America's Bank: The Epic Struggle to Create the Federal Reserve (30 page)

As the joke implied, the Fed’s parentage was mixed. It drew from both American traditions, Hamiltonian and Jacksonian. Some said the banks got all they wanted—that, in effect, the Money Trust won out. But they did not get control of the Reseve Board, and that was a very great concession. For National City to submit to Washington, in so many particulars and regulatory details, was more than it had ever done before. Control was to be shared—private or quasi-private banks but a government board. Similarly, the organization was split—Federal on top, regional below. The character of the money was also a compromise. The essential bargain was to respect the federalist character of American politics while overcoming its fierce resistance to centralization.

The Federal Reserve Act did not guarantee sound monetary policy any more than the establishment of Congress could guarantee good laws. Policy would be the burden of those in power—as disputatious today as in 1913. However, the Act unified the banking system, which unquestionably made it stronger. It created an institution for regulating the money supply, a difficult task but a necessary one for societies too advanced to depend on the vagaries of mining gold. It provided flexibility to respond to financial shocks and economic headwinds and thus made the system more resilient. It was an imperfect bill—nonetheless, after a decade of debate, division, panic, study, conspiracy, party platforms, elections, and legislative work, it was a highly worthy achievement.

From the time he entered the Senate in 1881, Nelson W. Aldrich was a bastion of conservatism and a stout defender of the decentralized Civil War banking structure. His cool exterior masked a melancholy nature and a yearning to leave his mark.

Senator Nelson W. Aldrich
. Unknown, n.d. Albumen print photograph. Graphics. Anonymous. RHI X17 141.

William Jennings Bryan, depicted soon after his stirring “cross of gold” speech at the 1896 Democratic convention, lost the election but won the support of farmers and working-class Americans who thought the banking system favored the wealthy. Wall Street regarded him with contempt.

Carter Glass, the son of a Confederate soldier reared on the gospel of states’ rights, was determined to reform the banking system without creating a dread “central bank.”

The young financier Paul Warburg moved to America in 1902 and joined his in-laws’ firm on Wall Street. He was horrified by the primitive condition of American banking and passionately crusaded for a system of centralized reserves like the one he had left behind in Germany.

The onetime farm boy Frank Vanderlip, heir apparent at National City Bank of New York, was upset that reserves were siphoned off to the countryside at harvest season, depleting metropolitan areas of funds. He agreed with Warburg that America needed a central bank.

Although Democrats opposed a national bank, the young president of Princeton University, Woodrow Wilson, had written favorably of Alexander Hamilton’s original experiment and was sympathetic to the cause of reform.

During the Panic of 1907, one man—J. P. Morgan, shown beside an ornamental vase in his library—fulfilled the role of “lender of last resort,” which in other nations was played by the central bank

Even Morgan’s efforts were not enough, as this scene from the Panic of 1907 demonstrates. Despite the efforts of Morgan and his colleagues to organize loans, banks around the country ran out of money and had to circulate scrip.

In 1908, the Harvard professor Piatt Andrew (shown at his home in Gloucester, Massachusetts) guided Aldrich and other members of the National Monetary Commission on a tour of Europe, studying central banking operations in London, Berlin, and Paris.

In Europe, Aldrich did an about-face and became convinced of the need for a central bank.

The rising progressive movement trained its sights on one villain in particular: Nelson Aldrich. In this political cartoon, typical of the era, Aldrich is depicted as a spider trapping needed reform efforts in its web.