip 1935, pp. 210–19).
on some revisions of the Jekyll Island draft with Forgan and George
Reynolds, Aldrich presented the Jekyll Island draft as the Aldrich
Plan to the full NMC in January 1911. But here an unusual event
occurred. Instead of quickly presenting this Aldrich Bill to the
Congress, its drafters waited for a full year, until January 1912.
Why the unprecedented year’s delay?
was that the Democrats swept the Congressional elections in 1910,
and Aldrich, disheartened, decided not to run for reelection to
the Senate the following year. The Democratic triumph meant that
the reformers had to devote a year of intensive agitation to convert
the Democrats, and to intensify propaganda to the rest of banking,
business, and the public. In short, the reformers needed to regroup
and accelerate their agitation.
Final Phase: Coping with the Democratic Ascendancy
The final phase
of the drive for a central bank began in January 1911. At the previous
January’s meeting of the National Board of Trade, Paul Warburg had
put through a resolution setting aside January 18, 1911, as a “monetary
day” devoted to a “Business Men’s Monetary Conference.” This conference,
run by the National Board of Trade, and featuring delegates from
metropolitan mercantile organizations from all over the country,
had C. Stuart Patterson as its chairman.
The New York
Chamber of Commerce, the Merchants’ Association of New York, and
the New York Produce Exchange, each of which had been pushing for
banking reform for the past five years, introduced a joint resolution
to the monetary conference supporting the Aldrich Plan, and proposing
the establishment of a new “business men’s monetary reform league”
to lead the public struggle for a central bank. After a speech in
favor of the plan by A. Piatt Andrew, the entire conference adopted
the resolution. In response, C. Stuart Patterson appointed none
other than Paul M. Warburg to head a committee of seven to establish
the reform league.
of seven shrewdly decided, following the lead of the old Indianapolis
convention, to establish the National Citizens’ League for the Creation
of a Sound Banking System at Chicago rather than in New York, where
the control really resided. The idea was to acquire the bogus patina
of a “grassroots” heartland operation and to convince the public
that the league was free of dreaded Wall Street control. As a result,
the official heads of the League were Chicago businessmen John V.
Farwell and Harry A. Wheeler, president of the US Chamber of Commerce.
The director was University of Chicago monetary economist J. Laurence
Laughlin, assisted by his former student, Professor H. Parker Willis.
with its Midwestern aura, most of the directors of the Citizens’
League were Chicago nonbanker industrialists: men such as B. E.
Sunny of the Chicago Telephone Company, Cyrus McCormick of International
Harvester (both companies in the Morgan ambit), John G. Shedd of
Marshall Field and Company, Frederic A. Delano of the Wabash Railroad
Company (Rockefeller-controlled), and Julius Rosenwald of Sears,
Roebuck. Over a decade later, however, H. Parker Willis frankly
conceded that the Citizens’ League had been a propaganda organ of
the nation’s bankers.
League swung into high gear during the spring and summer of 1911,
issuing a periodical, Banking and Reform, designed to reach
newspaper editors, and subsidizing pamphlets by such proreform experts
as John Perrin, head of the American National Bank of Indianapolis,
and George E. Roberts of the National City Bank of New York.
on the newspaper campaign was H. H. Kohlsaat, former executive committee
member of the Indianapolis Monetary Convention. Laughlin himself
worked on a book on the Aldrich Plan, to be similar to his own Report
of 1898 for the Indianapolis Convention.
a parallel campaign was launched to bring the nation’s bankers into
camp. The first step was to convert the banking elite. For that
purpose, the Aldrich inner circle organized a closed-door conference
of 23 top bankers in Atlantic City in early February, which included
several members of the currency commission of the American Bankers
Association, along with bank presidents from nine leading cities
of the country. After making a few minor revisions, the conference
warmly endorsed the Aldrich Plan.
meeting, Chicago banker James B. Forgan, president of the Rockefeller-dominated
First National Bank of Chicago, emerged as the most effective banker
spokesman for the central-bank movement. Not only was his presentation
of the Aldrich Plan before the executive council of the ABA in May
considered particularly impressive, it was especially effective
coming from someone who had been a leading critic (if on relatively
minor grounds) of the plan. As a result, the top bankers managed
to get the ABA to violate its own bylaws and make Forgan chairman
of its executive council.
At the Atlantic
City conference, James Forgan had succinctly explained the purpose
of the Aldrich Plan and of the conference itself. As Kolko sums
purpose of the conference was to discuss winning the banking
community over to government control directly by the bankers
for their own ends…. It was generally appreciated that the [Aldrich
Plan] would increase the power of the big national banks to
compete with the rapidly growing state banks, help bring the
state banks under control, and strengthen the position of the
national banks in foreign banking activities. (Kolko 1983, p.
1911, it was easy pickings to have the full American Bankers Association
endorse the Aldrich Plan. The nation’s banking community was now
solidly lined up behind the drive for a central bank.
and 1913 were years of some confusion and backing and filling, as
the Republican party split between its insurgents and regulars,
and the Democrats won increasing control over the federal government,
culminating in Woodrow Wilson’s gaining the presidency in the November
1912 elections. The Aldrich Plan, introduced into the Senate by
Theodore Burton in January 1912, died a quick death, but the reformers
saw that what they had to do was to drop the fiercely Republican
partisan name of Aldrich from the bill, and with a few minor adjustments,
rebaptize it as a Democratic measure.
for the reformers, this process of transformation was eased greatly
in early 1912, when H. Parker Willis was appointed administrative
assistant to Carter Glass, the Democrat from Virginia who now headed
the House Banking and Currency Committee. In an accident of history,
Willis had taught economics to the two sons of Carter Glass at Washington
and Lee University, and they recommended him to their father when
the Democrats assumed control of the House.
of the splits and maneuvers in the banking-reform camp during 1912
and 1913, which have long fascinated historians, are fundamentally
trivial to the basic story. They largely revolved around the successful
efforts by Laughlin, Willis, and the Democrats to jettison the name
the bankers had preferred the Federal Reserve Board to be appointed
by the bankers themselves, it was clear to most of the reformers
that this was politically unpalatable. They realized that the same
result of a government-coordinated cartel could be achieved by having
the president and Congress appoint the Board, balanced by the bankers
electing most of the officials of the regional Federal Reserve Banks
and electing an advisory council to the Fed.
would depend on whom the president would appoint to the board. The
reformers did not have to wait long. Control was promptly handed
to Morgan men, led by Benjamin Strong of Bankers’ Trust as all-powerful
head of the Federal Reserve Bank of New York. The reformers had
gotten the point by the end of congressional wrangling over the
Glass bill, and by the time the Federal Reserve Act was passed in
December 1913, the bill enjoyed overwhelming support from the banking
As A. Barton
Hepburn of the Chase National Bank persuasively told the American
Bankers Association at the annual meeting of August 1913: “The measure
recognizes and adopts the principles of a central bank. Indeed …
it will make all incorporated banks together joint owners of a central
dominating power” (Kolko 1983, p. 235). In fact, there was very
little substantive difference between the Aldrich and Glass bills:
the goal of the bank reformers had been triumphantly achieved.
elites of this country, notably the Morgan, Rockefeller, and Kuhn,
Loeb interests, were responsible for putting through the Federal
Reserve System as a governmentally created and sanctioned cartel
device to enable the nation’s banks to inflate the money supply
in a coordinated fashion, without suffering quick retribution from
depositors or noteholders demanding cash.
however, have also highlighted the vital supporting role of the
growing number of technocratic experts and academics, who were happy
to lend the patina of their allegedly scientific expertise to the
elite’s drive for a central bank. To achieve a regime of big government
and government control, power elites cannot achieve their goal of
privilege through statism without the vital legitimizing support
of the supposedly disinterested experts and the professoriate. To
achieve the Leviathan State, interests seeking special privilege
and intellectuals offering scholarship and ideology must work hand
originally appeared in Quarterly Journal of Austrian Economics,
Vol. 2, No. 3 (Fall 1999), pp. 3–51. It is also reprinted in A
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On the National Banking System background and on the increasing
unhappiness of the big banks, see Murray N. Rothbard (1984, pp.
89–94), Ron Paul and Lewis Lehrman (1982), and Gabriel Kolko (1983,
Indeed, much of the political history of the United States from
the late 19th century until World War II may be interpreted by
the closeness of each administration to one of these sometimes
cooperating, more often conflicting, financial groupings: Cleveland
(Morgan), McKinley (Rockefeller), Theodore Roosevelt (Morgan),
Taft (Rockefeller), Wilson (Morgan), Harding (Rockefeller), Coolidge
(Morgan), Hoover (Morgan), or Franklin Roosevelt (Harriman–Kuhn,
For the memorandum, see James Livingston (1986, pp. 104–05).
On Hadley, Jenks, and especially Conant, see Carl P. Parrini and
Martin J. Sklar (1983, pp. 559–78). The authors point out that
Conant’s and Hadley’s major works of 1896 were both published
by G. P. Putnam’s Sons of New York. The President of Putnam’s
was George Haven Putnam, a leader in the new banking reform movement
(ibid., p. 561, n 2).
The final report, including its recommendations for a central
bank, was hailed by F. M. Taylor, in his “The Final Report of
the Indianapolis Monetary Commission,” Journal of Political
Economy 6 (June 1898): 293–322. Taylor also exulted that
the convention had been “one of the most notable movements of
our time — the first thoroughly organized movement of the business
classes in the whole country directed to the bringing about of
a radical change in national legislation” (ibid., p. 322).
Joseph French Johnson (1900, pp. 482–507). Johnson, however, deplored
the one fly in the Bank of England ointment — the remnant of the
hard-money Peel’s Act of 1844 that placed restrictions on the
quantity of bank-note issue (ibid., p. 496).
Nelson W. Aldrich, who entered the Senate a moderately wealthy
wholesale grocer and left years later a multimillionaire, was
the father-in-law of John D. Rockefeller, Jr. His grandson and
namesake, Nelson Aldrich Rockefeller, later became vice president
of the United States, and head of the “corporate liberal” wing
of the Republican party.
Baker was head of the Morgan-dominated First National Bank of
New York, and served as a director of virtually every important
Morgan-run enterprise, including: Chase National Bank, Guaranty
Trust Company, Morton Trust Company, Mutual Life Insurance Company,
AT&T, Consolidated Gas Company of New York, Erie Railroad,
New York Central Railroad, Pullman Company, and United States
Steel. See Burch (1981, pp. 190, 229).
On the meeting, see Livingston (1986, p. 155).
On Gage and Shaw’s manipulations, see Rothbard (1984, pp. 94–96)
and Friedman and Schwartz (1963, pp. 148–56).
Indeed, the adoption of this theory of the alleged necessity for
imperialism in the “later stages” of capitalism went from proimperialists
like the US Investor, Charles A. Conant, and Brooks Adams
in 1898–1899, to the Marxist H. Gaylord Wilshire in 1900–1901,
and in turn to the English left-liberal anti-imperialist John
A. Hobson, who in turn influenced Lenin. See in particular Norman
Etherington (1984; 1982, pp. 1–36).
See also Etherington (1984, p. 24).
Seligman was also related by marriage to the Loebs and to Paul
Warburg of Kuhn, Loeb. Specifically, E. R. A. Seligman’s brother,
Isaac N. was married to Guta Loeb, sister of Paul Warburg’s wife,
Nina. See Stephen Birmingham (1977, appendix).
See the illuminating article by Emily S. Rosenberg (1985, pp.
Also getting their start in administering imperialism in Puerto
Rico were economist and demographer W. H. Willcox of Cornell,
who conducted the first census on the island as well as in Cuba
in 1900, and Roland P. Falkner, statistician and bank reformer
first at the University of Pennsylvania, and then head of the
Division of Documents at the Library of Congress, who became commissioner
of education in Puerto Rico in 1903. Falkner went on to head the
US Commission to Liberia in 1909 and to be a member of the Joint
Land Commission of the US and Chinese governments. Harvard economist
Thomas S. Adams served as assistant treasurer to Hollander in
Puerto Rico. Political scientist William F. Willoughby succeeded
Hollander as treasurer (Silva and Slaughter 1984, pp. 137–38).
See Rosenberg (1985, pp. 177–81). Other economists and social
scientists helping to administer imperialism in the Philippines
were Carl C. Plehn of the University of California, who served
as chief statistician to the Philippine Commission in 1900–1901,
and Bernard Moses, historian, political scientist and economist
at the University of California, an ardent advocate of imperialism
who served on the Philippine Commission from 1901–1903, and then
became an expert in Latin American affairs, joining in a series
of Pan-American conferences.
scientist David P. Barrows became superintendent of schools in
Manila and director of education for eight years, from 1901 to
1909. This experience ignited a lifelong interest in the military
for Barrows, who, while a professor at Berkeley and a general
in the California National Guard in 1934, led the troops that
broke the San Francisco longshoremen’s strike. During World War
II, Barrows carried over his interest in coercion to help in the
forced internment of Japanese Americans in concentration camps.
On Barrows, see Silva and Slaughter (1984, pp. 137–38). On Moses,
see Dorfman (1949, pp. 96–98).
It is certainly possible that one of the reasons for the outbreak
of the nationalist Mexican Revolution of 1910, in part a revolution
against US influence, was a reaction against the US-led currency
manipulation and the coerced shift from silver to gold. Certainly,
research needs to be done into this possibility.
The failure, however, did not diminish the US government’s demand
for Jenks’s services. He went on to advise the Mexican government,
serve as a member of the Nicaraguan High Commission under President
Wilson’s occupation regime, and also headed the Far Eastern Bureau
of the State Department (Silva and Slaughter 1989, pp. 136–37).
For an excellent study of the Kemmerer missions in the 1920s see
Seidel (1972, pp. 520–45).
Schiff and Warburg were related by marriage. Schiff, from a prominent
German banking family, was a son-in-law of Solomon Loeb, cofounder
of Kuhn, Loeb; and Warburg, husband of Nina Loeb, was another
son-in-law of Solomon Loeb’s by a second wife. The incestuous
circle was completed when Schiff’s daughter Frieda married Paul
Warburg’s brother Felix, another partner of Schiff and Paul Warburg’s.
See Birmingham (1977, pp. 21, 209–10, 383, appendix) and Attali
(1986, p. 53).
See the collection of Warburg’s essays in Paul M. Warburg (1930;
1914, pp. 387–612).
When the Federal Reserve System was established, Warburg boasted
of his crucial role in persuading the Fed to create an acceptance
market in the United States by agreeing to purchase all acceptance
paper available from a few large acceptance banks at subsidized
rates. In that way, the Fed provided an unchecked channel for
inflationary credit expansion. The acceptance program helped pave
the way for the 1929 crash.
The emergency currency provision was only used once, shortly before
the provision expired, in 1914, after the establishment of the
Federal Reserve System.
Victor Morawetz was an eminent attorney in the Morgan ambit, who
served as chairman of the executive committee of the Morgan-run
Atchison, Topeka, and Santa Fe Railway, and member of the board
of the Morgan-dominated National Bank of Commerce. In 1908, Morawetz,
along with J. P. Morgan’s personal attorney, Francis Lynde Stetson,
had been the principal drafters of an unsuccessful Morgan-National
Civic Federation bill for a federal incorporation law to regulate
and cartelize American corporations. Later, Morawetz was to be
a top consultant to another “progressive” reform of Woodrow Wilson’s,
the Federal Trade Commission. On Morawetz, see Rothbard (1984,
Willis’s (1923, pp. 149–50) account, however, conveniently overlooks
the dominating operational role that both he and his mentor, Laughlin,
played in the Citizens’ League. See also West (1977, p. 82).
On the essential identity of the two plans, see Friedman and Schwartz
(1963, p. 17), Kolko (1983, p. 235), and Warburg (1930, chaps.
8 and 9). On the minutiae of the various drafts and bills and
the reactions to them, see West (1977, pp. 79–135), Kolko (1983,
pp. 186–89, 217–47), and Livingston (1986, pp. 217–26).
On the capture
of banking control in the new Federal Reserve System by the Morgans
and their allies, and on the Morganesque policies of the Fed during
the 1920s, see Rothbard (1984, pp. 103–36).
N. Rothbard (1926–1995) was the author of Man,
Economy, and State, Conceived
in Liberty, What
Has Government Done to Our Money, For
a New Liberty, The
Case Against the Fed, and many
other books and articles.
He was also the editor – with Lew Rockwell – of
Rothbard-Rockwell Report, and academic vice president
of the Ludwig von Mises Institute.