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 contractual obligation to redeem their notes and deposits in cash or in gold. While the Treasury had stimulated inflation during 1905–1907, there was nothing it could do to prevent suspensions of payment, or to alleviate “the competitive hoarding of currency” after the panic, that is, the attempt to demand cash in return for increasingly shaky bank notes 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 twofold task: hammering out details of a 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 (AAPSS) of Philadelphia, and the Academy of Political Science (APS) of Columbia University, both of which included in their ranks leading corporate liberal businessmen, financiers, attorneys, and academics. Nicholas Murray Butler, the highly influential president of Columbia University, explained that the Academy of Political Science “is an intermediary between … the scholars and the men of affairs, those who may perhaps be said to be amateurs in scholarship.” Here, he pointed out, was where they “come together.”⁶¹

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 1907–1908, 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, gratified that his university was providing a platform for leading bankers and financial journalists to advocate a central bank, especially, he noted, because “it is proverbially difficult in a democracy to secure a hearing for the conclusions of experts.” 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 “more correct adjustment of present investment to future needs” than would a “horde of small competitors.” 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,

Even more important than the inelasticity of our note issue is its decentralization. The struggle which has been victoriously fought out everywhere else [in creating trusts] must be undertaken here in earnest and with vigor.⁶²

The next address was that of Frank Vanderlip. To Vanderlip, in contrast to Seligman, the panic of 1907 was “one of the great calamities of history”—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 “each institution stands alone, concerned first with its own safety, and using every endeavor to pile up reserves without regard” 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 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 rung the changes on the common theme by applying it to the volatile call loan market in New York. The market is volatile, Wheelock claimed, because the small country banks are able to lend on that market, and their deposits in New York banks then rise and fall in uncontrolled fashion. Therefore, there must be central corporate control over country bank money in the call loan market.

A. Barton Hepburn, head of Morgan’s Chase National Bank, came next, and spoke of 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 (1) having a central bank, as against decentralized American banking, and (2)—his old hobby horse—enjoying “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: “Small banks constitute a danger.”

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 Lynde 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 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 Bankers Publishing Company, in January 1908: “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 people as a whole.” That strategy was well under way.

During the same month, the legislative lead in banking reform was taken by the formidable Senator Nelson W. Aldrich (R-R.I.), 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 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 1908.⁶³ 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 swamp the public with supposed expertise and thereby “educate” them into supporting banking reform:

Reform can only be brought about by educating the people up to it, and such education must necessarily take much time. In no other way can such education be effected 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 “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 “keep the financial issue out of politics” and put it squarely in the safe custody of carefully selected “experts.”⁶⁴ Thus, the National Monetary Commission (NMC) was the apotheosis of the clever commission 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: “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, Loeb people. The two top expert posts advising or joining the commission were both suggested by Morgan leaders. On the advice of J.P. Morgan, seconded by Jacob Schiff, Aldrich picked as his top adviser the formidable Henry P. Davison, Morgan partner, founder of Morgan’s Bankers Trust Company, and vice president of George F. Baker’s First National Bank of New York. It would be Davison who, on the outbreak of World War I, would rush to England to cement J.P. Morgan and Company’s 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. Piatt 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. Piatt Andrew began to organize American banking experts and to commission reports and studies. The National City Bank’s foreign exchange department was commissioned to write papers on bankers’ acceptances and foreign debt, while Warburg and Bankers Trust official 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 façade of the congressmen and senators on the commission, Senator Aldrich began to form and expand his inner circle, which soon included Warburg and Vanderlip. Warburg formed around him a subcircle 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 banking reform, including E.R.A. Seligman; Thomas Nixon Carver of Harvard; Henry R. Seager of Columbia; Davis R. Dewey, historian of banking at MIT, longtime 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. Taussig 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 a lender of last resort—quite the contrary. It was rather that Forgan 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 Forgan 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 Forgan and others 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. Mollified, Forgan held a private conference with Aldrich’s inner circle and came fully on board for the central bank. As an outgrowth of Forgan’s concerns, the reformers decided to cloak their new central bank in a spurious veil of “regionalism” and “decentralism” through establishing regional reserve centers, that would provide the appearance of virtually independent regional central banks to cover the reality of an orthodox European central bank monolith. As a result, noted railroad attorney Victor Morawetz made his famous speech in November 1909, calling for regional banking districts under the ultimate direction of one 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.⁶⁵

On September 14, at the same time as Reynolds’s address 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 Burton—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 “toward removing the subject from the realm of theory to that of practical politics.”⁶⁶

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 “A Central Bank of Issue.” 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. government’s National Monetary Commission. The series was a summary of the reformers’ position, also going out of the way to assure the Forgans of this world that the new central bank “would probably deal directly only with the larger national banks, leaving it for the latter to rediscount for their more remote correspondents.”⁶⁷ To the standard arguments for a central bank—“elasticity” of the money supply, protecting 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 capital; that is, providing profitable outlets for savings by financing government expenditures.

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 commission 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 “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. Ely, 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 “popularize in the best sense, some of the valuable work of [the] Commission.”⁶⁸ And yet, Ely had the gall to add that, even though the APS would advertise the NMC’s arguments and conclusions, it would retain its “objectivity” by avoiding its own specific policy recommendations. As Ely put it, “We shall not advocate a central bank, but we shall only give the best results of your work in condensed form and untechnical language.”

The AAPSS, too, weighed in with its own special volume, Banking Problems (1910), featuring an introduction by A. Piatt 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 “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 percent of the nation’s bankers favored a central bank provided it was “not controlled by ‘Wall Street or any monopolistic interest.’” 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 “complete lack of modern bills of exchange” (that is, acceptances) in the United States. 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 “the best judgment of the best experts.” 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 (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.⁶⁹

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’ Assocation 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 “scientific” and “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 “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 cognoscenti, 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: “Advance is possible only by outlining a tangible plan” that would set the terms of the debate from then on.⁷⁰

The tangible plan 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. Also attending were a large number of economists, monetary analysts, and representatives of most of the top banks in the country. Attendants 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 Kemmerer, Laughlin, 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 was now solidly in the central banking camp, put it: “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.” C. Stuart Patterson pointed to the great lessons of the Indianapolis Monetary Commission, and the way in which its proposals triumphed in action because “we went home and organized an aggressive and active movement.” Patterson then laid down the marching orders of what this would mean concretely for the assembled troops:

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 this country.⁷¹

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; and finally, A. Piatt 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 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 “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 a decentralized patina taken from Morawetz.

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, Loeb person (Warburg), and one economist friendly to both camps (Andrew).⁷²

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, disheartened, 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.

---

---

⁶¹ Livingston, Origins, p. 175, n. 30.

⁶² Ibid., p. 177.

⁶³ The emergency currency provision was only used once, shortly before the provision expired, in 1914, and after the establishment of the Federal Reserve System.

⁶⁴ Livingston, Origins, pp. 182–83.

⁶⁵ Victor Morawetz was an eminent attorney in the Morgan ambit who served as chairman of the executive committee of the Morgan-run Atchison, Topeka and Santa Fe Railway, and member of the board of the Morgan-dominated National Bank of Commerce. In 1908, Morawetz, along with J.P. Morgan’s personal attorney, Francis Lynde Stetson, had been the principal drafter of an unsuccessful MorganNational Civic Federation bill for a federal incorporation law to regulate and cartelize American corporations. Later, Morawetz was to be a top consultant to another “progressive” reformer of Woodrow Wilson’s, the Federal Trade Commission. On Morawetz, see Rothbard, “Federal Reserve,” p. 99.

⁶⁶Wall Street Journal, 16 September 1909, p. 1. Cited in Livingston, Origins, p. 191.

⁶⁷ Ibid.

⁶⁸ Ibid., p. 194.

⁶⁹ See Rothbard, “Federal Reserve,” pp. 98–99. Also, on Warburg’s speech, see Livingston, Origins, pp. 194–98.

⁷⁰ Livingston, Origins, p. 203.

⁷¹ Ibid., pp. 205–07.

⁷² See Rothbard, “Federal Reserve,” pp. 99–101; and Frank A. Vanderlip, From Farm Boy to Financier (New York: D. Appleton-Century, 1935), pp. 210–19.