WEBVTT NOTE 37. Jacob Schiff Ignites the Drive for a Central Bank 1 00:00:00.000 --> 00:00:04.000 Jacob Schiff ignites the drive for a central bank. 2 00:00:04.000 --> 00:00:28.000 The defeat of the Fowler Bill for a broader asset currency and branch banking in 1902, coupled with the failure of Treasury Secretary Shaw's attempts of 1903 to 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. 3 00:00:28.000 --> 00:00:42.000 The campaign 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, Leb and Company, before the New York Chamber of Commerce. 4 00:00:42.000 --> 00:00:56.000 Schiff complained that, in the autumn of 1905, when, quote, the country needed money, the Treasury, instead of working to expand the money supply, reduced government deposits in the national banks, 5 00:00:56.000 --> 00:01:08.000 Thereby precipitating a financial crisis, a, quote, disgrace, in which the New York Clearinghouse Banks had been forced to contract their loans drastically, sending interest rates sky high. 6 00:01:08.000 --> 00:01:22.000 A, quote, 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. 7 00:01:22.000 --> 00:01:27.520 A colleague who had already been agitating for a central bank behind the scenes was Schiff's 8 00:01:27.520 --> 00:01:34.560 partner, Paul Moritz Warburg, who had suggested the plan to Schiff as early as 1903. 9 00:01:34.560 --> 00:01:37.960 Warburg had immigrated from the German investment firm of M.M. 10 00:01:37.960 --> 00:01:44.640 Warburg & Company in 1897, and before long his major function at Kuhn-Lebb was to agitate 11 00:01:44.640 --> 00:01:49.360 to bring the blessings of European central banking to the United States. 12 00:01:49.360 --> 00:01:53.020 It took less than a month for the Finance Committee of the New York Chamber to issue 13 00:01:53.020 --> 00:01:59.420 its report, but the bank reformers were furious, denouncing it as remarkably ignorant. 14 00:01:59.420 --> 00:02:04.000 When Frank A. Vanderlip of Rockefeller's flagship bank, the National City Bank of New 15 00:02:04.000 --> 00:02:10.560 York, reported on this development, his boss, James Stillman, suggested that a new five-man 16 00:02:10.560 --> 00:02:15.920 special commission be set up by the New York Chamber to come back with a plan for currency 17 00:02:15.920 --> 00:02:16.920 reform. 18 00:02:16.920 --> 00:02:24.280 In response, Vanderlip proposed that the five-man commission consist of himself, Schiff, JPMorgan, 19 00:02:24.280 --> 00:02:30.120 George Baker of the First National Bank of New York, Morgan's closest and longest associate, 20 00:02:30.120 --> 00:02:35.520 and former Secretary of the Treasury Lyman Gage, now president of the Rockefeller-controlled 21 00:02:35.520 --> 00:02:37.360 U.S. Trust Company. 22 00:02:37.360 --> 00:02:43.000 Thus, the commission would consist of two Rockefeller men, Vanderlip and Gage, two 23 00:02:43.000 --> 00:02:48.720 Two Morgan men, Morgan and Baker, and one representative from Kuhn-Leb. 24 00:02:48.720 --> 00:02:53.640 Only Vanderlip was available to serve, however, so the commission had to be redrawn. 25 00:02:53.640 --> 00:02:59.640 In addition to Vanderlip, beginning in March 1906, there sat, instead of Schiff, his close 26 00:02:59.640 --> 00:03:02.680 friend Isidor Strauss, a director of R.H. 27 00:03:02.680 --> 00:03:04.760 Macy & Company. 28 00:03:04.760 --> 00:03:09.680 Instead of Morgan and Baker, there now served two Morgan men, Dumont Clark, president of 29 00:03:09.680 --> 00:03:24.680 The Fifth Man was a veteran of the Indianapolis Monetary Convention, John Claflin of H.B. 30 00:03:24.680 --> 00:03:29.560 Claflin & Company, a large integrated wholesaling concern. 31 00:03:29.560 --> 00:03:33.840 Coming on board as Secretary of the New Currency Committee was Vanderlip's old friend Joseph 32 00:03:33.840 --> 00:03:45.960 The Commission used the old Indianapolis questionnaire technique, acquiring legitimacy by sending 33 00:03:45.960 --> 00:03:51.080 out a detailed questionnaire on currency to a number of financial leaders. 34 00:03:51.080 --> 00:03:56.120 With Johnson in charge of mailing and co-elating the questionnaire replies, Conant spent his 35 00:03:56.120 --> 00:04:00.840 time visiting and interviewing the heads of the central banks in Europe. 36 00:04:00.840 --> 00:04:04.960 The special commission delivered its report to the New York Chamber of Commerce in October 37 00:04:04.960 --> 00:04:07.020 1906. 38 00:04:07.020 --> 00:04:11.960 To eliminate instability and the danger of an inelastic currency, the commission called 39 00:04:11.960 --> 00:04:17.680 for the creation of a quote, central bank of issue under the control of the government, 40 00:04:17.680 --> 00:04:19.100 end quote. 41 00:04:19.100 --> 00:04:24.160 In keeping with other bank reformers, such as Professor Abram Piat Andrew of Harvard 42 00:04:24.160 --> 00:04:30.000 University, Thomas Nixon Carver of Harvard, and Albert Strauss, partner of J.P. Morgan 43 00:04:30.000 --> 00:04:31.420 and Company. 44 00:04:31.420 --> 00:04:37.080 The Commission was scornful of Secretary Shaw's attempt to use the Treasury as central bank. 45 00:04:37.080 --> 00:04:41.820 Shaw was particularly obnoxious because he was still insisting in his last annual report 46 00:04:41.820 --> 00:04:48.840 of 1906 that the Treasury, under his aegis, had constituted a quote, great central bank. 47 00:04:48.840 --> 00:04:53.600 The Commission, along with the other reformers, denounced the Treasury for over-inflating 48 00:04:53.600 --> 00:04:56.440 by keeping interest rates excessively low. 49 00:04:56.440 --> 00:05:01.640 A central bank, in contrast, would have much larger capital and undisputed control over 50 00:05:01.640 --> 00:05:06.340 the money market, and thus would be able to manipulate the discount rate effectively to 51 00:05:06.340 --> 00:05:09.240 keep the economy under proper control. 52 00:05:09.240 --> 00:05:14.200 The important point, declared the committee, is that there be, quote, centralization of 53 00:05:14.200 --> 00:05:17.460 financial responsibility, end quote. 54 00:05:17.460 --> 00:05:23.240 In the meantime, short of establishing a central bank, the committee urged that, at the least, 55 00:05:23.240 --> 00:05:27.840 The National Bank's powers to issue notes should be expanded to include being based on 56 00:05:27.840 --> 00:05:31.680 general assets as well as government bonds. 57 00:05:31.680 --> 00:05:36.640 After drafting and publishing this quote currency report, the reformers used the report as the 58 00:05:36.640 --> 00:05:41.860 lever for expanding the agitation for a central bank and broader note issue powers to other 59 00:05:41.860 --> 00:05:44.900 corporate and financial institutions. 60 00:05:44.900 --> 00:05:49.940 The next step was the powerful American Bankers Association or ABA. 61 00:05:49.940 --> 00:05:55.480 In 1905, the executive council of the ABA had appointed a currency committee which, 62 00:05:55.480 --> 00:06:00.340 the following year, recommended an emergency assets currency that would be issued by a 63 00:06:00.340 --> 00:06:05.080 federal commission, resembling an embryonic central bank. 64 00:06:05.080 --> 00:06:11.540 In a tumultuous plenary session of the ABA convention in October 1906, the ABA rejected 65 00:06:11.540 --> 00:06:16.960 this plan, but agreed to appoint a 15-man currency commission that was instructed to 66 00:06:16.960 --> 00:06:45.960 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. 67 00:06:45.960 --> 00:06:52.880 James B. Forgen, President of the Rockefeller-run First National Bank of Chicago and close friend 68 00:06:52.880 --> 00:06:59.400 of Jacob Schiff of Kuhn-Leb, as well as of Vanderlip, Joseph T. Talbert, Vice President 69 00:06:59.400 --> 00:07:04.880 of the Rockefeller-dominated Commercial National Bank of Chicago and soon to become Vice President 70 00:07:04.880 --> 00:07:11.480 of Rockefeller's flagship bank, the National City Bank of New York, Myron T. Herrick, one 71 00:07:11.480 --> 00:07:16.320 One of the most prominent Rockefeller politicians and businessmen in the country, Eric was the 72 00:07:16.320 --> 00:07:21.280 head of the Cleveland Society of Savings and was part of the small team of close Rockefeller 73 00:07:21.280 --> 00:07:27.280 business allies who, along with Mark Hanna, bailed out Governor William McKinley from bankruptcy 74 00:07:27.280 --> 00:07:29.400 in 1893. 75 00:07:29.400 --> 00:07:34.060 Eric was a previous president of the ABA and just finished a two-year stint as governor 76 00:07:34.060 --> 00:07:39.160 of Ohio and was later to become ambassador to France under his old friend and political 77 00:07:39.160 --> 00:07:44.280 Federal ally William Howard Taft, as well as later under President Warren G. Harding, 78 00:07:44.280 --> 00:07:49.440 and a recipient of Herrick's political support and financial largesse, and chairman of the 79 00:07:49.440 --> 00:07:55.100 ABA Commission, A. Barton Hepburn, president of one of the leading Morgan commercial banks, 80 00:07:55.100 --> 00:08:00.280 the Chase National Bank of New York, and author of the well-regarded History of Coinage and 81 00:08:00.280 --> 00:08:03.200 Currency in the United States. 82 00:08:03.200 --> 00:08:06.840 After meeting with Vanderlip and Conant as the representatives of the New York Chamber 83 00:08:06.840 --> 00:08:12.240 of Commerce Committee, the ABA Commission, along with Vanderlip and Conant, agreed on 84 00:08:12.240 --> 00:08:15.620 at least the transition demands of the reformers. 85 00:08:15.620 --> 00:08:20.480 The ABA Commission presented proposals to the public, the press, and the Congress in 86 00:08:20.480 --> 00:08:26.240 December 1906 for a broader asset currency as well as provisions for emergency issue 87 00:08:26.240 --> 00:08:29.120 of banknotes by national banks. 88 00:08:29.120 --> 00:08:33.940 But just as sentiment for a broader asset currency became prominent, the bank reformers 89 00:08:33.940 --> 00:08:38.840 The reformers began to worry about an uncontrolled adoption of such a currency, for that would 90 00:08:38.840 --> 00:08:45.060 mean that national bank credit and notes would expand and that, in the existing system, small 91 00:08:45.060 --> 00:08:50.160 state banks would be able to pyramid and inflate credit on top of the national credit using 92 00:08:50.160 --> 00:08:53.660 the expanded national bank notes as their reserves. 93 00:08:53.660 --> 00:08:59.940 The reformers wanted a credit inflation controlled by and confined to the large national banks. 94 00:08:59.940 --> 00:09:05.700 They most emphatically did not want uncontrolled state bank inflation that would siphon resources 95 00:09:05.700 --> 00:09:11.140 to small entrepreneurs and, quote, speculative marginal producers. 96 00:09:11.140 --> 00:09:16.020 The problem was aggravated by the accelerated rate of increase in the number of small southern 97 00:09:16.020 --> 00:09:19.540 and western state banks after 1900. 98 00:09:19.540 --> 00:09:23.600 Another grave problem for the reformers was that commercial paper was a different system 99 00:09:23.600 --> 00:09:25.540 from that of Europe. 100 00:09:25.540 --> 00:09:31.700 In Europe, commercial paper and hence bank assets were two name notes endorsed by a small 101 00:09:31.700 --> 00:09:34.740 group of wealthy acceptance banks. 102 00:09:34.740 --> 00:09:40.180 In contrast to this acceptance paper system, commercial paper in the United States was 103 00:09:40.180 --> 00:09:46.100 unendorsed single-name paper, with the bank taking a chance on the creditworthiness of 104 00:09:46.100 --> 00:09:47.620 the business borrower. 105 00:09:47.620 --> 00:09:54.220 Hence, a decentralized financial system in the United States was not subject to big banker 106 00:09:54.220 --> 00:09:55.900 Control. 107 00:09:55.900 --> 00:10:00.340 Worries about the existing system, and hence about uncontrolled asset currency, were voiced 108 00:10:00.340 --> 00:10:02.500 by the top bank reformers. 109 00:10:02.500 --> 00:10:08.500 Thus, Vanderlip expressed concern that, quote, there are so many state banks that might count 110 00:10:08.500 --> 00:10:13.020 these national banknotes in their reserves, end quote. 111 00:10:13.020 --> 00:10:18.940 Schiff warned that, quote, it would prove unwise, if not dangerous, to clothe six thousand 112 00:10:18.940 --> 00:10:25.700 and banks or more, with the privilege to issue independently a pure credit currency." 113 00:10:25.700 --> 00:10:30.800 And from the Morgan side, a similar concern was voiced by Victor Morowitz, the powerful 114 00:10:30.800 --> 00:10:35.460 chairman of the board of the Acheson, Topeka and Santa Fe Railroad. 115 00:10:35.460 --> 00:10:40.020 Taking the lead in approaching this problem of small banks and decentralization was Paul 116 00:10:40.020 --> 00:10:45.180 Moritz Warburg of Kuhn-Leb, fresh from his banking experience in Europe. 117 00:10:45.180 --> 00:10:50.900 In January 1907, Warburg began what would become years of tireless agitation for central 118 00:10:50.900 --> 00:10:57.620 banking with two articles, defects and needs of our banking system, and a plan for a modified 119 00:10:57.620 --> 00:11:02.980 central bank. Calling openly for a central bank, Warburg pointed out that one of the 120 00:11:02.980 --> 00:11:07.620 important functions of such a bank would be to restrict the eligibility of bank assets 121 00:11:07.620 --> 00:11:13.340 to be used for expansion of bank deposits. Presumably, too, the central bank could move 122 00:11:13.340 --> 00:11:37.700 Bankers magazine noted as a crucial reason the fact that asset currency would be expanding 123 00:11:37.700 --> 00:11:41.700 Bank Services to quote small producers and dealers.