America's Bank: The Epic Struggle to Create the Federal Reserve (57 page)

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Thomas Fortune Ryan, a tobacco magnate with investments in the New York subways, was a delegate from Virginia; fianancier August Belmont Jr., a delegate from New York.

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People still spoke of the “currency” question even though, by 1912, the issues centered on banking.

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Although it was not yet constitutionally required, some states already chose senators in general elections.

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Trying to convince Wilson that a central bank was permissible, House misquoted the Democratic platform as forbidding “the so called Aldrich Plan
for
the establishment of a central bank” [emphasis added]. Based on this fallacious wording, House argued that, therefore, the platform would tolerate other central banking plans. The actual platform objected to “the so-called Aldrich bill
or
the establishment of a central bank.”

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The resourceful Untermyer did not stop trying. In December he sought to have the two banking subcommittees combined, so that he could serve as counsel to the entire panel. The Glass subcommittee rejected him.

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The only states in which Wilson won popular majorities were the eleven former members of the Confederacy.

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True to Glass’s vision, today’s Federal Reserve Banks are private in the limited sense that their stock is owned by for-profit banks, to whom they pay dividends fixed by law. However, the stock cannot be transferred, all surplus profits are sent to the Treasury, and the Banks are subject to supervision by a federal agency, the Reserve Board in Washington.

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According to Glass’s memoir, Wilson also told Glass their plan should provide for overseas banking. This feature was long sought by Wall Street, and Wilson would scarcely have thought of such a detail on his own.

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Colonel House, in a diary entry shortly after the Princeton conference, said Wilson remarked that the plan “was like building three stories of a four story house, with the expectation that a fourth story would be demanded.” This suggests that Wilson did indeed hope that the capstone would evolve into a central bank.

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This was prescient of Warburg; lack of coordination among the Reserve Banks contributed to the Fed’s ineffectiveness during the Great Depression.

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Published in book form under the title
Other People’s Money and How the Bankers Use It,
in 1914, it became a progressive anthem.

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Congressional sessions were irregular. Frequently, after a presidential inauguration, Congress did not meet for any extended period until the following December.

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Willis, for instance, had the impression that House “was apparently vested with very large powers.”

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For instance, states were permitted to subscribe, dividends were capped, and reserve requirements were cut.

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According to Willis, since the Bryan faction in the House had no commitment to reform, “it was believed that the only way to get their support would be that of enlisting the direct aid of Mr. Bryan himself” (
The Federal Reserve System,
p. 210).

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After June 26, the legislation that was to become the Federal Reserve Act was commonly referred to as both the “Glass-Owen” bill and the “Owen-Glass” bill. For the sake of consistency, this text will use “Glass-Owen.”

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The mountain air did not lower Warburg’s temperature. Toward the end of July he fumed to Colonel House that if Glass-Owen was enacted in its current state, “
history will write down
President Wilson as a complete failure and Bryan will once more have ruined the chances of the Democratic Party.”

*
This was the real bills theory discussed in chapter 1. I am indebted to Robert Craig West,
Banking Reform and the Federal Reserve,
especially pp. 153–54 and 172–73.

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In 1914 Wilson signed the Clayton Antitrust Act, prohibiting directors from serving on the boards of more than one bank when either of the banks had capital, surplus, and deposits aggregating to more than $5 million.

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Among other demands, the bankers wanted a central bank or at most a handful of Reserve Banks, rather than the twelve in Glass-Owen; they wanted three Reserve Board directors chosen by bankers; they wanted to let banks continue depositing some reserves in private banks; and they wanted membership in the new system to be voluntary.

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The tariff cuts were destined to be of little consequence. Within a year of the legislation, World War I had broken out, disrupting world trade. After the war, once Republicans were returned to office, tariff rates were raised again.

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Legally, legislators would be free to defy a party caucus, and Senator Hitchcock made clear that he would do so.

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The inconsistency did not escape Glass, who sarcastically inquired, “If these things constituted ‘unsound banking’ in July” why were they not “unsound banking in November.” (Glass,
An Adventure in Constructive Finance,
p. 194.)

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Vanderlip remained hopeful about his proposal. On November 15, he boasted to Stillman, “There is no question at all but what the plan which I have presented to the Committee has met with the approval of the intelligent thought of the country.”

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The term “State of the Union” was not adopted until later.

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Reserve requirements were cut to 12 percent for country banks, 15 percent for middle-tier banks, and 18 percent for central reserve city banks. The previous standard was 15, 25, and 25 percent, respectively. Today, reserve requirements are zero up to $14.5 million of deposits, 3 percent up to $103.6 million of deposits, and 10 percent thereafter.

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While Federal Reserve notes make up more than 99 percent of the money in circulation today, some U.S. notes (greenbacks), as well as National Bank Notes and silver certificates, are still around. All remain legal tender.

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This was the same issue on which Warburg had debated Aldrich at Jekyl Island, but thanks to a subsequent amendment, Warburg prevailed. Thus, today, Federal Reserve notes in the vaults of banks are counted as reserves.

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Reserve Banks were placed in New York, Boston, Philadelphia, Richmond, Atlanta, Cleveland, Chicago, St. Louis, Kansas City, Minneapolis, Dallas, and San Francisco. Those twelve were also the top-ranking cities in the bankers’ poll, with the single exception of Cleveland, which was swapped by McAdoo for Cincinnati.

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The original Reserve Board members were appointed to terms of varying lengths; Warburg’s term expired that year.

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