Putting a central bank across, manipulating a movement, 1897 through 1902.
Around 1900, two mighty financial industrial groups, each consisting of investment banks, commercial banks and industrial resources,
confronted each other, usually with hostility, in the financial and, more importantly, the political arena.
These coalitions were, one, the interests grouped around the Morgan Bank, and two, an alliance of Rockefeller, Harriman and Kuhn lobe interest.
It became far easier for these financial elites to influence and control politicians and political affairs after 1900 than before.
For the third party system, which had existed in America from 1856 to 1896, was comprised of political parties, each of which was highly ideological and in intense conflict with the opposing party.
While each political party, in this case the Democratic, the Republican and various minor parties, consisted of a coalition of interests and forces, each was dominated by a firm ideology to which it was strongly committed.
As a result, citizens often felt lifelong party loyalties, were socialized into a party when growing up, were educated in party principles, and then rode herd on any party candidates who waffled or portrayed the cause.
For various reasons, the Democratic and Republican parties, after 1900, in the fourth and later party systems, were largely non-ideological, differed very little from each other, and as a result commanded little party loyalty.
In particular, the Democratic Party no longer existed, after the Bryan Takeover of 1896, as a committed laissez-faire, hard-money party.
From then on, both parties rapidly became progressive and moderately statist.
Since the importance of political parties dwindled after 1900 and ideological laissez-faire restraints on government intervention were gravely weakened, the power of financiers in government increased markedly.
Furthermore, Congress, the arena of political parties, became less important.
A power vacuum developed for the intellectuals and technocratic experts to fill the executive
bureaucracy and to run and plan national economic life relatively unchecked.
The House of Morgan had begun in the 1860s and 70s as an investment bank financing and
controlling railroads and then in later decades moved into manufacturing and commercial banking.
In the opposing coalition, the Rockefellers had begun in oil and moved into commercial
banking.
Harriman had earned his spurs as a brilliant railroad investor and entrepreneur in competition
with the Morgans, and Kuhn Loeb began in investment banking, financing, manufacturing.
From the 1890s until World War II, much of American political history of programs and
Conflicts can be interpreted not so much as Democrat versus Republican, but as the interaction
or conflict between the Morgans and their allies on the one hand and the Rockefeller-Harriman-Kuhn-Globe
alliance on the other. Thus, Grover Cleveland spent his working life allied with the Morgans
and his cabinet and policies were heavily Morgan-oriented. William McKinley, on the other hand, a Republican from Rockefeller's home state of Ohio, was completely in the Rockefeller camp.
In contrast, McKinley's vice president, who suddenly assumed the presidency when McKinley was assassinated, was Theodore Roosevelt, whose entire life was spent in the Morgan ambit.
When Roosevelt suddenly trotted out the Sherman Anti-Trust Act, previously a dead letter, to try to destroy Rockefeller's standard oil, as well as Harriman's control of the Northern Pacific Railroad, this led to a titanic struggle between the two mighty financial groups.
President Taft, an Ohio Republican who was close to the Rockefellers, struck back by trying to destroy the two main Morgan Trusts, United States Steel and International Harvester.
Infuriated, the Morgans created the new Progressive Party in 1912, headed by Morgan partner George W. Perkins,
and induced the popular ex-president Roosevelt to run for third term on the progressive ticket.
The aim and the result was to destroy Taft's chances for re-election
and to elect the first democratic president in 20 years, Woodrow Wilson.
But while the two financial groups clashed on many issues and personalities,
on some matters they agreed and were able to work in concert.
concert. Thus both groups favored the new trend toward cartelization in the name of
progressivism and curbing alleged big business monopoly, and both groups led by the Morgans
were happy to collaborate in the National Civic Federation. On banking and on the alleged
necessity for central bank, both groups again were in happy agreement, and while later on
Found in the history of the Federal Reserve, there would be a mighty struggle for control
between the factions to found the Fed. They were able to work in undisturbed harmony and
even tacitly agreed that the Morgan Bank would take the lead and play the role of first among
equals. J. P. Morgan's fondness for a central bank was heightened by the memory of the fact
that the bank of which his father Junius was junior partner, the London firm of George
Peabody and Company, was saved from bankruptcy in the panic of 1857 by an emergency credit
from the Bank of England. The elder Morgan took over the firm upon Peabody's retirement
and its name was changed to J.S. Morgan and Company.
The bank reform movement, sponsored by the Morgan and Rockefeller forces, began as soon
as the election of McKinley as president in 1896 was secured and the populist Brian Menace
beaten back.
The reformers decided not to shock people by calling for central bank right away but
to move toward it slowly, first raising the general point that the money supply must be
cured of its inelasticity.
The bankers decided to employ the techniques they had used successfully in generating a
mass pro-gold standard movement in 1895 and 1896.
The crucial point was to avoid the damaging appearance of Wall Street prominence and control
in the new movement by creating a spurious grassroots movement of non-banker businessmen
centered in the noble American heartland of the Middle West, far from the sinful environments
of Wall Street. It was important for bankers, a fortiori Wall Street bankers, to take a
discreet back seat in the reform movement which was to consist seemingly of heartland
businessmen, academics and other supposedly disinterested experts. The reform movement
The movement was officially launched just after the 1896 election by Hugh Henry Hannah, president of the Atlas Engine Works of Indianapolis, who had been active in the gold standard movement earlier in the year.
Hannah sent a memorandum to the Indianapolis Board of Trade urging a heartland state like Indiana to take the lead in currency reform.
The reformers responded with remarkable speed.
Answering the call of the Indianapolis Board of Trade, delegates of boards of trade from 12 Midwestern cities met in Indianapolis at the beginning of December,
and they called for a large monetary convention of businessmen from 26 states, which met quickly in Indianapolis on January 12.
This Indianapolis Monetary Convention, IMC, resolved, a, to urge President McKinley to continue the gold standard, and, b, to urge the President to create a new system of elastic bank credit by appointing a monetary commission to prepare legislation for a revised monetary system.
The IMC named Hugh Hannah as chairman of a permanent executive committee that he would appoint to carry out these policies.
The influential Yale Review hailed the IMC for deflecting opposition by putting itself forward as a gathering of businessmen rather than bankers.
But to those in the know, it was clear that the leading members of the executive committee were important financiers in the Morgan ambit.
Two particularly powerful executive members were Alexander E. Orr, Morgan-oriented New York City banker, grain merchandiser, railroad director,
and director of the J.P. Morgan-owned Publishing House of Harper Brothers
and Milwaukee tycoon Henry C. Payne, a Republican leader, head of the Morgan-dominated Wisconsin telephone company
and long-time director of the North American Company, a giant public utility holding company.
So close was North American to the Morgan interest that its board included two top Morgan financiers,
Edmund C. Converse, President of the Morgan Run Liberty National Bank of New York, and soon to be founding president of Morgan's Bankers Trust Company, and Robert Bacon, a partner in J.P. Morgan & Company, and one of Theodore Roosevelt's closest friends.
When Theodore Roosevelt became President, he made Bacon Assistant Secretary of State,
while Henry Payne took the top political job of Postmaster General of the United States.
A third member of the IMC Executive Committee was an even more powerful Secretary of the Committee,
and was even closer to the Morgan Empire. He was George Hoster Peabody.
The entire Peabody family of Boston Brahmins had long been personally and financially closely
associated with the Morgans. A George Peabody had established an international banking firm
of which J. P. Morgan's father, Junius, had been a senior partner. A member of the Peabody
clan had served as best man at J. P. Morgan's wedding in 1865. George Foster Peabody was
President McKinley was an eminent politically left liberal, New York investment banker who was to help the Morgans reorganize one of their prime industrial firms, General Electric, and who was later offered the job of Secretary of Treasury in the Wilson administration.
Although he turned down the official post, Peabody functioned throughout the Wilson regime as a close advisor and statesman without portfolio.
President McKinley was highly favorable to the IMC and in his first inaugural address he endorsed the idea of some revision of the banking system.
He followed this up in late July 1897 with a special message to Congress proposing the establishment of a special monetary commission, a bill for a commission passed the House but failed in the Senate.
Disappointed, but imperturbable, the Executive Committee of the IMC decided in August to select their own Indianapolis Monetary Commission.
The leading role in appointing the new commission was played by George Foster Peabody.
The commission consisted of various industrial notables, almost all either connected with Morgan Railroads or, in one case, with the Morgan-controlled General Electric Company.
Some examples. Former Secretary of the Treasury, under Cleveland, Charles S. Fairchild, a leading New York banker, former partner in the Boston Brahman, Morgan-oriented investment banking firm of Lee, Higginson & Company.
Fairchild's father, Sidney T., had been a leading attorney for the Morgan-controlled New York Central Railroad.
Another member of the Commission was Stuyvesant Fish, Skyon of two long-time aristocratic New York families, partner of the Morgan-dominated New York investment firm of Morton, Bliss & Company, and president of the Illinois Central Railroad.
A third member was William B. Dean, merchant from St. Paul, Minnesota, and a director of
the St. Paul-based transcontinental railroad, Great Northern, owned by James J. Hill, a
powerful ally of Morgan in his titanic battle with Harriman Rockefeller and Kuhn Loeb for
control of the Northern Pacific Railroad.
The working head of the Monetary Commission was economist J. Lawrence Loughlin, Professor
of Political Economy at the University of Chicago and editor of the University's prestigious
Journal of Political Economy.
Loughlin supervised the operations of the Commission staff in the writings of its reports.
The staff consisted of two of Loughlin's graduate students at Chicago.
The then impressive sum of $50,000 was raised throughout the nation's banking and corporate
community to finance the work of the Indianapolis Monetary Commission. New York City's large
quota was raised by Morgan bankers Peabody and Orr, and a large contribution came from
none other than J.P. Morgan himself. Setting up shop in Washington in mid-September, the
Commission staff pioneered in persuasive public relations techniques to spread the reports
of the Commission far and wide. In the first place, they sent a detailed monetary questionnaire
to several hundred selected, impartial experts who they were sure would answer the questions
in the desired manner. These questionnaire answers were then trumpeted as the received
Opinions of the Nation's Business Community Chairman of the IMC, Hugh Hanna, made the
inspired choice of hiring as a Washington Assistant of the Commission the financial
journalist Charles A. Conant, who had recently written A History of Modern Banks of Issue.
The Monetary Commission was due to issue its preliminary report in mid-December. By early
Early December, Conant was beating the drums for the Commission's recommendations, leading
an advance line of the report in an issue of Sound Currency magazine, and bolstering
the Commission's proposals with frequent reports of unpublished replies to the Commission's
questionnaire.
Conant and his colleagues induced newspapers throughout the country to print abstracts
And in that way, as the Commission's secretary reported, by careful manipulation, we're able to get part or all of the preliminary Commission report printed in nearly 7,500 newspapers, large and small, across the nation.
Thus, long before the days of computerized direct mail, Conant and the others on the
staff developed a distribution or transmission system of nearly 100,000 correspondents dedicated
to the enactment of the Commission's plan for banking and currency reform.
The prime emphasis of the Commission's preliminary report was to complete the McKinley victory
by codifying the existing de facto single gold standard.
More important in the long run was a call for fundamental banking reform to allow greater
elasticity so that bank credit could be increased during recessions.
As yet, there were little specifics for such a long run transformation.
The executive committee now decided to organize the second and final meeting of the Indianapolis
and the US Monetary Convention, which met at that city in January 1898.
The second convention was a far grander affair than the first, bringing together nearly 500 delegates from 31 states.
Moreover, the gathering was a cross-section of America's top corporate leaders.
The purpose of this second convention, as former Secretary of the Treasury Fairchild candidly explained to the gathering,
was to mobilize the nation's leading businessmen into a mighty and influential banking reform movement.
As he put it, if men of business give serious attention and study to these subjects, they will substantially agree upon legislation,
and thus agreeing, their influence will be prevailing.
Presiding Officer of the Convention, Iowa's Governor Leslie M. Shaw was, however, a bit
disingenuous when he told the meeting, You represent today not the banks, for there are
few bankers on this floor. You represent the business industries and the financial interests
of the country. For there were plenty of bankers there too. Shaw himself, later to be Secretary
The Secretary of the Treasury, under Theodore Roosevelt, was a small-town banker in Iowa, president of the Bank of Denison, who saw nothing wrong with continuing in this post throughout his term as governor.
More important for Shaw's career was the fact that he was a long-time leading member of the Des Moines Regency, the Iowa Republican machine, headed by the powerful Senator William Boyd Allison.
Dawson, who was later to obtain the Treasury Post for Shaw, was in turn closely tied to
Charles E. Perkins, a close Morgan ally, president of the Chicago, Burlington and Quincy Railroad,
and kinsman of the highly influential Forbes Financial Group of Boston, long tied to the
Morgan interest.
Also serving as delegates to this convention were several eminent economists, who, however,
Professor Jeremiah W. Jenks of Cornell, a leading proponent of government cartelization
and enforcement of trust, and soon to become a friend and advisor of Theodore Roosevelt
as Governor of New York, came as a delegate from the Ithaca Businessmen's Association.
Frank W. Tosik of Harvard represented the Cambridge Merchants Association. Yale's Arthur
Twining Hadley, soon to become President of Yale University, came as representative of
the New Haven Chamber of Commerce, and Fred M. Taylor of the University of Michigan came
representing the Ann Arbor Businessmen's Association. Each of these men held powerful
Posts in the Organized Economics Profession, Jencks, Tosik and Taylor serving on the Currency
Committee of the American Economic Association, Hadley, a leading railroad economist, also
served on the board of directors of two leading Morgan railroads, the New York, New Haven
and Hartford, and the Atchison, Topeka and Santa Fe railroads. Both Tosik and Taylor
Taylor were monetary theorists who urged reform to make the money supply more elastic.
Tosig wanted an expansion of national banknotes to inflate in response to the needs of business
so that the currency would grow without trammels as the needs of the community spontaneously
call for increase.
Taylor too urged a modification of the gold standard by a conscious control of the movement
of Money by Government in order to maintain the stability of the credit system. Taylor
went so far as to justify suspensions of specie payment by the government in order to protect
the gold reserve. In late January, the Convention duly endorsed the preliminary report with
virtual unanimity, after which Professor Laughlin was assigned the task of drawing up a more
Loughlin's final report finally let the cat out of the bag, for the report not only came out for a greatly increased issue of national bank notes, but it also called explicitly for a central bank that would enjoy a monopoly of the issue of national bank notes.
Issue of Bank Notes
The final report, including the recommendation for a central bank, was hailed by convention
delegate F.M. Taylor in Laughlin's economic journal, the Journal of Political Economy.
Taylor also exalted that the convention had been one of the most notable movements of
our time, the first thoroughly organized movement of the business classes in the whole country
directed to the bringing about of a radical change in national legislation.
The convention delegates promptly took the gospel of banking reform and a central bank
to the length and breadth of the corporate and financial communities.
Thus, in April 1898, A. Barton Hepburn, monetary historian and president of the Chase National
of New York, at that time the flagship commercial bank for the Morgan interest and a man who would play a leading role in the drive to establish a central bank, invited monetary commissioner Robert S. Taylor to address the New York State Bankers Association on the currency question, since bankers like other people need instruction on this subject.
All the monetary commissioners, especially Taylor, were active during this period in exhorting groups of businessmen throughout the nation on behalf of banking reform.
Taylor was an Indiana attorney for General Electric Company.
Meanwhile, the lobbying team of Hannah and Conant were extremely active in Washington.
A bill embodying the proposals of the Indianapolis Monetary Commission was introduced into the
House by Indiana Congressman Jesse Overstreet in January, and was reported out by the House
Banking and Currency Committee in May.
In the meanwhile, Conant met also continually with the Banking Committee members, while
while Hannah repeatedly sent circular letters to the Convention delegates and to the public,
urging a letter-writing campaign in support of the bill at every step of the Congressional
process.
Amidst this agitation, McKinley's Secretary of the Treasury, Lyman J. Gage, worked closely
with Hannah, Conant and their staff.
Gage sponsored several bills along the same lines.
Gage, a friend of several of the monetary commissioners, was one of the top leaders of the Rockefeller interest in the banking field.
His appointment as Secretary of the Treasury had been secured for him by Ohio's Mark Hanna, political mastermind and financial backer of President McKinley,
and old friend, high school classmate and business associate of John D. Rockefeller Sr.
Before his appointment to the Cabinet, Gage had been president of the powerful First National Bank of Chicago, one of the leading commercial banks in the Rockefeller ambit.
During his term in office, Gage tried to operate the Treasury Department as a central bank, pumping in money during recessions by purchasing government bonds in the open market and depositing large funds with pet commercial banks.
In 1900, Gage called vainly for the establishment of regional central banks. Finally, in his last annual report as Secretary of the Treasury in 1901, Lyman Gage called outright for a governmental central bank.
Without such a central bank, he declared in alarm, individual banks stand isolated and apart, separated units, with no tie of mutuality between them.
in them. Unless a central bank could establish such ties, he warned, the panic of 1893 would
be repeated. Any reform legislation, however, had to wait until the gold forces could secure
control of Congress in the elections of 1898. In the autumn, the Permanent Executive Committee
of the Indianapolis Monetary Convention mobilized its forces, calling on 97,000 correspondents
Throughout the country to whom it had distributed its preliminary report, the executive committee
urged its readers to elect a gold standard congress, a task which was accomplished in
November.
As a result, the McKinley administration now could submit its bill to codify the single
gold standard which congress passed as the gold standard act of March 1900.
Phase one of the reformer's task had been accomplished. Gold was the sole standard, and the silver menace had been crushed.
Less well known are the clauses of the gold standard act that began the march toward a more elastic currency.
Capital requirements for national banks in small towns and rural areas were now loosened, and it was made easier for national banks to issue notes.
The purpose was to meet a popular demand for more money in rural areas at crop moving time.
But the reformers regarded the gold standard act as only the first step toward fundamental banking reform.
Thus, Frank Tosik in Harvard's Economic Journal praised the gold standard act
Act, and was particularly gratified that it was the result of a new social and ideological
alignment sparked by strong pressure from the business community through the Indianapolis
Monetary Convention, but Tosik warned that more reform was needed to allow for greater
expansion of money and bank credit. More detailed in calling for reform in his comment on the
Gold Standard Act was Joseph French Johnson, professor of finance at the Wharton School
of Business at the University of Pennsylvania.
Johnson deplored the U.S. banking system as the worst in the world and pointed in contrast
to the glorious central banking systems existing in Britain and France.
In the United States, however, unfortunately, there is no single business institution and
There is no group of large institutions in which self-interest, responsibility and power naturally unite and conspire for the protection of the monetary system against twists and strains.
In short, there was far too much freedom and decentralization in the banking system so that the deposit credit structure trembles whenever credit expansion leads to demands for cash or gold.
Johnson had been a mentor and close friend at the Chicago Tribune of both Lyman Gage and Frank A. Vanderlip, who was to play a particularly important role in the drive for Central Bank.
When Gage went to Washington as Secretary of the Treasury, he brought Vanderlip along as his assistant secretary.
On the accession of Roosevelt to the presidency, Gage left the cabinet in early 1902, and Gage, Vanderlip and Conant all left for top banking positions in New York.
Gage became president of the Rockefeller-controlled U.S. Trust Company.
Anderlip became vice president at the flagship commercial bank of the Rockefeller interest,
the National City Bank of New York.
And Conant became treasurer of the Morgan-controlled Morton Trust Company.
The political pressure for reform after 1900 was poured on by the large bankers.
A. Barton Hepburn, head of Morgan's Chase National Bank, drew up a bill as head of a
The HEPBURN Fowler Bill was reported out of the Committee the following April. The Fowler
Bill allowed for further expansion of national bank notes. It also allowed national banks
to establish branches at home and abroad, a step that had been illegal and has still
been illegal until very recently due to the fierce opposition by the small country bankers.
Third, the Fowler Bill proposed to create a three-member board of control within the
Treasury Department to supervise new bank notes and to establish clearing houses. This
This would have been a step toward a central bank, but at this point, fierce opposition
by the country bankers managed to kill the Fowler Bill on the floor of the House in 1902,
despite agitation in its favor by the Executive Committee and staff of the Indianapolis Monetary
Convention.
Thus, the opposition of the small country bankers managed to stop the reform drive in
Congress.
Following another tack, Theodore Roosevelt's Secretary of Treasury, Leslie Shaw, attempted
to continue and expand Lyman Gage's experiments in making the U.S. Treasury function like
a central bank. In particular, Shaw made open market purchases in recessions and violated
the independent Treasury statutes confining Treasury funds to its own vaults by depositing
in Treasury Funds in Favored Large National Banks.
In his last annual report of 1906, Secretary Shah urged that he be given total power to
regulate all the nation's banks.
By this time, the reformers had all dubbed these efforts a failure.
A central bank itself was deemed clearly necessary.