America’s Bank: The Epic Struggle to Create the Federal Reserve

368 Pages·2015·6.76 MB·English

by  Roger Lowenstein

ALSO BY ROGER LOWENSTEIN
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While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted
San Diego, and Loom as the Next Financial Crisis
Origins of the Crash: The Great Bubble and Its Undoing
When Genius Failed: The Rise and Fall of Long-Term Capital Management
Buffett: The Making of an American Capitalist

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Photograph credits:
Courtesy of the Rhode Island Historical Society: Insert image 1; Library of Congress, Prints and Photographs Division: 2, 10, 11, 14,
18; Library of Congress, Harris & Ewing Collection: 3; courtesy of the Jekyll Island Museum Archives: 4, 9, 12, 13; Citi Center for
Culture/Heritage Collection: 5; courtesy of the Woodrow Wilson Presidential Library, Staunton, Virginia: 6, 15, 19, 20; Museum of
American Finance: 7, 8; Library of Congress, National Photo Company Collection: 16; Library of Congress, Bain Collection: 17
ISBN 978-1-10161412-9
Version_1
TO JUDY, ALWAYS
We do not think it fair that men . . . should raise the cry of a central bank or summon
the ghost of Andrew Jackson.
—NELSON ALDRICH
CONTENTS
ALSO BY ROGER LOWENSTEIN
TITLE PAGE
COPYRIGHT
DEDICATION
EPIGRAPH
INTRODUCTION
PART ONE
THE ROAD TO JEKYL ISLAND
ONE: THE FORBIDDEN WORDS
TWO: PRIVILEGED BANKER, SELF-MADE SENATOR
THREE: JITTERS ON WALL STREET
FOUR: PANIC
FIVE: THE CROSSING
SIX: PROGRESSIVISM
SEVEN: JEKYL ISLAND
PART TWO
THE LEGISLATIVE ARENA
EIGHT: INTO THE CRUCIBLE
NINE: THE GREAT CAMPAIGN
TEN: WOODROW’S MIRACLE
ELEVEN: THE PRINCETON DEPOT
TWELVE: THE “SLIME OF BRYANISM”
THIRTEEN: “THE IMPOSSIBLE HAS HAPPENED”
FOURTEEN: EPILOGUE

PHOTOGRAPHS
ACKNOWLEDGMENTS
NOTES
INDEX
INTRODUCTION
SO PERVASIVE IS ITS INFLUENCE that Americans today can scarcely imagine a
world without the Federal Reserve. To begin with, the Fed—America’s central
bank—issues the Federal Reserve notes that we call “money.” It sets the short-
term interest rate that affects the market for mortgages, car loans, corporate debt,
and even the level of the stock market. It manages, sometimes adroitly and
sometimes wantingly, the supply of credit whose ebb and flow alternately buoys
and batters business. It supervises—or it is supposed to supervise—the nation’s
banks. And as Americans were vividly reminded during the meltdown of 2008,
the Federal Reserve acts as the lender of last resort, providing loans to banks
when credit shuts down.
Barely a century ago, the Fed did not exist. Every other industrialized nation
had such a central bank to oversee its banking system and to assure stability, yet
America’s financial system—if system one can call it—was antiquated,
disorganized, and deficient. The United States boasted the world’s largest
economy, its vast territory was ribboned with railroad tracks and telephone
wires, its cities were bursting with factories churning out iron and steel. Yet,
almost as if history had missed a turn, its banks were disconnected and isolated,
left to prosper or flounder (or fail) according to the reserves of each individual
institution. As Paul Warburg, one of the heroes of this story, was to observe with
his trademark acuity, America’s banks resembled less an army commanded by a
central staff than they did an inchoate legion of disjointed and disunited infantry.
It was hardly surprising that throughout the latter half of the nineteenth century
and into the early twentieth, the United States—alone among the industrial
powers—suffered a continual spate of financial panics, bank runs, money
shortages, and, indeed, full-blown depressions.
This book tells the story of how, culminating in the days before Christmas
1913, the Federal Reserve came to be. It was not a gentle or an easy birth, nor
was it swift. To Americans of the early twentieth century, especially farmers, the
prospect of a central bank threatened the comfortable Jeffersonian principle of
small government. To a people for whom local autonomy was sacrosanct, the
notion of a powerful bank, joined to the even more powerful federal government,
was deeply unnerving. Opposition to central authority had animated the
minutemen at Lexington and Concord, and the battle to establish the Fed
resembled a second American revolution—a financial revolution.
America had, of course, experimented with central banking early in its
history. After the War of Independence, a military success but a financial
disaster, the government was saddled with debt. When in due course the
Constitution was ratified, providing a greater degree of political unity, Alexander
Hamilton proposed a financial equivalent, a Bank of the United States, modeled
after the Bank of England. Thomas Jefferson was mightily opposed, as were his
many followers. Nonetheless, President Washington was persuaded, as was a
majority of Congress, and in 1791, the Bank, headquartered in Philadelphia,
opened for business.
To modern eyes, the Bank was a strange beast, 20 percent owned by the
government and 80 percent by private investors. It was authorized to hold the
government’s deposits but not, specifically, to be the nation’s monetary steward
or to perform other functions of a central bank. Nonetheless, the Bank began to
play this role. In particular, it strengthened the previously shoddy credit of the
federal government. The twenty years of its initial charter were generally
prosperous, and the number of private banks, which received charters from the
states, swelled from five to more than one hundred.
But the Bank was doomed by the rise of the anti-federalists, both in the
White House, in the person of James Madison, and in Congress. Rechartering
failed by one vote in each chamber. Thus, in 1811, America was returned to a
condition of monetary innocence, or laissez-faire, money again being the
business of individual banks in the states, each of which issued notes according
to its respective powers. Inflation followed, and when the government’s credit
became overtaxed by the War of 1812, banks suspended operations, causing
Madison to rethink matters. In 1816, Congress, now with Madison’s
endorsement, chartered the Second Bank of the United States.
The Second Bank, though endowed with more capital, was in most respects a
replica of the first. It succeeded at restraining the state banks from issuing too
many notes, thus keeping a lid on inflation. It worked to mute excesses in the
business cycle. And the Bank’s notes were widely accepted as a common
currency, no small thing for a nation pushing across an unsettled continent. But
the Second Bank met a fate no better than the first. Although Congress approved
its recharter, the margin was not sufficient to override the determined veto of
Andrew Jackson. In 1836, the national bank was, for the second time, allowed to
expire. Once again, the country experienced an inflation, this time followed by a
severe depression. In 1841, Congress chartered a third bank. President John