The 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
and their contractual obligation to redeem their notes and deposits in cash or in gold.
While the Treasury had stimulated inflation during 1905 to 1907, there was nothing it
could do to prevent suspensions of payments or to alleviate, quote, the competitive hoarding
of currency, end quote, after the panic.
That is, the attempt to demand cash in return for increasingly shaky banknotes and deposits.
Very quickly 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 the new central bank, and more
important, 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, the AAPSS of Philadelphia, and the Academy of
Political Science, the APS of Columbia University, both of which included in their ranks leading
In Corporate Liberal Businessmen, Financeers, Attorneys, and Academics
Nicholas Murray Butler, the highly influential president of Columbia University, explained
that the Academy of Political Science, quote, is an intermediary between the scholars and
the men of affairs, those who may perhaps be said to be amateurs in scholarship, end
quote.
Here, he pointed out, was where they, quote, come together.
It is not surprising, then, that the American Academy of Political and Social Science, the
American Association for the Advancement of Science, and Columbia University held three
symposia during the winter of 1907 to 1908, each calling for a central bank, and thereby
disseminating the message of a central bank to a carefully selected elite public.
Not surprising, too, was that E.R.A. Seligman was the organizer of the Columbia Conference,
Seligman gratified that his university was providing a platform for leading bankers and financial journalists to advocate a central bank.
Especially, he noted, because, quote,
it is proverbially difficult in a democracy to secure a hearing for the conclusions of experts, end quote.
Then in 1908, Seligman collected the addresses into a volume, The Currency Problem.
Professor Seligman set the tone for the Columbia 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 quote, more correct
adjustments of present investment to future needs, end quote, than would a quote, horde
of small competitors, end quote.
In that way, Seligman displayed no comprehension of how competitive markets facilitate adjustments.
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,
The next address was that of Frank Vanderlip. To Vanderlip, in contrast to Seligman, the
panic of 1907 was, quote, one of the great calamities of history, end quote, 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, quote, each institution stands alone, concerned first with its own
safety and using every endeavor to pile up reserves without regard, end quote, to the
effect of such actions on other banking institutions.
This backward system had to be changed to follow the lead of other great nations where
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.
Thomas Wheelock, editor of the Wall Street Journal, then wrung the changes on the common
A. Barton Hepburn, head of Morgan's Chase National Bank, came next, and spoke of the
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 one, having a central bank as against decentralized
American Banking, and two, his old hobby horse enjoying, quote, 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,
quote, small banks constitute a danger, end quote.
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 longtime personal attorney
Francis Leid Stetson, and J.P. Morgan himself. Meanwhile, 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
and 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 Banker's Publishing Company, in January 1908,
Quote,
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 public as a whole."
That strategy was well underway.
During the same month, the legislative lead in banking reform was taken by the formidable
Senator Nelson W. Aldrich, Republican from Rhode Island, head of the Senate Finance Committee
and, as the father-in-law of John D. Rockefeller Jr., Rockefeller's man in the U.S. Senate.
He introduced the Aldrich Bill, which focused on a relatively minor interbank dispute about
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 swap the public with
supposed expertise and thereby, quote, educate them into supporting banking reform.
Quote, reform can only be brought about by educating the people up to it, and such education
Education must necessarily take much time.
In no other way can such education be affected 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."
The results of the quote study were of course predetermined, as would be the membership
of the allegedly impartial study commission.
Another function 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, quote, keep the
financial issue out of politics, end quote, and put it squarely in the safe custody of
carefully selected, quote, experts.
Thus, the National Monetary Commission, or NMC, was the apotheosis of the clever commission
and Concept, launched in Indianapolis a decade earlier.
Aldrich lost no time setting up the 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, quote,
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-led people.
The two top expert posts advising or joining the commission were both suggested by Morgan leaders.
On the advice of JP Morgan, seconded by Jacob Schiff, Aldrich picked as his top advisor
It would be Davidson who, on the outbreak of World War I, would rush to England to cement J.P. Morgan and companies' 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.
For technical 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. Piat 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. Piet Andrew began to organize American banking experts and to
commission reports and studies.
The National Citibank's Foreign Exchange Department was commissioned to write papers
on bankers' acceptances and foreign debt, while Warburg and Bankers Trust official Fred
Fred Kent wrote on the European discount market.
Having gathered 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 facade of the congressmen and senators on the commission, Senator Aldrich began to
to form and expand his inner circle, which soon included Warburg and Vanderlip.
Warburg formed around him a sub-circle 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 December 1908.
Warburg met and corresponded frequently with leading academic economists advocating
in Banking Reform, including E. R. A. Seligman, Thomas Nixon Carver of Harvard, Henry R. Seeger
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. Tosig of Harvard
and Irving Fisher of Yale.
During 1909, 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 lender of last resort.
Quite the contrary.
It was rather that Forgen 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 Forgen 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 Forgen andology 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.
Forgen held a private conference with Aldrich's inner circle and came fully on board for the
central bank.
As an outgrowth of Forgen's concerns, the reformers decided to cloak their new central
bank in a spurious veil of quote, regionalism and quote, decentralism, through establishing
regional reserve centers that would provide the appearance of virtually independent regional
Central Central Banks to cover the reality of an orthodox European central bank monolith.
As a result, noted railroad attorney Victor Morowitz made his famous speech in November
1909, calling for regional banking districts under the ultimate direction of one's 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.
On September 14th, at the same time as Reynolds addressed 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
and Burden 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, quote, toward removing the
subject from the realm of theory to that of practical politics, end quote.
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 quote, a central bank of issue, end quote.
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 U.S.
The series was a summary of the reformer's position, also going out of the way to assure
the forgans of this world that the new central bank, quote, would probably deal directly
only with the larger national banks, leaving it for the latter to re-discount for their
more remote correspondents, end quote.
To the standard arguments for a central bank, quote, elasticity of the money supply, protecting
and Bank Reserves by manipulating the discount rate and the international flow of gold and
combating crisis 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
The Wall 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 commissioned 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 quote, newsy paragraphs to catch the eye of newspaper
editors.
The academic organizations proved particularly helpful to the NMC, lending their cloak of
disinterested expertise to the endeavor.
In February, Robert E. Eli, 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, quote, popularize in the best sense some of the valuable work
of the Commission, end quote.
And yet, Eli had the gall to add that, even though the APS would advertise the NMC's
The AAPSS, too, weighed in with its own special volume, Banking Problems, in 1910, featuring
and an introduction by A.P. at 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, a former Chicago banker and U.S. Mint official about
to join National City.
Meanwhile, Paul M. Warburg capped his lengthy campaign for a central bank in a famous speech
to the New York YMCA on March 23, on quote, 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% of the nation's
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 quote, complete lack of modern
Warburg added 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, quote, the best judgment of
the best experts, end quote.
And guess who was slated to be one of the best of those best experts?
The greatest cheerleader for the Warburg Plan and the man who introduced the APS's Reform
of the Currency in 1911, the volume on banking reform featuring Warburg's speech, was Warburg's
kinsman and member of the Seligman Investment Banking family, Columbia economist E.R.A.
Seligman.
So delighted 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 that 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 quote scientific and quote value free, but all designed to
aid in furthering the common agenda of a central bank.
Typical was E.W. Kemmerer's mammoth statistical study of seasonal variations in the demand
for money.
Stress was laid on the problem of the quote 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 Cognacenti, 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 Reform of the Currency, published by the APS, Warburg made the point with crystal clarity,
quote, advance is possible only by outlining a tangible plan, end quote, that would set
the terms of the debate from then on.
The tangible planned 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.
The people who attended were a large number of economists, monetary analysts, and representatives of most of the top banks in the country.
Attendance at the conference included Frank Vanderlip, Elihu Root, Thomas W. Lamont of the Morgans, Jacob Schiff, and J.P. Morgan.
The formal sessions of the conference were organized around papers by Kammerer, Loughlin, 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, Chicago banker who is now solidly in the central banking camp, put
it, quote, 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, end quote.
see Stuart Patterson pointed to the great lessons of the Indianapolis Monetary Commission
and the way in which its proposals triumphed in action because, quote, we went home and
organized an aggressive and active movement, end quote.
Patterson then laid down the marching orders of what this would mean concretely for the
assembled troops, quote, 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 the country."
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 Club on Jekyll Island, Georgia.
Facilities for their meeting were arranged by club member and co-owner 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.
The conferees 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, AP at 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
were 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, quote, 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
with a decentralized patina taken from Morowitz.
The financial power elite now had a bill.
The significance of the composition of the small meeting must be stressed.
Two Rockefeller men, Aldrich and Vanderlip, two Morgans, Davison and Norton, one Kuhn
led person, Warburg, and one economist friendly to both camps, Andrew.
After working 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?
The problem was that the Democrats swept the Congressional elections in 1910, and Aldrich,
This hardened decided not to run for re-election 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.