All the Presidents' Bankers (9 page)

From this, Glass knew that the bankers would fight for the Aldrich plan as it was drafted, so he tried to find a way to capitulate but still leave his and the party’s mark on it. He publicly suggested drafting a bill giving local reserve banks equal power, as opposed to one that would empower a strong centralized source, and placing the burden on the advocates of the Aldrich bill to show that a central superstructure would not possess “the evils of bank monopoly and the dangers of centralized power.”
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Unofficially, though, Glass knew nothing would pass unless he preserved the elements of the Aldrich plan that the bankers supported. Though he wrote Wilson several letters about his centralization concerns, Wilson did not reply to his concerns until it was clear that Glass was leaning toward a better compromise with the bankers, and the bankers were indicating their approval of the Glass plan in return.

Morgan’s Defiance

While those conversations were progressing, J. P. Morgan traveled from New York to Washington on December 17, 1912, with an entourage of fifteen men—including his son, Jack, and his partner, Thomas Lamont.

In his testimony before the Pujo Committee, Morgan was curt and defiant. In one exchange with Untermyer, he brushed aside both the idea that he could save the country’s finances in a panic, as his admirers insisted he had done in 1907, and that he could control them for his advantage.

      
Q.
  
Your power in any direction is entirely unconscious to you, is it not?

      
A.
  
It is, sir; if that is the case.

      
Q.
  
You do not think you have any power in any department of industry in this country, do you?

      
A.
  
I do not.

      
Q.
  
Not the slightest?

      
A.
  
Not the slightest.

Thus the man who routinely convened with the heads of finance and industry in New York, London, and Jekyll Island yielded no information about his methods and presented no awareness of the power of their impact.

Ten days later, as a parting gift to the bankers, outgoing President Taft attempted to stonewall the final stages of the investigation. He informed Pujo that he would refuse to force the comptroller of the currency to gather any additional information from the national banks for use in the investigation.
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On February 26, 1913, the Pujo Committee issued its final report, a searing indictment of the dangers of high concentration of money and credit in the hands of a few elite “money trusts.” The report outlined a list of their unsavory practices, such as “wash sales,” which provided the appearance of demand for securities cultivated by the firms that created them to entice investors, and “short sales,” which gave firms the ability to sell their securities to give the appearance of weaker demand and then profit by buying them back later at lower prices.
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The report revealed that J. P. Morgan & Company—“the acknowledged leaders of the allied forces,” as Louis Brandeis put it—held seventy-two directorships in forty-seven of the largest American companies. More broadly, its members and the directors of its controlled trust companies, the First National Bank, and the National City bank held 341 directorships in 112 corporations with resources or capitalizations of $22.25 billion (including in banks, trusts, insurance companies, transportation systems, and public utilities).
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Brandeis considered this the tip of the iceberg. He believed that “wealth expressed in figures give[s] a wholly inadequate picture of the allies’ power. . . . Their wealth is dynamic. It is wielded by geniuses in combination. It finds its proper expression in means of control.”
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Morgan had a different perspective. His firm had declared in its letter to the Pujo Committee that “practically all the railroads and institutional development of this country has taken place initially through the medium of the great banking houses.” Conversely, Brandeis argued, “nearly every contribution to
our comfort and prosperity was ‘initiated’
without
their aid.” Banks entered the picture once success had been established.
⁵⁶

Once the spectacle was over, the committee came up empty-handed. Wall Street rallied around Morgan’s performance.
⁵⁷
The
New York Times
praised the accompanying letter from the firm as a “sermon” to the unconverted.
⁵⁸

It was to be Morgan’s last mortal triumph, capping off the short-lived and shallow decline of the money trust, which would soon be resurrected in a broader, global form as the Great War provided the firm with more opportunities for influence and placed Wilson’s government in a greater position of financial dependence than ever.

Six weeks after the report was issued and just past midnight on March 31, 1913, Morgan died at the Grand Hotel in Rome. His partners attributed the death of the great titan to the stress of the Pujo investigations. There may have been some truth to that, but as Morgan’s biographer Ron Chernow wrote, “Pierpont was seventy-five . . . smoked dozens of cigars daily, stowed away huge breakfasts, drank heavily and refused to exercise.”
⁵⁹

Leaders from Pope Pius to the German emperor to fellow bankers publicly mourned his death. Jack Morgan took over the firm and gained control of its political alliances at the age of forty-six. Though he never led the firm with as controlling or exacting a command as his father, or possessed the ability to gather its collaborators in the same way, Jack would shepherd the bank through the ratification of the Federal Reserve Act, which his father had championed behind the scenes, and navigate the bank through the war.

Passing the Federal Reserve Act

It turned out that 1913 was a busy year for legislation. On February 3, the Sixteenth Amendment was ratified, allowing the Treasury Department to impose an income tax. Two months later, the Seventeenth Amendment, requiring direct popular election of US senators, was passed. But Washington’s main debate concerned the Glass-Owen bill, the reformation of the Aldrich bill. That legislation would define financial power in the United States and, by extension, US private banking power globally.

Despite concerns over the structure of the board and who would be in charge of appointing its officials, the bankers adopted a more conciliatory tone toward this version of the Glass-Owen bill, which, after all, granted them the ability to access currency when they needed it and to expand their branches overseas. Glass was encouraged by the changed attitude of some of the influential bankers.

“These gentlemen,” as Glass informed Wilson on January 27, “concluded that they could not carry out Mr. Warburg’s purpose of ‘battering the committee into a repudiation of the Democratic platform.’” Glass continued, “They were now willing to cooperate with the committee in trying to secure the ‘best remedial legislation that is possible to obtain.’” Having the bankers on board ironically placed a potential bull’s-eye mark on Glass, who realized “too pronounced activity by the organized bankers might arouse suspicion and hostility among those who regard banks as essentially evil.” He decided, therefore, “to proceed discreetly.”
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Work on the bill thus progressed through the spring. Based on advice from his confidant Colonel Edward House, Wilson appointed William McAdoo—who had worked on Wilson’s campaign and had been his interlocutor with Vanderlip—as his Treasury secretary.
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On April 11, House and McAdoo dined at the White House at Wilson’s invitation. After dinner, the three men adjourned to the library to discuss New York appointments, currency reform, and the Glass bill. They agreed that McAdoo, Glass, Owen, and House should meet Monday evening and “whip it in shape.”
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It could represent an early and strong political victory for Wilson.

Two months later, as the Glass bill adopted more of what the big bankers wanted, Brandeis voiced his concern to Wilson over the pending legislation in an attempt to swing the pendulum away from Wall Street. “The power to issue currency should be vested exclusively in Government officials,” he wrote. “The American people will not be content . . . in a Board composed wholly or in part of bankers; for their judgment may be biased by private interest or affiliation.”
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But Glass was now leaning toward giving the bankers precisely that power. On June 18, 1913, he asked Wilson to allow bank representation on the proposed Federal Reserve Board.
⁶⁴
Glass had been up past one o’clock the night before discussing the matter with Representative Robert Bulkley, a member of the subcommittee on banking and currency and “a strong man of the committee with whom we must reckon,” as he told Wilson.
⁶⁵

Bulkley, a millionaire Democrat from Ohio, was popular in the Washington society circuit; he counted as his friends bankers and Republicans alike.
⁶⁶
He didn’t want the banking business exposed to undue government controls. As such, he proposed an alteration to the current draft of the plan to allow bankers to sit on the main Federal Reserve Board. He confirmed Glass’s new belief that it would prove “an almost irretrievable mistake to leave the banks without representation on the Central Board.”
⁶⁷

Five days later, Wilson addressed the issue of banking and currency reform before a joint session of Congress. He again stressed that control of the
banking system “must be vested in the Government itself, so that the banks may be the instruments, not the masters, of business and of individual enterprise and initiative.”
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But he shied away from specifics about how the board should be comprised.

Signing the Federal Reserve Act

Wilson had privately agreed to incorporate Bulkley’s suggestions. He intended to allow bankers on the Board of the New York Federal Reserve, one of a dozen reserve banks that would comprise the Federal Reserve System—the most powerful one by virtue of its location in the heart of the banking community and the size of its assets. It was a compromise that gave the bankers the power they wanted but preserved the president’s power to appoint the main board in Washington, DC. By doing so, Wilson got the Republican votes needed to pass the bill.

After six more months of haggling over minor details, Wilson signed the Federal Reserve Act into law on December 23, 1913, establishing the twelve-bank Federal Reserve System and its powerful Wall Street–centric arm, the New York Fed (the part that complied with the bankers’ demands).
⁶⁹
The name sounded “public” and “of the government,” and indeed the act delineated the Fed’s ability to balance credit, monitor inflation, and help cultivate employment. (Though that aspect was absent from the private conversations that preceded the act, the addition played well publicly.) And yet its members were the private banks that wanted it to exist. It was Aldrich’s plan in essence, if not in each particular detail.

Wilson painted the act’s passage as a political victory for the power of the presidency and his party, coated in populist terms. At the signing he effused, “This bill furnishes the machinery for free and elastic and uncontrolled credit, put at the disposal of the merchants and the manufacturers of this country for the first time in fifty years.” (The National Banking Act was passed in 1863—with revisions in 1864 and 1865—to help fund the Civil War by creating currency notes issued by the larger nationally chartered banks rather than state-chartered ones. The Union government established many more nationalistic institutions, as opposed to the more fractious and weaker brand of federalism that existed beforehand.
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The National Banking Act also formed the Office of the Comptroller of the Currency, which issued national banking charters, ensured these banks adhered to strict capital requirements, and required them to back currency notes via holding US government securities.)

At the signing ceremony, in the spirit of bipartisanship and the influence it bestowed upon him politically, Wilson said, “We rejoice together.”
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In a quiet moment afterward, he wrote Glass of his admiration for the way he had carried the fight for the currency bill so successfully.
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He presented his partners Glass, McAdoo, and Owen with gold signing pens.

Though it was largely devised with bankers’ input, the act was presented to the American public as in their best interests domestically. Like the European powers, the United States would now have a centralized entity that operated on the principle of “discount” rates, whereby large national banks would receive loans stemming from reserve funds for a certain interest charge, which would supposedly be used to lend onward to businesses and citizens as needed.

The Federal Reserve System was similar to a European central bank from a monetary policy perspective in that it was able to set rates, but some of its members were more powerful than others. Though all twelve member banks theoretically decided matters with equal influence, the most powerful components of the system characterized the power-sharing arrangement of the president and the bankers. The Board of Governors would be selected by the president, and the Board of the New York Fed would be closest to the Wall Street bankers, who would hold the most sway over the Federal Reserve System because they controlled the largest portion of reserves.