History Book Club
Wednesday, February 24, 2016
History of Money and Banking in America
Signing of the Federal Reserve Act by Pres. Wilson, 1913
Roger Lowenstein, America’s Bank: The Epic Struggle to Create the Federal Reserve. New York: Penguin. 2015.
This is about the election of 1912. It was a fascinating time in our history. Among the candidates was a rich New Yorker who talked loud and was a bit of a bully.
There was a Socialist running against him, running at a time even before the Russian Revolution of 1917 had happened.
There was also a Republican, named Taft, and a Democrat, named Wilson. The rich New Yorker was a former President, Theodore Roosevelt, trying to come back for another term, and the Socialist was Eugene V. Debs.
As it turned out, the Democrat won the election.
In the first years of the Twentieth century the words “Central Bank” aroused much opposition. Ever since Andrew Jackson had vetoed the Bank of the United States in 1832, Americans had been bitterly opposed to any idea of a central bank.
After the Civil War, our banking system began to expand quickly. But it had a built-in vulnerability, in that there was little interoperability among banks. We were mostly an agrarian economy, and much of what many banks did was to lend money to farmers so they could buy seeds and equipment in the winter, and then, in the fall, when they sold their crops, pay off their loans and deposit – hopefully—their profits.
Paul Warburg (1868-1932) His “Defects and Needs of our Banking System” appeared in the New York Times Jan. 6, 1907.
Paul Warburg was a banker from a prominent German Jewish banking family in Hamburg. He and his wife, daughter of another prominent German Jewish banking family, moved to America in 1902. He began work in the bank established by his father-in-law, and soon was amazed to see the immaturity of America’s banking system. “It was like every home having a bucket to fight fires, but no central fire station.” German banking worked with military precision, but he saw American banking still at the level of the Medicis of Florence in the 15th Century.
When he mentioned this to Americans they reacted sharply. They were so mistrustful of overreaching government that they could not tolerate the idea of a central bank. Much as the label “socialism”, “central bank” was un-American. Period.
Author Lowenstein sets the stage for the creation of the Federal Reserve by introducing the key players. Paul Warburg was of course one.
Sen. Nelson Aldrich (R-RI) (1841-1915)
This story takes on a local flavor at this point, because Senator Nelson Aldrich (R-RI) entered the picture, predisposed to reject any idea of a “central bank”. However, as he neared the peak of his career he wanted to create a legacy, and the banking system needed a major improvement.
He contacted J. Pierpont Morgan, then one of the most powerful men in American finance. Morgan recommended a young Harvard professor of economics, A. Piatt Andrew, Jr. to assist Aldrich in studying the American banking system and developing a major improvement. Andrew lived in Gloucester, in an estate on Eastern Point known as “Red Roof”.
Senator Aldrich, with the help of Warburg and others, put together a bill to create a Federal Reserve System, with much collaboration and opposition from the banking system, Wall Street, and Congressmen and Senators from all over the country. After the Panic of 1907, it was clear that our banks were not providing the elasticity needed to weather a fiscal crisis.
Aldrich, a Republican from Rhode Island, had been a staunch defender of the monetary doctrine of Andrew Jackson, who created the national abhorrence of any idea of a central bank. However, as Aldrich’s career was coming to a close, he saw the need to create a system to provide the country with a flexible source for currency in good times and bad, and the expand access of Americans to credit.
There was plenty of appetite for something like a Federal Reserve System, but everyone had their own ideas about it.
In the meantime, the Republican administration of Howard Taft drew to a close, and Woodrow Wilson, former Governor of New Jersey and former President of Princeton University, and a Democrat, became President.
Wilson, as he was running for office, and then, having been elected President, had many chances to be exposed to the vital importance of making significant changes to America’s banking system, and now it was time. Congressman Carter Glass, (D.VA) became the point man for this, and he began to create legislation to create a Federal Reserve System.
Cong. Carter Glass (D-VA) (1858-1946)
Paul Warburg kept himself very close to this process, but he demonstrated his typically German attitude toward banking, and his fellow citizens of America.
Glass worked with Senator Robert L. Owen (D-OK) (1856-1947) to craft a bill for making its way through both houses of Congress.
There was much opposition to the bill from Wall Street, the banking industry, and senators and congressmen from the Midwest, who saw the whole thing as another way for the slick Wall Street crowd to skin them. The whole idea of the Federal Reserve was to provide credit for businesses, to stabilize the dollar, to provide individual banks with liquidity when they needed it, and to allow more money to stay in circulation, rather than locked up in a vault.
There was much fighting about the various ideas of a Central bank, alone, or a system of banks across the country. The prevailing idea was to have a bank in reach of member banks by an overnight train trip.
President Wilson, with a large majority in Congress, pressed and cajoled and produced this landmark monetary legislation. He kept congress from leaving for their Christmas vacations in 1913—held them in their seats until they passed the Glass-Owens Federal Reserve Act of Dec. 23, 1913. It took Glass, Owens and Wilson just one year to do this, and observers were amazed. Here the Democratic party, steeped in anti-banking stereotypes and the fierce defender of the legacy of Andrew Jackson, had done this.
The law created a Federal Reserve System with 12 regional banks. While it was still taking shape in 1914, war broke out in Europe, and there was a tremendous demand for American credit, and American banks and Wall Street were called upon to support the war as only a mature banking system could. Treasury Secretary William McAdoo distinguished himself by his leadership. He closed Wall Street trading at the end of July 1914 and kept it closed for four months to prevent the tremendous drain of European creditors to convert American debt to gold. This marked the emergence of the United States as a world economic leader.
The Federal Reserve System has been modified over the years, but it has proven itself as a tremendous asset to the financial health of the nation.
Future History Book Club Topics
Here is a list of topics for 2016. Feel free to comment on these topics, and to suggest additional or substitute topics.
Wednesday, March 30, 2016: “The End of the World” –History of Doomsday Forecasts. Arrival of the Antichrist, Swedenborg and the Last Judgment, the Millerites of 1844, the End Times, Marshall Applewhite and the Heaven’s Gate Cult, Armageddon, more.
Wednesday, April 27, 2016: History of Journalism and the Media. Benjamin Franklin, Horace Greeley, Yellow Press, “Acta Diurna” in Ancient Rome; “Notizie Scritta in Venice; The Manchester Guardian; Jonathan Swift; more.
Wednesday, May 25, 2016: Modern Life in the Middle East and the Islamic State. Iraq from its formation after WWI, Syria, the Caliphate, Origins of conflict, Sunni vs. Shii vs. Kurds vs. Alewhites Vs. Wahabi vs. ? Modern technology with Seventh-century ideas, Impact of USSR and U.S. in Afghanistan, U.S. combat in Iraq; Arab Spring; Turkey and Islam, Jordan, The Gulf States, Egypt, much more.
Wednesday, June 29, 2016: Africa since 1900. Colonization by Belgium, France, Britain, Germany and Portugal; End of Colonialism; Democracy and Dictatorship; Rwanda; Jomo Kenyatta; Apartheid and South Africa; Congo; Angola; more…
Wednesday, July 27, 2016: American Foreign Policy from the Barbara Pirates to today. Civil War alliances by both Union and Confederacy; Gunboat Diplomacy; Spanish-American War; “He Kept Us out of War!”; Britain and the U.S. in WWII; The Cold War; more.
Wednesday, August, 31, 2016: Germs and Plagues: A history of epidemics in the world. Plague of Athens (429 BC), Plague of Justinian (541 AD), “Black Death” in 1346, Cocoliztli Epidemic in Mexico (1528), Wampanoag Smallpox in 1616, 1918 Flu Pandemic, more.
Wednesday, September 28, 2016: Scaremongering and Witch Hunts in America. Salem Witch Trials, House Un-American Activities Committee; McCarthy Investigations; more.
Wednesday, October 26, 2016: Political Parties in America. Whigs, Know-Nothings, Federalists, Copperheads; Communists, Socialists, Republicans, Democrats, more.
Wednesday, November 30, 2016: Colonization in America. Jamestown, Plymouth, Gloucester, St. Augustine, Junipero Serra, Roger Williams, Quebec, Nieuw Amsterdam, more.
December: No Meeting