Chapter Twenty-One: Competition Is A Sin

The story of how the New York investment bankers formed a cartel to avoid competition; the drafting of proposed legislation to legalize that cartel; the strategy to camouflage the true nature of the legislation; the failure of the deception and the defeat of the bill.

We have traveled to many points on a large circle of time and now are reapproaching the journey to Jekyll Island where this book began.

In the last chapter, we saw how the expansion and contraction Of the money supply following the Civil War led to a series of booms and busts. We saw how the firm of J. P. Morgan & Company, with help from financiers in London, was able to reap great profits from both sides of those cycles but particularly from the recessions. At that point, we jumped ahead in time to examine how J. P. Morgan and other leading American financiers were closely aligned with British interests. We also saw how, in the 1920s, the American dollar was deliberately weakened by Morgan agents within the Federal Reserve System in order to prop up the sagging British economy. Let us return now to the point of departure and allow our cast to resume playing out that most important prior scene: the actual creation of the Federal Reserve System itself.

Halfway House To Central Banking

Historians seeking to justify governmental control of the monetary system have claimed that the booms and busts that occurred during this period were the result of free and competitive banking. As we have seen, however, these destructive cycles were the direct result of the creation and then extinguishing of fiat money through a system of federally chartered national banks — dominated by a handful of firms on Wall Street — which constituted a halfway house to central banking. None of these banks were truly free of state control nor were they competitive in the traditional sense of the word. They were in fact subsidized by the government and had many monopolistic privileges. From the perspective of bankers on Wall Street, however, there was a great deal more to be desired. For one thing, America still did not have a lender of last resort, That is banker language for a full-blown central bank with the power to create unlimited amounts of fiat money which can be rushed to the aid of any individual bank that is under siege by its depositors wanting their money back. Having a lender of last resort is the only way a bank can create money out of nothing and still be protected from a potential run by its customers. In other words, it is the means by which the public is forced to pay a hidden tax of inflation to cover the shortfall of fractional-reserve banking. That is why the so-called virtue of a lender of last resort is taught with great reverence today in virtually all academic institutions offering degrees in banking and finance. It is one of the means by which the system perpetuates itself.

The banks could now inflate more radically and more in unison than before the war but, when they pushed too far and too fast, their bank-generated booms still collapsed into recessions. While this could be highly profitable to the banks, it was also precarious. As the American economy expanded in size, the magnitude of the booms and busts increased also, and it was becoming more and more difficult for firms like Morgan & Company to safely ride out the storm. There was a growing dread that the next collapse might be more than even they could handle.

In addition to these concerns was the fact that many state banks, mostly in the developing Southern and Western states, had elected not to join the national banking system and, consequently, had escaped control by the Wall Street-Washington axis. As the population expanded south and westward, much of the nation’s banking moved likewise, and the new banks were becoming an increasing source of competition to the New York power center. By 1896, the number of non-national banks had grown to sixty-one percent, and they already held fifty-four percent of the country’s total banking deposits. By 1913, the year in which the Federal Reserve Act was passed, those numbers had swelled to seventy-one percent non-national banks holding fifty-seven percent of the nation’s deposits. Something had to be done to stop this movement.

Additional competition was developing from the trend in industry to finance itself from profits rather than borrowed capital. Between 1900 and 1910, seventy percent of American corporate growth was funded internally, making industry increasingly independent of the banks. What the bankers wanted — and what many businessmen wanted also — was a more flexible or elastic money supply, which would allow them to create enough of it at any point in time so as to be able to drive interest rates downward at will. That would make loans to businessmen so attractive they would have little choice but to return to the bankers’ stable.

Trusts and Cartels Replace Competition

One more problem facing Wall Street was the fact that the biggest investment houses, such as Morgan & Company and Kuhn, Loeb & Company, although they remained as competitors, were by this time so large they had ceased doing serious battle against each other. The concept of trusts and cartels had dawned in America and, to those who already had made it to the top, joint ventures, market sharing, price fixing, and mergers were far more profitable than free-enterprise competition. Ron Chernow explains:

Wall Street was snowballing into one big, Morgan-dominated institution. In December 1909, Pierpont had bought a majority stake in the Equitable Life Assurance Society from Thomas Fortune Ryan. This gave him strong influence over America’s three biggest insurance companies — Mutual Life, Equitable, and New York Life … His Bankers Trust had taken over three other banks. In 1909, he had gained control of Guaranty Trust, which through a series of mergers he converted into America’s largest trust … The core Money Trust group included J. P. Morgan and Company, First National Bank, and National City Bank …

Wall Street bankers incestuously swapped seats on each other’s boards. Some banks had so many overlapping directors it was hard to separate them … The banks also shared large equity stakes in each other …

Why didn’t banks just merge instead of carrying out the charade of swapping shares and board members? Most were private partnerships or closely held banks and could have done so. The answer harked back to traditional American antipathy against concentrated financial power. The Morgan-First National-National City trio feared public retribution if it openly declared its allegiance.

Interlocking directorates and other forms of hidden control were far more safe than open consolidation but they, too, had their limitations. For one thing, they could not penetrate the barriers of similar competitive groupings. As these combines became larger and larger, ways were sought to bring them together at the top rather than to capture the corporate entities which comprised them. Thus was born the concept of a cartel, a community of interest among businessmen in the same field, a mechanism for coming together as partners at a high level and to reduce or eliminate altogether the harsh necessity of competition.

All cartels, however, have an internal self-destruct mechanism. Sooner or later, one of the members inevitably becomes dissatisfied with his agreed-upon piece of the pie. He decides to compete once again and seeks a greater share of the market. It was quickly recognized that the only way to prevent this from happening was to use the police power of government to enforce the cartel agreement. The procedure called for the passage of laws disguised as measures to protect the consumer but which actually worked to ensure the elimination of competition. Henry P. Davison, who was a Morgan partner, put it bluntly when he told a Congressional committee in 1912: I would rather have regulation and control than free competition. John D. Rockefeller was even more to the point in one of his often repeated comments: Competition is a sin.

This trend was not unique to the banking industry. Ron Paul and Lewis Lehrman provide the historical perspective:

After 1896 and 1900, then, America entered a progressive and predominantly Republican era. Compulsory cartelization in the name of progressivism began to invade every aspect of American economic life. The railroads had begun the parade with the formation of the ICC in the 1880s, but now field after field was being centralized and cartelized in the name of efficiency, stability, progress, and the general welfare … In particular, various big business groups, led by the J. P. Morgan interests, often gathered in the National Civic Federation and other think tanks and pressure organizations, saw that the voluntary cartels and the industrial merger movements of the late 1890s had failed to achieve monopoly prices in industry. Therefore, they decided to turn to governments, state and federal, to curb the winds of competition and to establish forms of compulsory cartels, in the name, of course, of curbing big business monopoly and advancing the general welfare.

The challenge no longer was how to overcome one’s adversaries, but how to keep new ones from entering the field. When John D. used his enormous profits from Standard Oil to take control of the Chase National Bank, and his brother, William, bought the National City Bank of New York, Wall Street had yet one more gladiator in the financial arena. Morgan found that he had no choice except to allow the Rockefellers into the club but, now that they were in, they all agreed that the influx of competitors had to be stopped. And that was to be the hidden purpose of federal legislation and government control. Gabriel Kolko explains:

The sheer magnitude of many of the mergers, culminating in U.S. Steel, soon forced him [Morgan] to modify his stand, though at times he would have preferred total control. More important, by 1898 he could not ignore the massive power of new financial competitors and had to treat them with deference. Standard Oil Company, utilizing National City Bank for its investments, had fixed resources substantially larger than Morgan’s, and by 1899 was ready to move into the general economy … The test came, of course, in the Northern Securities battle, which was essentially an expensive draw. Morgan and Standard paid deference to each other thereafter, and mutual toleration among bankers increased sharply … A benign armed neutrality, rather than positive affection, is as much a reason as any for the high number of interlocks among the five major New York banking houses.

Writing in the year 1919, from the perspective of an inside view of Wall Street at that time, John Moody completes the picture:

This remarkable welding together of great corporate interests could not, of course, have been accomplished if the masters of capital in Wall Street had not themselves during the same period become more closely allied. The rivalry of interests which was so characteristic during the reorganization period a few years before had very largely disappeared. Although the two great groups of financiers, represented on the one hand by Morgan and his allies and on the other by the Standard Oil forces, were still distinguishable, they were now working in practical harmony on the basis of a sort of mutual community of interest of their own. Thus the control of capital and credit through banking resources tended to become concentrated in the hands of fewer and fewer men … Before long it could be said, indeed, that two rival banking groups no longer existed, but that one vast and harmonious banking power had taken their place.

The Aldrich-Vreeland Act

The monetary contractions of 1879 and 1893 were handled by Wall Street fairly easily and without government intervention, but the crisis of 1907 pushed their resources close to the abyss. It became clear that two changes had to be made: all remnants of banking competition now had to be totally eliminated and replaced by a national cartel; and far greater sums of fiat money had to be made available to the banks to protect them from future runs by depositors. There was now no question that Congress would have to be brought in as a partner in order to use the power of government to accomplish these objectives. Kolko continues:

The crisis of 1907, on the other hand, found the combined banking structure of New York inadequate to meet the challenge, and chastened any obstreperous financial powers who thought they might build their fortunes independently of the entire banking community … The nation had grown too large, banking had become too complex. Wall Street, humbled and almost alone, turned from its own resources to the national government.

The first step in this direction was openly a stop-gap measure. In 1908, Congress passed the Aldrich-Vreeland Act which, basically, accomplished two objectives. First, it authorized the national banks to issue an emergency currency, called script, to substitute for regular money when they found themselves unable to pay their depositors. Script had been used by the bank clearing houses during the panic of 1907 with partial success, but it had been a bold experiment with no legal foundation. Now Congress made it quite legal and, as Galbraith observed, The new legislation regularized these arrangements. This could be done against the security of sundry bonds and commercial loans — these could, in effect, be turned into cash without being sold,

The second and perhaps most important feature of the Act was to create a National Monetary Commission to study the problems of American banking and then make recommendations to Congress on how to stabilize the monetary system. The commission consisted of nine senators and nine representatives. The Vice-Chairman was Representative Edward Vreeland, a banker from the Buffalo area. The chairman, of course, was Senator Nelson Aldrich. From the start, it was obvious that the Commission was a sham. Aldrich conducted virtually a one-man show. The so-called fact-finding body held no official meetings for almost two years while Aldrich toured Europe consulting with the top central bankers of England, France, and Germany. Three-hundred thousand tax dollars were spent on these junkets, and the only tangible product of the Commission’s work was thirty-eight massive volumes of the history of European banking. None of the members of the Commission were ever consulted regarding the official recommendations issued by Aldrich in their name. Actually, these were the work of Aldrich and six men who were not even members of the Commission, and their report was drafted, not in a bare Congressional conference room in Washington, but in a plush private hunting resort in Georgia.

And this event finally brings us back to that cold, blustery night at the New Jersey railway station where seven men, representing one-fourth of the wealth of the world, boarded the Aldrich private car for a clandestine journey to Jekyll Island.

The Jekyll Island Plan

As summarized in the opening chapter of this book, the purpose of that meeting was to work out a plan to achieve five primary objectives:

  1. How to stop the growing influence of small, rival banks and to insure that control over the nation’s financial resources would remain in the hands of those present;
  2. How to make the money supply more elastic in order to reverse the trend of private capital formation and to recapture the industrial loan market;
  3. How to pool the meager reserves of all the nation’s banks into one large reserve so that at least a few of them could protect
  4. How to shift the inevitable losses from the owners of the banks to the taxpayers;
  5. How to convince Congress that the scheme was a measure to protect the public.

It was decided that the first two objectives could be achieved simply by drafting the proper technical language into a cartel agreement and then re-working the vocabulary into legislative phraseology. The third and fourth could be achieved by including in that legislation the establishment of a lender of last resort; in other words, a true central bank with the ability to create unlimited amounts of fiat money. These were mostly technical matters and, although there was some disagreement on a few minor points, generally they were content to follow the advice of Paul Warburg, the man who had the most experience in these matters and who was regarded as the group’s theoretician. The fifth objective was the critical one, and there was much discussion on how to achieve it.

To convince Congress and the public that the establishment of a banking cartel was, somehow, a measure to protect the public, the Jekyll Island strategists laid down the following plan of action:

  1. Do not call it a cartel nor even a central bank.
  2. Make it look like a government agency.
  3. Establish regional branches to create the appearance of decentralization, not dominated by Wall Street banks.
  4. Begin with a conservative structure including many sound banking principles knowing that the provisions can be quietly altered or removed in subsequent years.
  5. Use the anger caused by recent panics and bank failures to create popular demand for monetary reform.
  6. Offer the Jekyll Island plan as though it were in response to that need.
  7. Employ university professors to give the plan the appearance of academic approval.
  8. Speak out against the plan to convince the public that Wall Street bankers do not want it.

A Central Bank by Any Other Name

Americans would never have accepted the Federal Reserve System if they had known that it was half cartel and half central bank. Even though the concept of government protectionism was rapidly gaining acceptance in business, academic, and political circles, the idea of cartels, trusts, and restraint of free competition was still quite alien to the average voter. And within the halls of Congress, any forthright proposal for either a cartel or a central bank would have been soundly defeated. Congressman Everis Hayes of California warned: Our people have set their faces like steel against a central bank, Senator John Shafroth of Colorado declared: The Democratic Party is opposed to a central bank. The monetary scientists on Jekyll Island decided, therefore, to devise a name for their new creature which would avoid the word bank altogether and which would conjure the image of the federal government itself. And to create the deception that there would be no concentration of power in the large New York banks, the original plan calling for a central bank was replaced by a proposal for a network of regional institutions, which supposedly would share and diffuse that power.

Nathaniel Wright Stephenson, Senator Aldrich’s biographer, tells us: Aldrich entered the discussion at Jekyll Island an ardent convert to the idea of a central bank. His desire was to transplant the system of one of the great European banks, say the Bank of England, bodily to America. Galbraith explains further: It was his [Senator Aldrich’s] thought to outflank the opposition by having not one central bank but many. And the word bank would itself be avoided.

Frank Vanderlip tells us the regional concept was merely window dressing and that the network was always intended to operate as one central bank. He said: The law as enacted provided for twelve banks instead of one, … but the intent of the law was to coordinate the twelve through the Federal Reserve Board in Washington, so that in effect they would operate as a central bank.

If not using the word bank was essential to the Jekyll Island plan, avoiding the word cartel was even more so. Yet, the cartel nature of the proposed central bank was obvious to any astute observer. In an address before the American Bankers Association, Aldrich laid it out plainly. He said: The organization proposed is not a bank, but a cooperative union of all the banks of the country for definite purposes. Two years later, in a speech before that same group of bankers, A. Barton Hepburn of Chase National Bank was even more candid. He said: The measure recognizes and adopts the principles of a central bank. Indeed, if it works out as the sponsors of the law hope, it will make all incorporated banks together joint owners of a central dominating power, It would be difficult to find a better definition of the word cartel than that.

The plan to structure the Creature conservatively at the start and then to remove the safeguards later was the brainchild of Paul Warburg. The creation of a powerful Federal Reserve Board was also his idea as a means by which the regional branches could be absorbed into a central bank with control safely in New York. Professor Edwin Seligman, a member of the international banking family of J&W Seligman, and head of the Department of Economics at Columbia University, explains and praises the plan:

It was in my study that Mr. Warburg first conceived the idea of presenting his views to the public. … In its fundamental features, the Federal Reserve Act is the work of Mr. Warburg more than any other man in the country … The existence of a Federal Reserve Board creates, in everything but in name, a real central bank … Mr. Warburg had a practical object in view … It was incumbent on him to remember that the education of the country must be gradual and that a large part of the task was to break down prejudices and remove suspicion. His plans, therefore, contain all sorts of elaborate suggestions designed to guard the public against fancied dangers and to persuade the country that the general scheme was at all practicable. It was the hope of Mr. Warburg that with the lapse of time it may be possible to eliminate from the law not a few clauses which were inserted largely, at his suggestion, for educational purposes.

The Aldrich Bill

The first draft of the Jekyll Island plan was submitted to the Senate by Nelson Aldrich but, due to the Senator’s unexpected illness when he returned to Washington, it was actually written by Frank Vanderlip and Benjamin Strong. Although it was co-authored by Congressman Vreeland, it immediately became known as the Aldrich Bill. Vreeland, by his own admission, had little to do with it either, but his willingness to be a team player in the game of national deception was of great value. Writing in the August 25, 1910, issue of The Independent, which incidentally was owned by Aldrich himself and was anything but independent, Vreeland said: The bank I propose … is an ideal method of fighting monopoly. It could not possibly itself become a monopoly and it would prevent other banks combining into monopolies. With earnings limited to four and one-half percent, there could not be a monopoly.

What an amazing statement. It is brilliantly insidious because of the half-truths it contains. It is true that monopolies cannot — or at least do not-operate at four and one-half percent interest. But it is untrue that the Federal Reserve banks were to be held to that lowly rate. It is true that four percent was the stated amount they would earn on the stock purchased in the System, but it is also true that the real profits were to be made, not from stock dividends, but from the harvesting of interest payments on fiat money. To this was to be added the profits made possible from operating on smaller safety margins yet still being protected from bankruptcy. Furthermore, being on the inside of the nation’s central bank would make Jhem privy to the important money-making data and decisions long before their competitors. The profits that could be derived from such an advantage would be equal to or even greater than those from the Mandrake Mechanism. It is true that the Federal Reserve was to be a private institution, but it is certainly not true that this was to mark the disappearance of the government from the banking business. In fact, it was just the opposite, because it marked the appearance of the government as a partner with private bankers and as the enforcer of their cartel agreement. Government would now become more deeply involved than ever before in our history.

Half-truths and propaganda notwithstanding, the organizational structure proposed by the Aldrich Bill was similar in many ways to the old Bank of the United States. It was to have the right to convert federal debt into money, to loan that money to the government, to control the affairs of regional banks, and to be the depository of government funds. The dissimilarities were in those provisions which gave the Creature more privilege and power than the older central bank. The most important of these was the right to create the official money of the United States. For the first time in our history, the paper notes of a banking institution became legal tender, not only for public debts but for private ones as well. Henceforth, anyone refusing to accept these notes would be sent to prison. The words The United States of America were to appear on the face of every note along with the great seal of the United States Treasury. And, of course, the signature of the Treasurer himself would be printed in a conspicuous location. All of this was designed to convince the public that the new institution was surely an agency of the government itself.

Turning the Opposition Against Itself

Now that the basic strategy was in place and a specific bill had been drafted, the next step was to create popular support for it. This was the critical part of the plan and it required the utmost finesse. The task actually was made easier by the fact that there was a great deal of genuine opposition to the concentration of financial power on Wall Street. Two of the most outspoken critics at that time were Wisconsin Senator Robert LaFollette and Minnesota Congressman Charles Lindbergh. Hardly a week passed without one of them delivering a scathing speech against what they called the money trust which was responsible, they said, for deliberately creating economic booms and busts in order to reap the profits of salvaging foreclosed homes, farms, and businesses. If anyone doubted that such a trust really existed, their skepticism was abruptly terminated when LaFollette publicly charged that the entire country was controlled by just fifty men. The monetary scientists were not dismayed nor did they even bother to deny it. In fact, when George F. Baker, who was a partner of J. P. Morgan, was asked by reporters for his reaction to LaFollette’s claim, he replied that it was totally absurd. He knew from personal knowledge, he said, that the number was not more than eight!

The public was, of course, outraged, and the pressure predictably mounted for Congress to do something. The monetary scientists were fully prepared to turn this reaction to their own advantage. The strategy was simple: (1) set up a special Congressional committee to investigate the money trust; (2) make sure the committee is staffed by friends of the trust itself; and (3) conceal the full scope of the trust’s operation while revealing just enough to intensify the public clamor for reform. Once the political climate was hot enough, then the Aldrich Bill could be put forward, supposedly as the answer to that need.

This strategy was certainly not new. As Congressman Lindbergh explained:

Ever since the Civil War, Congress has allowed the bankers to completely control financial legislation. The membership of the Finance Committee in the Senate and the Committee on Banking and Currency in the House has been made up of bankers, their agents, and attorneys. These committees have controlled the nature of the bills to be reported, the extent of them, and the debates that were to be held on them when they were being considered in the Senate and the House. No one, not on the committee, is recognized … unless someone favorable to the committee has been arranged for.

The Pujo Committee

The Pujo Committee was a perfect example of this kind of chicanery. It was a subcommittee of the House Committee on Banking and Currency and it was given the awesome responsibility of conducting the famous Money Trust investigation of 1912. Its chairman was Arsene Pujo of Louisiana who, true to form, was regarded by many as a spokesman for the Oil Trust The hearings dragged on for eight months producing volumes of dry statistics and self-serving testimony of the great Wall Street bankers themselves. At no time were the financiers asked any questions about their affairs with foreign investment houses. Nor were they asked about their response to competition from new banks. There were no questions about their plan to protect the speculative banks from currency drains; or their motive for wanting artificially low interest rates; or their formula for passing on their losses to the taxpayer. The public was given the impression that Congress was really prying off the lid of scandal and corruption, but the reality was more like a fireside chat between old friends. No matter what vagaries or absurdities fell from the bankers’ lips, it was accepted without contest.

These hearings were conducted largely as a result of the public accusations made by Congressmen Lindbergh and Senator LaFollette. Yet, when they requested to appear before the Committee, both of them were denied access. The only witnesses to testify were the bankers themselves and their friends. Kolko tells us:

Fortunately for the reformers, the Pujo Committee swung into high gear in its investigation of the Money Trust during the summer of 1912 and for eight months frightened the nation with its awesome, if inconclusive, statistics on the power of Wall Street over the nation’s economy … Five banking firms, the elaborate tables of the committee showed, held 341 directorships in 112 corporations with an aggregate capitalization of over $22 billion. The evidence seemed conclusive, and the nation was suitably frightened into realizing that reform of the banking system was urgent — presumably to bring Wall Street under control …

The orgy of Wall Street was resurrected by the newspapers, who quite ignored the fact that the biggest advocates of banking reform were the bankers themselves, bankers with a somewhat different view of the problem … Yet it was largely the Pujo hearings that made the topic of banking reform a serious one.

Kolko has touched upon an interesting point. Almost no one put any significance to the fact that some of the biggest bankers on Wall Street were the first marchers to lead the parade for banking reform. The most conspicuous among these was Paul Warburg of Kuhn, Loeb & Company who, for seven years prior to passage of the Federal Reserve Act, traveled around the country doing nothing but giving reform speeches and writing scholarly articles for the media, including an eleven-part series for The New York Times. Spokesmen from the houses of Morgan and Rockefeller joined in and made regular appearances before professional and political bodies echoing the call for reform. Yet no one paid any attention to the unmistakable odor of fish.

Enlisting the Help of Academia

The speeches and articles by big-name bankers were never intended to sway the public at large. They served the function of putting forth the basic arguments and the technical details which were to be the starting point for the work of others who could not be accused of having self-serving motives. To carry the message to the voters, it was decided that representatives from the world of academia should be enlisted to provide the necessary aura of respectability and intellectual objectivity. For that purpose, the banks contributed a sum of $5 million to a special educational fund, and much of that money found its way into the environs of three universities: Princeton, Harvard, and the University of Chicago, all of which had been recipients of large endowments from the captains of industry and finance.

1 It was precisely at this time that the study of economics was becoming a new and acceptable field, and it was not difficult to find talented but slightly hungry professors who, in return for a grant or a prestigious appointment, were eager to expound the virtues of the Jekyll Island plan. Not only was such academic pursuit financially rewarding, it also provided national recognition for them as pioneers in the new field of economics. Galbraith says:

Under Aldrich’s direction a score or more of studies of monetary institutions in the United States and, more particularly, in other countries were commissioned from the emergent economics profession. It is at least possible that the reverence in which the Federal Reserve System has since been held by economists owes something to the circumstance that so many who pioneered in the profession participated also in its [the System’s] birth.

The principal accomplishment of the bank’s educational fund Was to create an organization called the National Citizens’ League. Although it was entirely financed and controlled by the banks under the personal guidance of Paul Warburg, it presented itself merely as a group of concerned citizens seeking banking reform. The function of the organization was to disseminate hundreds of thousands of educational pamphlets, to organize letter-writing campaigns to Congressmen, to supply quotable material to the news media, and in other ways to create the illusion of grass-roots support for the Jekyll Island plan.

Nathaniel Stephenson, in his biography of Nelson Aldrich, says: The league was non-partisan. It was careful to abstain from emphasizing Senator Aldrich … First and last, hundreds of thousands of dollars were spent by the league in popularizing financial science.

The man chosen to head up that effort was an economics professor by the name of J. Laurence Laughlin. Kolko says that Laughlin, nominally very orthodox in his commitment to laissez-faire theory, was nevertheless a leading academic advocate of banking regulation … and was sensitive to the needs of banking as well as the realities of politics. Did his appointment bring intellectual objectivity to the new organization? Stephenson answers: Professor Laughlin of the University of Chicago was given charge of the League’s propaganda. To which Congressman Lindbergh adds this reminder: The reader knows that the University of Chicago is an institution endowed by John D. Rockefeller with nearly fifty million dollars. It may truly be said to be the Rockefeller University.

This does not necessarily mean that Laughlin was purchased like so many pounds of hamburger and told by Rockefeller what to say and do. It doesn’t work that way. The professor undoubtedly believed in the virtue of the Jekyll Island plan, and the evidence is that he pursued his assignment with enthusiastic sincerity. But there is no doubt that he was selected for his new post precisely because he did support the concept of a partnership between banking and government as a healthy substitute for destructive competition. In other words, if he didn’t honestly agree with John D. that competition was a sin, he probably never even would have been given a professorship in the first place.

Woodrow Wilson was yet another academic who was brought into the national spotlight as a result of his views on banking reform. It will be recalled from a previous chapter that Wilson’s name had been put into nomination for President at the Democratic national convention largely due to the influence of Col. Edward Mandell House. But that was 1912. Ten years prior to that, he was relatively unknown. In 1902 he had been elected as the president of Princeton University, a position he could not have held without the concurrence of the University’s benefactors among Wall Street bankers. He was particularly close with Andrew Carnegie and had become a trustee of the Carnegie Foundation.

Two of the most generous donors were Cleveland H. Dodge and Cyrus McCormick, directors of Rockefeller’s National City Bank. They were part of that Wall Street elite which the Pujo Committee had described as America’s Money Trust Both men had been Wilson’s classmates at Princeton University. When Wilson returned to Princeton as a professor in 1890, Dodge and McCormick were, by reason of their wealth, University trustees, and they took it upon themselves to personally advance his career’ Ferdinand Lundberg, in America’s Sixty Families, says this:

For nearly twenty years before his nomination Woodrow Wilson had moved in the shadow of Wall Street … In 1898 Wilson, his salary unsatisfactory, besieged with offers of many university presidencies threatened to resign. Dodge and McCormick thereupon constituted themselves his financial guardians and agreed to raise the additional informal stipendium that kept him at Princeton. The contributors to this private fund were Dodge, McCormick, and Moses Taylor Pyne and Percy R. Pyne, of the family that founded the National City Bank In 1902 this same group arranged Wilson’s election as president of the university.

A grateful Wilson often had spoken in glowing terms about the rise of vast corporations and had praised J. P. Morgan as a great American leader. He also had come to acceptable conclusions about the value of a controlled economy. The old time of individual competition is probably gone by, he said. It may come back; I don’t know; it will not come back within our time, I dare say.

H.S. Kenan tells us the rest of the story:

Woodrow Wilson, President of Princeton University, was the first prominent educator to speak in favor of the Aldrich Plan a gesture, which immediately brought him the Governorship of New Jersey and later the Presidency of the United States. During the panic of 1907, Wilson declared that: all this trouble could be averted if we appointed a committee of six or seven public-spirited men like J. P. Morgan to handle the affairs of our country.

Opposition to the Aldrich Bill

One of the disagreements at the Jekyll Island meeting was over the name to be attached to the proposed legislation. Warburg, being the master psychologist he was, wanted it to be called the National Reserve Bill or the Federal Reserve Bill, something which would conjure up the dual images of government and reserves, both of which were calculated to be subconsciously appealing. Aldrich, on the other hand, acting out of personal ego, insisted that his name be attached to the bill. Warburg pointed out that the Aldrich name was associated in the minds of the public with Wall Street interests, and that would be an unnecessary obstacle to achieving their goal. Aldrich said that, since he had been the chairman of the National Monetary Commission which was created specifically to make recommendations for banking reform, people would be confused if his name were not associated with the bill The debate, we are told, was long and heated. But, in the end, the politician’s ego won out over the banker’s logic.

Warburg, of course, was right. Aldrich was well known as a Republican spokesman for big business and banking His loyal >es were further publicized by recently sponsored tariff bills to protect the tobacco and rubber trusts. The Aldrich name on a bill for banking reform was an easy target for the opposition. On December 15, 1911, Congressman Lindbergh rose before the House of Representatives and took careful aim:

The Aldrich Plan is the Wall Street Plan. It is a broad challenge to the government by the champion of the money trust. It means another panic, if necessary, to intimidate the people. Aldrich, paid by the government to represent the people, proposes a plan for the trust instead.

The Aldrich Bill never came to a vote. When the Republicans lost control of the House in 1910 and then lost the Senate and the Presidency in 1912, any hope there may have been of putting through a Republican bill was lost. Aldrich had been voted out of the Senate by his constituents, and the ball was now squarely in the court of the Democrats and their new president, Woodrow Wilson.

How this came to pass is an interesting lesson on reality politics, and we shall turn to that part of the story next.


Banking in the period immediately prior to passage of the Federal Reserve Act was subject to a myriad of controls, regulations, subsidies, and privileges at both the federal and state levels. Popular history portrays this period as one of unbridled competition and free banking. It was, in fact, a halfway house to central banking. Wall Street, however, wanted more government participation. The New York bankers particularly wanted a lender of last resort to create unlimited amounts of fiat money for their use in the event they were exposed to bank runs or currency drains. They also wanted to force all banks to follow the same inadequate reserve policies so that more cautious ones would not draw down the reserves of the others. An additional objective was to limit the growth of new banks in the South and West.

This was a time of growing enchantment with the idea of trusts and cartels. For those who had already made it to the top, competition was considered chaotic and wasteful. Wall Street was snowballing into two major banking groups: the Morgans and the Rockefellers, and even they had largely ceased competing with each other in favor of cooperative financial structures. But to keep these cartel combines from flying apart, a means of discipline was needed to force the participants to abide by the agreements. The federal government was brought in as a partner to serve that function.

To sell the plan to Congress, the cartel reality had to be hidden and the name central bank had to be avoided. The word Federal ‘was chosen to make it sound like it was a government operation; the word Reserve was chosen to make it appear financially sound; fend the word System (the first drafts used the word Association) was chosen to conceal the fact that it was a central bank. A structure of 12 regional institutions was conceived as a further ploy to create the illusion of decentralization, but the mechanism was designed from the beginning to operate as a central bank closely modeled after the Bank of England.

The first draft of the Federal Reserve Act was called the Aldrich Bill and was co-sponsored by Congressman Vreeland, but it was not the work of either of these politicians. It was the brainchild of banker Paul Warburg and was actually written by bankers Frank Vanderlip and Benjamin Strong.

Aldrich’s name attached to a banking bill was bad strategy because he was known as a Wall Street Senator. His bill was not politically acceptable and was never released from committee. The groundwork had been done, however, and the time had arrived to change labels and political parties. The measure would now undergo minor cosmetic surgery and reappear under the sponsorship of a politician whose name would be associated in the public mind with anti-Wall Street sentiments.