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NOTE 38. The Panic of 1907 and Mobilization for a Central Bank

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The Panic of 1907 and Mobilization for a Central Bank

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A severe financial crisis, the Panic of 1907, struck in early October.

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Not only was there a general recession and contraction, but the major banks in New York

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and Chicago were, as in most other depressions in American history, allowed by the government

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to suspend specie payments, that is, to continue in operation while being relieved of their

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and their contractual obligation to redeem their notes and deposits in cash or in gold.

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While the Treasury had stimulated inflation during 1905 to 1907, there was nothing it

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could do to prevent suspensions of payments or to alleviate, quote, the competitive hoarding

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of currency, end quote, after the panic.

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That is, the attempt to demand cash in return for increasingly shaky banknotes and deposits.

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Very quickly after the panic, banker and business opinion consolidated on behalf of a central

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bank, an institution that could regulate the economy and serve as a lender of last resort

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to bail banks out of trouble.

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The reformers now faced a two-fold task, hammering out details of the new central bank, and more

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important, mobilizing public opinion on its behalf.

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The first step in such mobilization was to win the support of the nation's academics

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and Experts.

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The task was made easier by the growing alliance and symbiosis between academia and the power

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elite.

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Two organizations that proved particularly useful for this mobilization were the American

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Academy of Political and Social Science, the AAPSS of Philadelphia, and the Academy of

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Political Science, the APS of Columbia University, both of which included in their ranks leading

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In Corporate Liberal Businessmen, Financeers, Attorneys, and Academics

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Nicholas Murray Butler, the highly influential president of Columbia University, explained

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that the Academy of Political Science, quote, is an intermediary between the scholars and

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the men of affairs, those who may perhaps be said to be amateurs in scholarship, end

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quote.

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Here, he pointed out, was where they, quote, come together.

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It is not surprising, then, that the American Academy of Political and Social Science, the

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American Association for the Advancement of Science, and Columbia University held three

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symposia during the winter of 1907 to 1908, each calling for a central bank, and thereby

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disseminating the message of a central bank to a carefully selected elite public.

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Not surprising, too, was that E.R.A. Seligman was the organizer of the Columbia Conference,

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Seligman gratified that his university was providing a platform for leading bankers and financial journalists to advocate a central bank.

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Especially, he noted, because, quote,

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it is proverbially difficult in a democracy to secure a hearing for the conclusions of experts, end quote.

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Then in 1908, Seligman collected the addresses into a volume, The Currency Problem.

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Professor Seligman set the tone for the Columbia gathering in his opening address.

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The panic of 1907, he alleged, was moderate because its effects had been tempered by the

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growth of industrial trusts, which provided a more controlled and quote, more correct

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adjustments of present investment to future needs, end quote, than would a quote, horde

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of small competitors, end quote.

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In that way, Seligman displayed no comprehension of how competitive markets facilitate adjustments.

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One big problem, however, still remained for Seligman.

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The horde of small competitors, for whom Seligman had so much contempt, still prevailed in the

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field of currency and banking.

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The problem was that the banking system was still decentralized.

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As Seligman declared,

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The next address was that of Frank Vanderlip. To Vanderlip, in contrast to Seligman, the

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panic of 1907 was, quote, one of the great calamities of history, end quote, the result

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of a decentralized, competitive American banking system, with 15,000 banks all competing vigorously

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for control of cash reserves.

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The terrible thing is that, quote, each institution stands alone, concerned first with its own

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safety and using every endeavor to pile up reserves without regard, end quote, to the

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effect of such actions on other banking institutions.

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This backward system had to be changed to follow the lead of other great nations where

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Where a central bank is able to mobilize and centralize reserves, and create an elastic

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currency system.

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Putting the situation in virtually Marxian terms, Vanderlip declared that the alien external

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power of the free and competitive market must be replaced by central control following modern,

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allegedly scientific principles of banking.

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Thomas Wheelock, editor of the Wall Street Journal, then wrung the changes on the common

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A. Barton Hepburn, head of Morgan's Chase National Bank, came next, and spoke of the

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The Great Importance of Having a Central Bank that Would Issue a Monopoly of Bank Notes

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It was particularly important that the central bank be able to discount the assets of national

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banks and thus supply an elastic currency.

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The last speaker was Paul Warburg, who lectured his audience on the superiority of European

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over American banking, particularly in one, having a central bank as against decentralized

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American Banking, and two, his old hobby horse enjoying, quote, modern acceptance paper instead

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of single name promissory notes.

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Warburg emphasized that these two institutions must function together.

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In particular, tight government central bank control must replace competition and decentralization,

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quote, small banks constitute a danger, end quote.

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The other two symposia were very similar.

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At the AAPSS Symposium in Philadelphia in December 1907, several leading investment bankers and

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Comptroller of the Currency William B. Ridgely came out in favor of a central bank.

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It was no accident that members of the AAPSS's Advisory Committee on Currency included A.

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Barton Hepburn, Morgan attorney and statesman Elihu Root, Morgan's longtime personal attorney

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Francis Leid Stetson, and J.P. Morgan himself. Meanwhile, the AAAS symposium in January 1908

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was organized by none other than Charles A. Conant, who happened to be chairman of the AAAS's social

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and economic section for the year. Speakers included Columbia economist J.B. Clark, Frank

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Vanderlip, Conant, and Vanderlip's friend George E. Roberts, head of the Rockefeller-oriented

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and Commercial National Bank of Chicago, who would later wind up at the National City Bank.

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All in all, the task of the bank reformers was well summed up by J.R. Duffield, Secretary

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of the Banker's Publishing Company, in January 1908,

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Quote,

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It is recognized generally that before legislation can be had, there must be an educational campaign

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carried on, first among the bankers, and later among commercial organizations, and finally

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among the public as a whole."

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That strategy was well underway.

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During the same month, the legislative lead in banking reform was taken by the formidable

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Senator Nelson W. Aldrich, Republican from Rhode Island, head of the Senate Finance Committee

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and, as the father-in-law of John D. Rockefeller Jr., Rockefeller's man in the U.S. Senate.

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He introduced the Aldrich Bill, which focused on a relatively minor interbank dispute about

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about whether and on what basis the national banks could issue special emergency currency.

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A compromise was finally hammered out and passed as the Aldrich-Vreeland Act in 1908.

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But the important part of the Aldrich-Vreeland Act, which got very little public attention

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but was perceptively hailed by the bank reformers, was the establishment of a national monetary

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commission that would investigate the currency question and suggest proposals for comprehensive

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Banking Reform.

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Two enthusiastic comments on the monetary commission were particularly perceptive and prophetic.

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One was that of Sereno S. Pratt of the Wall Street Journal.

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Pratt virtually conceded that the purpose of the commission was to swap the public with

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supposed expertise and thereby, quote, educate them into supporting banking reform.

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Quote, reform can only be brought about by educating the people up to it, and such education

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Education must necessarily take much time.

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In no other way can such education be affected more thoroughly and rapidly than by means

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of a commission that would make an international study of the subject and present an exhaustive

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report, which could be made the basis for an intelligent agitation."

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The results of the quote study were of course predetermined, as would be the membership

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of the allegedly impartial study commission.

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Another function of the commission, as stated by Festus J. Wade, St. Louis banker and member

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of the Currency Commission of the American Bankers Association, was to, quote, keep the

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financial issue out of politics, end quote, and put it squarely in the safe custody of

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carefully selected, quote, experts.

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Thus, the National Monetary Commission, or NMC, was the apotheosis of the clever commission

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and Concept, launched in Indianapolis a decade earlier.

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Aldrich lost no time setting up the NMC, which was launched in June 1908.

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The official members were an equal number of senators and representatives, but these

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were mere window dressing.

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The real work would be done by the copious staff, appointed and directed by Aldrich,

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who told his counterpart in the House, Cleveland Republican Theodore Burton, quote,

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My idea is, of course, that everything shall be done in the most quiet manner possible, and without any public announcement."

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From the beginning, Aldrich determined that the NMC would be run as an alliance of Rockefeller, Morgan and Kuhn-led people.

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The two top expert posts advising or joining the commission were both suggested by Morgan leaders.

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On the advice of JP Morgan, seconded by Jacob Schiff, Aldrich picked as his top advisor

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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.

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For technical economic expertise, Aldrich accepted the recommendation of President Roosevelt's

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close friend and fellow Morgan man, Charles Eliot, president of Harvard University, who

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urged the appointment of Harvard economist A. Piat Andrew.

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And an ex officio commission member chosen by Aldrich himself was George M. Reynolds,

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president of the Rockefeller-oriented Continental National Bank of Chicago.

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The NMC spent the fall touring Europe and conferring on information and strategy with

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heads of large European banks and central banks.

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As Director of Research, A. Piet Andrew began to organize American banking experts and to

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commission reports and studies.

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The National Citibank's Foreign Exchange Department was commissioned to write papers

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on bankers' acceptances and foreign debt, while Warburg and Bankers Trust official Fred

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Fred Kent wrote on the European discount market.

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Having gathered information and advice in Europe in the fall of 1908, the NMC was ready

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to go into high gear by the end of the year.

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In December, the commission hired the inevitable Charles A. Conant for research, public relations

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and agitprop.

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Behind the facade of the congressmen and senators on the commission, Senator Aldrich began to

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to form and expand his inner circle, which soon included Warburg and Vanderlip.

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Warburg formed around him a sub-circle of friends and acquaintances from the Currency

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Committee of the New York Merchants Association, headed by Irving T. Bush, and from the top

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ranks of the American Economic Association, to whom he had delivered an address advocating

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central banking in December 1908.

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Warburg met and corresponded frequently with leading academic economists advocating

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in Banking Reform, including E. R. A. Seligman, Thomas Nixon Carver of Harvard, Henry R. Seeger

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of Columbia, Davis R. Dewey, Historian of Banking at MIT, long-time Secretary-Treasurer

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of the AEA and brother of the progressive philosopher John Dewey, Oliver M. W. Sprague,

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Professor of Banking at Harvard of the Morgan-Connected Sprague family, Frank W. Tosig of Harvard

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and Irving Fisher of Yale.

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During 1909, however, the reformers faced an important problem.

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They had to bring such leading bankers as James B. Forgan, head of the Rockefeller-oriented

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First National Bank of Chicago, solidly into line in support of a central bank.

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It was not that Forgan objected to centralized reserves or lender of last resort.

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Quite the contrary.

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It was rather that Forgen recognized that, under the national banking system, large banks

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such as his own were already performing quasi-central banking functions with their own country bank

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depositors, and he didn't want his bank deprived of such functions by a new central bank.

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The bank reformers, therefore, went out of their way to bring such men as Forgen into

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enthusiastic support for the new scheme.

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In his presidential address to the powerful American Bankers Association in mid-September

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1909, George M. Reynolds not only came out flatly in favor of a central bank in America

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to be modeled after the German Reichsbank, he also assured Forgen andology that such

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a central bank would act as depository of reserves only for the large national banks

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in the central reserve cities, while the national banks would continue to hold deposits for

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the country banks.

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Forgen held a private conference with Aldrich's inner circle and came fully on board for the

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central bank.

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As an outgrowth of Forgen's concerns, the reformers decided to cloak their new central

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bank in a spurious veil of quote, regionalism and quote, decentralism, through establishing

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regional reserve centers that would provide the appearance of virtually independent regional

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Central Central Banks to cover the reality of an orthodox European central bank monolith.

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As a result, noted railroad attorney Victor Morowitz made his famous speech in November

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1909, calling for regional banking districts under the ultimate direction of one's central

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control board.

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Thus, reserves and note issue would be supposedly decentralized in the hands of the regional

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reserve banks, while they would really be centralized and coordinated by the central

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Control Board.

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This, of course, was the scheme eventually adopted in the Federal Reserve system.

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On September 14th, at the same time as Reynolds addressed to the nation's bankers, another

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significant address took place.

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President William Howard Taft, speaking in Boston, suggested that the country seriously

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consider establishing a central bank.

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Taft had been close to the reformers, especially his Rockefeller-oriented friends Aldrich and

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and Burden since 1900.

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But the business press understood the great significance of this public address, that

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it was, as the Wall Street Journal put it, a crucial step, quote, toward removing the

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subject from the realm of theory to that of practical politics, end quote.

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One week later, a fateful event in American history occurred.

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The banking reformers moved to escalate their agitation by creating a virtual government

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Bank Press Complex to drive through a central bank.

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On September 22, 1909, the Wall Street Journal took the lead in this development by beginning

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a notable front-page 14-part series on quote, a central bank of issue, end quote.

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These were unsigned editorials by the Journal, but they were actually written by the ubiquitous

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Charles A. Conant, from his vantage point as Salaried Chief Propagandist of the U.S.

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The series was a summary of the reformer's position, also going out of the way to assure

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the forgans of this world that the new central bank, quote, would probably deal directly

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only with the larger national banks, leaving it for the latter to re-discount for their

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more remote correspondents, end quote.

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To the standard arguments for a central bank, quote, elasticity of the money supply, protecting

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and Bank Reserves by manipulating the discount rate and the international flow of gold and

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combating crisis by bailing out individual banks, Conant added a Conant Twist.

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The importance of regulating interest rates and the flow of capital in a world marked

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by surplus capital.

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Government debt would, for Conant, provide the important function of sopping up surplus

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The Wall Street Journal series inaugurated a shrewd and successful campaign by Conant

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to manipulate the nation's press and get it behind the idea of a central bank.

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Building on his experience in 1898, Conant, along with Aldrich's secretary, Arthur B.

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Shelton, prepared abstracts of commissioned materials for the newspapers during February

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and March of 1910.

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Soon Shelton recruited J.P.

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Gavitt, head of the Washington Bureau of the Associated Press, to scan Commission abstracts,

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articles and forthcoming books for quote, newsy paragraphs to catch the eye of newspaper

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editors.

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The academic organizations proved particularly helpful to the NMC, lending their cloak of

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disinterested expertise to the endeavor.

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In February, Robert E. Eli, Secretary of the APS, proposed to Aldrich that a special volume

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of its proceedings be devoted to banking and currency reform, to be published in cooperation

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with the NMC in order to, quote, popularize in the best sense some of the valuable work

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of the Commission, end quote.

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And yet, Eli had the gall to add that, even though the APS would advertise the NMC's

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The AAPSS, too, weighed in with its own special volume, Banking Problems, in 1910, featuring

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and an introduction by A.P. at Andrew of Harvard and the NMC and articles by veteran bank reformers

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such as Joseph French Johnson, Horace White and Morgan Bankers Trust official Fred I. Kent.

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But most of the articles were from leaders of Rockefeller's National City Bank of New

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York, including George E. Roberts, a former Chicago banker and U.S. Mint official about

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to join National City.

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Meanwhile, Paul M. Warburg capped his lengthy campaign for a central bank in a famous speech

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to the New York YMCA on March 23, on quote, a United Reserve Bank for the United States.

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Warburg basically outlined the structure of his beloved German Reichsbank, but he was careful to

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begin his talk by noting a recent poll in the Banking Law Journal that 60% of the nation's

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To calm this fear, Warburg insisted that, semantically, the new reserve bank not be

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called a central bank, and that the Reserve Bank's governing board be chosen by government

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officials, merchants and bankers, with bankers, of course, dominating the choices.

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He also provided a distinctive Warburg twist by insisting that the Reserve Bank replace

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the hated single-name paper system of commercial credit dominant in the United States by the

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European system whereby a Reserve Bank provided a guaranteed and subsidized market for two

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named commercial paper endorsed by acceptance banks.

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In this way, the United Reserve Bank would correct the quote, complete lack of modern

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Warburg added that the entire idea of a free and self-regulating market was obsolete, particularly

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in the money market.

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Instead, the action of the market must be replaced by, quote, the best judgment of

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the best experts, end quote.

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And guess who was slated to be one of the best of those best experts?

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The greatest cheerleader for the Warburg Plan and the man who introduced the APS's Reform

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of the Currency in 1911, the volume on banking reform featuring Warburg's speech, was Warburg's

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kinsman and member of the Seligman Investment Banking family, Columbia economist E.R.A.

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Seligman.

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So delighted was the Merchants Association of New York with Warburg's speech that it

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distributed 30,000 copies during the spring of 1910.

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Warburg had paved the way for this support by regularly meeting with the Currency Committee

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of the Merchants Association since October 1908, and his efforts were aided by the fact

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that the resident expert for that committee was none other than Joseph French Johnson.

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At the same time, in the spring of 1910, the numerous research volumes published by the

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NMC poured onto the market.

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The object was to swamp public opinion with a parade of impressive, analytic and historical

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Scholarship, all allegedly quote scientific and quote value free, but all designed to

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aid in furthering the common agenda of a central bank.

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Typical was E.W. Kemmerer's mammoth statistical study of seasonal variations in the demand

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for money.

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Stress was laid on the problem of the quote inelasticity of the supply of cash, in particular

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the difficulty of expanding that supply when needed.

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While Kemmerer felt precluded from spelling out the policy implications – establishing

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a central bank – in the book, his acknowledgments in the preface to Fred Kent and the inevitable

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Charles Conant were a tip-off to the Cognacenti, and Kemmerer himself disclosed them in his

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address to the Academy of Political Science the following November.

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Now that the theoretical and scholarly groundwork had been laid, by the latter half of 1910,

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It was time to formulate a concrete, practical plan and put on a mighty putsch on its behalf.

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In Reform of the Currency, published by the APS, Warburg made the point with crystal clarity,

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quote, advance is possible only by outlining a tangible plan, end quote, that would set

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the terms of the debate from then on.

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The tangible planned phase of the central bank movement was launched by the ever-pliant APS,

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which held a monetary conference in November 1910, in conjunction with the New York Chamber

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of Commerce and the Merchants Association of New York.

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The members of the NMC were the guests of honor at this conclave, and delegates were

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chosen by governors of 22 states, as well as presidents of 24 chambers of commerce.

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The people who attended were a large number of economists, monetary analysts, and representatives of most of the top banks in the country.

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Attendance at the conference included Frank Vanderlip, Elihu Root, Thomas W. Lamont of the Morgans, Jacob Schiff, and J.P. Morgan.

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The formal sessions of the conference were organized around papers by Kammerer, Loughlin, Johnson, Bush, Warburg, and Conant.

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And the general atmosphere was that bankers and businessmen were to take their general

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guidance from the attendant scholars.

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As James B. Forgan, Chicago banker who is now solidly in the central banking camp, put

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it, quote, Let the theorists, those who can study from past history and from present conditions

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the effect of what we are doing, lay down principles for us and let us help them with

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the details, end quote.

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see Stuart Patterson pointed to the great lessons of the Indianapolis Monetary Commission

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and the way in which its proposals triumphed in action because, quote, we went home and

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organized an aggressive and active movement, end quote.

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Patterson then laid down the marching orders of what this would mean concretely for the

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assembled troops, quote, that is just what you must do in this case.

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You must uphold the hands of Senator Aldrich.

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You have got to see that the bill which he formulates obtains the support of every part

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of the country."

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With the New York monetary conference over, it was now time for Aldrich, surrounded by

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a few of the topmost leaders of the financial elite, to go off in seclusion and hammer out

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a detailed plan around which all parts of the central bank movement could rally.

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Someone in the Aldrich inner circle, probably Morgan partner Henry P. Davison, got the idea

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of Convening a Small Group of Top Leaders in a Super-Secret Conclave to Draft the Central

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Bank Bill.

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On November 22, 1910, Senator Aldrich, with a handful of companions, set forth in a privately

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chartered railroad car from Hoboken, New Jersey, to the coast of Georgia, where they sailed

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to an exclusive retreat, the Jekyll Island Club on Jekyll Island, Georgia.

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Facilities for their meeting were arranged by club member and co-owner J.P. Morgan.

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The cover story released to the press was that this was a simple duck-hunting expedition,

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and the conferees took elaborate precautions on the trips there and back to preserve their

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secrecy.

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Thus, the attendees addressed each other only by first name, and the railroad car was

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kept dark and closed off from reporters or other travelers on the train.

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One reporter apparently caught on to the purpose of the meeting, but was in some way persuaded

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by Henry P. Davison to maintain silence.

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The conferees worked for a solid week at Jekyll Island to hammer out the draft of the Federal

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Reserve bill.

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In addition to Aldrich, the conferees included Henry P. Davison, Morgan Partner, Paul Warburg,

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whose address in the spring had greatly impressed Aldrich, Frank A. Vanderlip, Vice President

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of the National City Bank of New York, AP at Andrew, head of the NMC staff, who had

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recently been made Assistant Secretary of the Treasury by President Taft.

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After a week of meetings, the six men had forged a plan for a central bank, which eventually

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became the Aldrich Bill.

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Vanderlip acted as Secretary of the meeting and contributed the final writing.

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The only substantial disagreement was tactical, with Aldrich attempting to hold out for a

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were a straightforward central bank on the European model, while Warburg and the other

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bankers insisted that the reality of central control be cloaked in the politically palatable

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camouflage of, quote, decentralization.

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It is amusing that the bankers were the more politically astute, while the politician Aldrich

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wanted to waive political considerations.

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Warburg and the bankers won out, and the final draft was basically the Warburg plan with

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with a decentralized patina taken from Morowitz.

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The financial power elite now had a bill.

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The significance of the composition of the small meeting must be stressed.

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Two Rockefeller men, Aldrich and Vanderlip, two Morgans, Davison and Norton, one Kuhn

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led person, Warburg, and one economist friendly to both camps, Andrew.

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After working on some revisions of the Jekyll Island draft with Forgan and George Reynolds,

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Aldrich presented the Jekyll Island Draft as the Aldrich Plan to the full NMC in January

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1911.

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But here, an unusual event occurred.

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Instead of quickly presenting this Aldrich bill to the Congress, its drafters waited

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for a full year, until January 1912.

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Why the unprecedented year's delay?

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The problem was that the Democrats swept the Congressional elections in 1910, and Aldrich,

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This hardened decided not to run for re-election to the Senate the following year.

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The democratic triumph meant that the reformers had to devote a year of intensive agitation

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to convert the democrats and to intensify propaganda to the rest of banking, business

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and the public.

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In short, the reformers needed to regroup and accelerate their agitation.