A Study of the Federal Reserve and its Secrets

Preface

In the fall of 1949 I went to the Library of Congress to get material for a newspaper article about the Federal Reserve Board of Governors. What I expected to be a week’s labor turned into a lengthy research job of nineteen months, for I discovered, in my initial inquiry, that there existed not one narrative account of the origins and activities of this powerful organization. Consequently, the majority of my information was gathered piecemeal from a vast number of periodicals, ranging from popular magazines such as the Saturday Evening Post to the exclusive bankers’ magazine, The Economist.

The standard works on the Federal Reserve System, almost entirely abstruse and technical works on economics, I found of little practical value. Even in the matter of acceptances, the usual textbooks contained no information upon such an important item in America’s economic history as the changeover from the open-book system of credit to the acceptance system, which has wrought such vast changes in our practice of commerce, and for this information I found only one source, a few pamphlets published by the American Acceptance Council from 1915 to 1928. It is, then, little wonder that the student with a Master’s Degree in Economics from one of the better universities will see here for the first time material which should have been before him in his elementary courses.

The birthplace of the Federal Reserve Act, Jekyl Island, is now operated as a public park by the State of Georgia, but the tourist will find no plaque there commemorating the event. This is not so much an oversight on the part of the park officials as it is a triumph for the more than adequate publicists of the Federal Reserve Board, who have perpetuated the comfortable fiction that the Act was born in the halls of Congress, the product of the minds of Carter Glass and Woodrow Wilson. It is the writer’s hope that this and many similar fictions will not long survive the publication of this work.

E. MULLINS,

Jan. 12, 1952

Chapter One

NELSON ALDRICH

On the night of November 22, 1910, a crowd of newspaper reporters gathered at the Hoboken, New Jersey, railway station. They had been tipped off that some very highly-placed people were coming over to Hoboken from New York City to board a train and go away on a secret mission. What the mission might be, or who the personages involved, none of them knew, but they were certain that an extremely important event was in the making.

Senator Nelson Aldrich entered the station. Here was their proof. The reporters gathered around him. He was always good copy, although he was noted for his brusqueness and the difficulty of getting a story from him. This was due to his tieup with the powerful Rubber Trust and the Tobacco Trust. As one of the coalition of five Republican Senators then ruling the Senate, Aldrich had used his elective position to enact a series of tariffs and laws favorable to his own interests, and had been denounced many times for his callous disregard of his oath of office as he devoted his power to the program of international financier.

Aldrich had recently returned from Europe with the National Monetary Commission, of which he was head. This was a Commission appointed by Congress in response to public feeling against big bankers after the artificial Panic of 1907. The commission had been charged to make a thorough study of financial practices before formulating banking and currency reform legislation for Congress. It was pointed out at the time that such legislation seemed unlikely to offer genuine reform under the leadership of a man with Aldrich’s known sympathies and employment, but Congress was blithely impervious to this criticism.

Senator Aldrich and the National Monetary Commission had spent nearly two years touring Europe at the American taxpayer’s expense. He and his entourage had dissipated more than three hundred thousand dollars of public money, although they had been wined and dined by all the important European financiers and seemed to live off the land wherever they traveled. Since his return to this country, Senator Aldrich had made no effort to report to Congress the outcome of his trip, nor had he as yet offered any ideas as to banking reform. The nation waited for him to provide a cure for the recurring financial panics which had upset business and small fortunes continually since the Civil War. He had not come to any definite plan for such a cure.

With Senator Aldrich was A. Piatt Andrew, professional economist and Assistant Secretary of the Treasury, who had traveled with Aldrich to Europe as Special Assistant to the National Monetary Commission. They were followed by Aldrich’s private secretary, Shelton, and reporters with a number of pieces of luggage. Evidently they were going away for an extended time. The crowd of reporters, representing most of the great New York dailies, were convinced that the secret mission must have some connection with the proposed financial reform, and clustered aggressively around Aldrich, demanding a story.

Aldrich was accustomed to dealing with reporters, and walked past them without answering any of the questions shouted at him, nor did his companions so much as look up at the newsmen. They entered Aldrich’s private car at the end of the train, and the shades were immediately drawn over the windows. The reporters were left to speculate with each other on the possible destination of the legislators.

Their curiosity was increased when they saw coming into the station two more bankers, followed by a group of porters. Here was Frank Vanderlip, a stocky, genial man who had risen from working as a farmhand to become President of the National City Bank of New York, the most powerful bank in this country, representing the Rockfeller oil interests and the railroad systems owned by the banking house of Kuhn, Loeb Company. The National City Bank had large interests in South America, and had been charged in 1898 with getting the United States to go to war with Spain. At any rate, the National City Bank came out of the Spanish-American War as the owner of Cuba’s sugar industry.

With Vanderlip was the austere Henry P. Davison, senior partner of J. P. Morgan Company, and Charles D. Norton, President of Morgan’s First National Bank of New York. These three financiers were dominant in the small group of New York Bankers which had been accused of controlling the entire money and credit of the United States. In response to the reporter’s question, Mr. Vanderlip declared that they were only going away for a quiet weekend in the country.

These men controlled the oil, railroads, communications, and heavy industry of this country. What plan of action brought them skulking out of New York to board a private train on the other side of the river? Men as powerful as these had no reason to hide their comings and goings, and in the past they had been openly scornful of public opinion and public interest. No large new enterprise could be undertaken without coming to one or more of these men, and they saw to it that their advice and aid were well recompensed. They elected Congressmen, appointed Judges, and bought and sold newspapers and publishing houses whenever they needed a job done. One of their number had once earned a sort of fame by exclaiming The public be damned! It was not in character that they should cloak themselves in mystery.

The reporters had the same luck with these bankers that they had had with Aldrich, and watched their story disappear into Aldrich’s private car. The next figure to appear was not so well known to them. This was Paul Moritz Warburg, a German immigrant who had been in this country less then eight years, but who had so availed himself of the privileges of this land of opportunity that he was already a partner in the banking house of Kuhn, Loeb Company, New York, at a salary of five hundred thousand dollars a year. His family house of M. M. Warburg Company, of Hamburg and Amsterdam, was the chief German representative of the great European banking family, the Rothschilds. Liberal amounts of Rothschild funds had enabled Jacob Schiff to purchase a partnership in Kuhn, Loeb Company and less than twenty years later achieve an unchallenged domination over the large railway systems of the United States.

Paul Warburg had not devoted much attention to business since he arrived in this country. Instead, he had spent much of his time writing and lecturing on the subject of monetary reform. This seemed to be in direct conflict with his personal interests and the interests of his employers, for a genuine monetary reform would certainly reduce their profits and power, but his work along these lines brought him an increased salary and even more time to advocate banking legislation which would set up a central bank in the United States similar to those of Europe. Warburg was already known as the banking brain of New York, and commanded large audiences among the city bankers when he spoke at the meetings of the Chamber of Commerce or other bankers’ fraternal groups.

With Warburg was Benjamin Strong, who had come to prominence on Wall Street during the Panic of 1907 as an able lieutenant of J. P. Morgan, when he demonstrated his ability to carry out orders. This was a money panic which had been called by Morgan to wipe out the competition of the Heinze-Morse group in the banking, shipping, and iron industries. Strong’s appearance as companion of Warburg was no accident, for the J. P. Morgan interests and Kuhn, Loeb interests had formed an alliance in 1901, known as the Northern Securities Company which dominated the country ever since. This alliance had put Theodore Roosevelt in as President of the United States in 1904 to delay the prosecution of the Northern Securities Company by the Department of Justice. Roosevelt was successful in doing this, and the Morgan-Kuhn-Loeb alliance was able to work out a more complicated and less vulnerable system. For this work, Roosevelt was given the name of trust-buster. *

Warburg and Strong were silent as the others, and the reporters watched the train leave the station without so much as a quote from any of the bankers. They returned to their papers with nothing more than a few paragraphs on the mysterious departure of the financiers from New York, but not a single metropolitan daily carried the story. The city editors wisely ignored the event.

The first public reference to the mysterious mission appeared some six years later, three years after the Federal Reserve Act had been passed and was in operation. This was an article by E. C. Forbes in Frank Leslie’s magazine, a feature in praise of Paul Warburg which incidentally told a story called Jekyl Island, giving the first revelation of what happened in November, 1910. Bit by bit, Forbes’ account was enlarged upon during the next thirty years, in statements and biographies of the principal characters, until the entire story had come out.

Aldrich’s private car, which had left Hoboken Station with drawn shades, had taken the financiers to Jekyl Island, Georgia, to the Jekyl Island Hunt Club, a very exclusive club owned by J. P. Morgan and a small group of influential New York Bankers. The club was very isolated, and was used as a comfortable retreat far from the cares of the New York money market. Its advantageous location made it much in demand for pursuits other than hunting, and on such occasions members of the club were informed that they should not appear there for a certain number of days. When Aldrich’s group left New York, the club’s members had been notified that the club would be occupied for the next two weeks.

The Aldrich group was not interested at this time in hunting. They had come to Jekyl Island to get a lot of work done, and they wanted to do that work in absolute secrecy. For that reason, the customary attendants at the club were given two week vacations, and new servants brought in for this occasion. The Aldrich group felt that it was imperative that their identity be kept secret, and allowed no visitors during the next two weeks. They were so anxious to prevent any knowledge of their mission leaking out that they never used last names, calling each other by their first names only, such as Henry, Ben, and Paul.

This proved to be so satisfactory for all concerned that it was made more formal after their return to New York, when they organized the first-name club and limited its membership to those who had been on Jekyl Island.

Why all this secrecy? Why this thousand-mile trip in a closed railway car to a remote hunting club? The Aldrich group went there to write the banking and currency legislation which the National Monetary Commission had been ordered to prepare. At stake was the future control of the money and credit of the United States. If any monetary reform was passed by Congress which was not written by and for the New York Bankers, their power would be ended. As the most technically-informed of the bankers, Paul Warburg was charged with doing most of the drafting of the plan. Senator Nelson Aldrich was there to see that it came out in a form which could be gotten through Congress, and the other bankers were there to offer suggestions and help on banking problems. Instead of making a report to Congress or to the American people on the results of the National Monetary Commission’s trip to Europe, Senator Aldrich went to Jekyl Island to write a bill which later was passed by Congress and signed by President Woodrow Wilson as the Federal Reserve Act of 1913.

The Jekyl Island group remained at the club for nine days, working steadily to complete their job, for Congress was already complaining that the National Monetary Commission seemed to have no solution ready. Despite the common interests of all present, the work did not proceed without friction Senator Aldrich considered himself the leader of the group, and, as a dictatorial type, could not help ordering everyone about. Aldrich also felt somewhat out of place as the only member who was not a professional banker. He knew very little about the technical aspects of financial operations, previously having been content to see to it that the country’s laws took care of his business for him. Paul Warburg felt that every question demanded a lecture, and he never lost an opportunity to go into a long discourse or to impress the others with the extent of his technical knowledge of banking. This often seemed a waste of time, and drew many barbed remarks from Aldrich, so that it sometimes required all the diplomacy of Henry P. Davison to keep them at their work. Also, Warburg’s thick German accent grated on them all. As the lone European in this clique of American aristocrats, he realized the delicacy of his position, but nevertheless quarreled on any occasion concerning technical problems, which he considered his personal field.

One of the main difficulties in working out a monetary reform plan which could then be presented as the work of the National Monetary Commission was to keep hidden the obvious authorship of the bill. So great was popular resentment against bankers since the Panic of 1907 that no Congressman would dare vote for a bill bearing the Wall Street taint, regardless of who had paid his campaign expenses. The plan which was being worked out at Jekyl Island was a plan for a central bank. There was in American history a long tradition of war against inflicting a central bank on the finances of this country, and there had until 1896 been a continuous struggle against a totalitarian domination of our financial resources. It had begun with Jefferson’s fight against Alexander Hamilton’s scheme for the First Bank of the United States. It had continued with Andrew Jackson’s successful war against Nicholas Biddle’s Second Bank of the United States (Biddle had been backed in that fight by James Rothschild of Paris); a fight which was a financial Civil War, and it had resulted in the setting-up of the Independent Sub-Treasury System which supposedly had kept the United States’ funds out of the hands of the great bankers. Because our funds were in the Sub-Treasury System, the bankers had precipitated the money panics of 1873, 1893, and 1907, causing widespread suffering throughout the country and arousing the public to demand that Congress enact legislation to prevent the recurrence of artificially inspired money panics. Such monetary reform now seemed inevitable, and it was to head off and control such reform that the National Monetary Commission has been set up with the multimillionaire Nelson Aldrich at its head. The financiers’ inner circle was now gathered at Jekyl Island to write banking legislation which would protect their interests, legislation which would be publicized as a people’s banking bill.

The main problem, so Paul Warburg informed his colleagues, was to avoid the name of Central Bank, and for that reason he had come upon the designation of Federal Reserve System. This would allay suspicion in the popular mind that the bill was a central bank plan. However, it would still function as a central bank, fulfilling the three main functions in that tradition, that is, it would be owned by private individuals who would draw profit from ownership of shares, and who could control the nation’s issue of money, it would have at its command the nation’s entire financial resources, and it would be able to mobilize credit and mortgage the United States by involving us in major foreign wars.

The next principle consideration was to conceal the fact that the proposed Federal Reserve System would be dominated by the operators of the New York money market. The Congressmen from the South and the West particularly could not survive a vote for a Wall Street plan. Farmers and small businessmen in these sections had suffered most from the repeated money panics, and there had been ever since the Revolutionary War, considerable amount of popular resentment against Eastern bankers. The private papers and letters of Nicholas Biddle, which were not publicly printed until nearly a century after his death, show that even at that time the Eastern bankers had to take into consideration the feeling against them.

Paul Warburg had already worked out the primary deception which would keep the people from recognizing his plan as a central bank. This was the regional reserve system, an organization of four (later passed as twelve) branch reserve banks located in different sections of the country. No person unacquainted with the details of the nation’s credit structure would be likely to realize that the present concentration