WEBVTT NOTE 34. The Gold Standard Act of 1900 and After 1 00:00:00.000 --> 00:00:05.000 The Gold Standard Act of 1900 and after 2 00:00:05.000 --> 00:00:14.000 Any reform legislation had to wait until after the elections of 1898, for the gold forces were not yet in control of Congress. 3 00:00:14.000 --> 00:00:20.000 In the autumn, the Executive Committee of the Indianapolis Monetary Convention mobilized its forces, 4 00:00:20.000 --> 00:00:28.000 calling on no less than 97,000 correspondents throughout the country through whom it had distributed the preliminary report. 5 00:00:28.000 --> 00:00:34.620 The Executive Committee urged its constituency to elect a gold standard Congress. 6 00:00:34.620 --> 00:00:39.180 When the gold forces routed the civil rights in November, the results of the election were 7 00:00:39.180 --> 00:00:43.160 hailed by Hanna as eminently satisfactory. 8 00:00:43.160 --> 00:00:48.520 The decks were now cleared for the McKinley administration to submit its bill, and the 9 00:00:48.520 --> 00:00:53.800 Congress that met in December 1899 quickly passed the measure. 10 00:00:53.800 --> 00:00:59.760 Reformers then passed the conference report of the gold standard act in March 1900. 11 00:00:59.760 --> 00:01:02.680 The currency reformers had gotten their way. 12 00:01:02.680 --> 00:01:07.700 It is well known that the gold standard act provided for a single gold standard with no 13 00:01:07.700 --> 00:01:11.680 retention of silver money except as tokens. 14 00:01:11.680 --> 00:01:18.680 Less well known are the clauses that began the march toward a more, quote, elastic currency. 15 00:01:18.680 --> 00:01:26.160 As Lyman Gage had suggested in 1897, national banks, previously confined to large cities, 16 00:01:26.160 --> 00:01:32.500 were now made possible with a small amount of capital in small towns and rural areas. 17 00:01:32.500 --> 00:01:36.880 And it was made far easier for national banks to issue notes. 18 00:01:36.880 --> 00:01:43.560 The object of these clauses, as one historian put it, was to satisfy a quote, increased 19 00:01:43.560 --> 00:01:50.040 demand for money at crop moving time, and to meet popular cries for more money by encouraging 20 00:01:50.040 --> 00:01:56.800 the organization of national banks in comparatively undeveloped regions." 21 00:01:56.800 --> 00:02:01.680 The reformers exalted over the passage of the gold standard act, but took the line that 22 00:02:01.680 --> 00:02:07.480 this was only the first step on the much needed path to fundamental banking reform. 23 00:02:07.480 --> 00:02:13.360 Thus, Professor Frank W. Tosig of Harvard praised the act and greeted the emergence 24 00:02:13.360 --> 00:02:19.280 of a new social and ideological alignment caused by quote, strong pressure from the 25 00:02:19.280 --> 00:02:25.280 business community, end quote, through the Indianapolis Monetary Convention. 26 00:02:25.280 --> 00:02:30.600 He particularly welcomed the fact that the gold standard act quote, treats the national 27 00:02:30.600 --> 00:02:37.120 banks not as grasping and dangerous corporations, but as useful institutions deserving the 28 00:02:37.120 --> 00:02:41.960 and the Fostering Care of the Legislature. 29 00:02:41.960 --> 00:02:46.040 But such tender legislative care was not enough. 30 00:02:46.040 --> 00:02:51.560 Fundamental banking reform was needed, for, Tosig declared, 31 00:02:51.560 --> 00:02:56.920 The changes in banking legislation are not such as to make possible any considerable 32 00:02:56.920 --> 00:03:02.600 expansion of the national system or to enable it to render the community the full service 33 00:03:02.600 --> 00:03:05.960 of which it is capable. 34 00:03:05.960 --> 00:03:10.640 In short, the change is allowed for more and greater expansion of bank credits and the 35 00:03:10.640 --> 00:03:12.360 supply of money. 36 00:03:12.360 --> 00:03:18.780 Therefore, Tosik concluded, quote, It is well nigh certain that eventually Congress will 37 00:03:18.780 --> 00:03:25.840 have to consider once more the further remodeling of the national bank system, end quote. 38 00:03:25.840 --> 00:03:31.560 In fact, the gold standard act of 1900 was only the opening gun of the banking reform 39 00:03:31.560 --> 00:03:33.280 movement. 40 00:03:33.280 --> 00:03:38.720 Three friends and financial journalists, two from Chicago, were to play a large role in 41 00:03:38.720 --> 00:03:41.240 the development of that movement. 42 00:03:41.240 --> 00:03:50.280 Massachusetts-born Charles A. Conant, 1861-1915, a leading historian of banking, wrote A History 43 00:03:50.280 --> 00:03:56.640 of Modern Banks of Issue in 1896, while still a Washington correspondent for the New York 44 00:03:56.640 --> 00:04:01.520 Journal of Commerce and an editor of Bankers Magazine. 45 00:04:01.520 --> 00:04:06.920 After his stint of public relations work and lobbying for the Indianapolis convention, Conant 46 00:04:06.920 --> 00:04:14.260 moved to New York in 1902 to become treasurer of the Morgan-oriented Morton Trust Company. 47 00:04:14.260 --> 00:04:20.880 The two Chicagoans, both friends of Lyman Gage, were, along with Gage, in the Rockefeller 48 00:04:20.880 --> 00:04:22.040 ambit. 49 00:04:22.040 --> 00:04:27.600 Frank A. Vanderlip was picked by Gage as his assistant secretary of the treasury, and when 50 00:04:27.600 --> 00:04:33.600 When Gage left office, Vanderlip came to New York as a top executive at the flagship commercial 51 00:04:33.600 --> 00:04:38.400 bank of the Rockefeller interests, the National City Bank of New York. 52 00:04:38.400 --> 00:04:44.000 Meanwhile, Vanderlip's close friend and mentor at the Chicago Tribune, Joseph French 53 00:04:44.000 --> 00:04:50.220 Johnson, had also moved east to become professor of finance at the Wharton School of the University 54 00:04:50.220 --> 00:04:52.220 of Pennsylvania. 55 00:04:52.220 --> 00:04:58.420 No sooner had the gold standard act been passed when Joseph Johnson sounded the Trump by calling 56 00:04:58.420 --> 00:05:01.200 for more fundamental reform. 57 00:05:01.200 --> 00:05:08.340 Professor Johnson stated flatly that the existing banknote system was weak in not, quote, responding 58 00:05:08.340 --> 00:05:14.380 to the needs of the money market, end quote, that is, not supplying a sufficient amount 59 00:05:14.380 --> 00:05:15.380 of money. 60 00:05:15.380 --> 00:05:21.300 Since the national banking system was incapable of supplying those needs, Johnson opined, 61 00:05:21.300 --> 00:05:24.140 There was no reason to continue it. 62 00:05:24.140 --> 00:05:28.760 Johnson deplored the U.S. banking system as the worst in the world and pointed to the 63 00:05:28.760 --> 00:05:34.140 glorious central banking system as existed in Britain and France. 64 00:05:34.140 --> 00:05:38.380 But no centralized banking system yet existed in the United States. 65 00:05:38.380 --> 00:05:45.320 Quote, In the United States, however, there is no single business institution and no group 66 00:05:45.320 --> 00:05:52.360 group of large institutions, in which self-interest, responsibility, and power naturally unite 67 00:05:52.360 --> 00:06:00.340 and conspire for the protection of the monetary system against twists and strains." 68 00:06:00.340 --> 00:06:05.680 In short, there was far too much freedom and decentralization in the system. 69 00:06:05.680 --> 00:06:12.000 In consequence, our massive deposit credit system, quote, trembles whenever the foundations 70 00:06:12.000 --> 00:06:14.720 are Disturbed." 71 00:06:14.720 --> 00:06:20.240 That is, whenever the chickens of inflationary credit expansion come home to roost in demands 72 00:06:20.240 --> 00:06:22.280 for cash or gold. 73 00:06:22.280 --> 00:06:28.400 The result of the inelasticity of money and of the impossibility of interbank cooperation, 74 00:06:28.400 --> 00:06:34.140 Johnson opined, was that we were in danger of losing gold abroad just at the time when 75 00:06:34.140 --> 00:06:39.260 gold was needed to sustain confidence in the nation's banking system. 76 00:06:39.260 --> 00:06:44.060 After 1900, the banking community was split on the question of reform. 77 00:06:44.060 --> 00:06:49.100 The small and rural bankers preferring the status quo, but the large bankers, headed 78 00:06:49.100 --> 00:06:54.860 by A. Barden Hepburn of Morgan's Chase National Bank, grew up a bill as head of a commission 79 00:06:54.860 --> 00:07:01.320 of the American Bankers Association and presented it in late 1901 to Representative Charles 80 00:07:01.320 --> 00:07:07.780 N. Fowler of New Jersey, chairman of the House Banking and Currency Committee, who had introduced 81 00:07:07.780 --> 00:07:18.020 The Hepburn proposal was reported out of committee in April 1902 as the Fowler Bill. 82 00:07:18.020 --> 00:07:21.700 The Fowler Bill contained three basic clauses. 83 00:07:21.700 --> 00:07:26.700 One allowed the further expansion of national bank notes based on broader assets than government 84 00:07:26.700 --> 00:07:28.060 bonds. 85 00:07:28.060 --> 00:07:34.060 The second, a favorite of the big banks, was to allow national banks to establish branches 86 00:07:34.060 --> 00:07:39.980 at Home and Abroad, a step illegal under the existing system due to fierce opposition by 87 00:07:39.980 --> 00:07:42.740 the small country bankers. 88 00:07:42.740 --> 00:07:47.480 While branch banking is consonant with a free market and provides a sound and efficient 89 00:07:47.480 --> 00:07:52.960 system for calling on other banks for redemption, the big banks had little interest in branch 90 00:07:52.960 --> 00:07:57.660 banking unless accompanied by centralization of the banking system. 91 00:07:57.660 --> 00:08:03.460 Thus, the Fowler Bill proposed to create a three-member Board of Control within the Treasury 92 00:08:03.460 --> 00:08:09.060 Department to supervise the creation of the new bank notes and to establish clearinghouse 93 00:08:09.060 --> 00:08:12.360 associations under its aegis. 94 00:08:12.360 --> 00:08:17.020 This provision was designed to be the first step toward the establishment of a full-fledged 95 00:08:17.020 --> 00:08:18.980 central bank. 96 00:08:18.980 --> 00:08:23.980 Although they could not control the American Bankers Association, the multitude of country 97 00:08:23.980 --> 00:08:30.340 bankers up in arms against the proposed competition of big banks in the form of branch banking 98 00:08:30.340 --> 00:08:35.660 put fierce pressure upon Congress and managed to kill the Fowler Bill in the House during 99 00:08:35.660 --> 00:08:42.740 1902, despite the agitation of the executive committee and staff of the Indianapolis Monetary 100 00:08:42.740 --> 00:08:44.500 Convention. 101 00:08:44.500 --> 00:08:48.900 With the defeat of the Fowler Bill, the big bankers decided to settle for more modest 102 00:08:48.900 --> 00:08:51.300 goals for the time being. 103 00:08:51.300 --> 00:08:56.600 Senator Nelson W. Aldrich of Rhode Island, perennial Republican leader of the U.S. Senate 104 00:08:56.600 --> 00:09:02.000 and Rockefeller's Man in Congress submitted the Aldrich bill the following year, allowing 105 00:09:02.000 --> 00:09:08.920 the large national banks in New York to issue, quote, emergency currency based on municipal 106 00:09:08.920 --> 00:09:11.000 and railroad bonds. 107 00:09:11.000 --> 00:09:13.640 But even this bill was defeated. 108 00:09:13.640 --> 00:09:18.920 Meeting setbacks in Congress, the big bankers decided to regroup and turn temporarily to 109 00:09:18.920 --> 00:09:21.240 the executive branch. 110 00:09:21.240 --> 00:09:26.640 foreshadowing a later, more elaborate collaboration, two powerful representatives, each from the 111 00:09:26.640 --> 00:09:31.520 Morgan and Rockefeller banking interests, met with the Comptroller of the Currency, 112 00:09:31.520 --> 00:09:38.560 William B. Ridgely, in January 1903, to try to persuade him, by administrative fiat, to 113 00:09:38.560 --> 00:09:44.320 restrict the volume of loans made by the country banks in the New York money market. 114 00:09:44.320 --> 00:09:49.560 The two Morgan men at the meeting were J.P. Morgan and George F. Baker, Morgan's closest 115 00:09:49.560 --> 00:10:15.560 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 longtime board member of the National City Bank. 116 00:10:15.560 --> 00:10:32.560 The meeting 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. 117 00:10:32.560 --> 00:10:39.360 The unexpected and sudden shift from McKinley to Roosevelt in the presidency meant more 118 00:10:39.360 --> 00:10:41.840 than just a turnover of personnel. 119 00:10:41.840 --> 00:10:48.560 It meant a fundamental shift from a Rockefeller-dominated to a Morgan-dominated administration. 120 00:10:48.560 --> 00:10:53.960 In the same way, the shift from Gage to Shaw was one of the many Rockefeller to Morgan 121 00:10:53.960 --> 00:10:55.960 displacements. 122 00:10:55.960 --> 00:11:02.160 On monetary and banking matters, however, the Rockefeller and Morgan camps were as one. 123 00:11:02.160 --> 00:11:07.400 Secretary Shaw attempted to continue and expand Gage's experiments in trying to make the 124 00:11:07.400 --> 00:11:14.200 Treasury function like a central bank, particularly in making open market purchases in recessions 125 00:11:14.200 --> 00:11:19.840 and in using Treasury deposits to bolster the banks and expand the money supply. 126 00:11:19.840 --> 00:11:24.800 Shaw violated the statutory institution of the independent Treasury, which had tried 127 00:11:24.800 --> 00:11:29.480 to confine government revenues and expenditures to its own coffers. 128 00:11:29.480 --> 00:11:36.040 Instead, he expanded the practice of depositing treasury funds in favored big national banks. 129 00:11:36.040 --> 00:11:42.240 Indeed, even banking reformers denounced the deposit of treasury funds to pet banks as 130 00:11:42.240 --> 00:11:47.760 artificially lowering interest rates and leading to artificial expansion of credit. 131 00:11:47.760 --> 00:11:52.920 Furthermore, any government deficit would obviously throw a system dependent on a flow 132 00:11:52.920 --> 00:11:56.480 of new government revenues into chaos. 133 00:11:56.480 --> 00:12:02.200 All in all, the reformers agreed increasingly with the verdict of economist Alexander Porves 134 00:12:02.200 --> 00:12:08.920 that quote, the uncertainty as to the secretary's power to control the banks by arbitrary decisions 135 00:12:08.920 --> 00:12:14.160 and orders and the fact that at some future time the country may be unfortunate in its 136 00:12:14.160 --> 00:12:20.980 chief treasury official has led many to doubt the wisdom, end quote, of using the treasury 137 00:12:20.980 --> 00:12:23.580 as a form of central bank. 138 00:12:23.580 --> 00:12:29.860 In his last annual report of 1906, Secretary Shaw urged that he be given total power to 139 00:12:29.860 --> 00:12:35.300 regulate all the nation's banks, but the game was up and by then it was clear to the 140 00:12:35.300 --> 00:12:42.340 reformers that Shaw's, as well as Gage's, proto-central bank manipulations had failed. 141 00:12:42.340 --> 00:12:47.500 It was time to undertake a struggle for a fundamental, legislative overhaul of the American 142 00:12:47.500 --> 00:12:51.820 banking system, to bring it under central banking control.