Thursday, July 7, 2016

Wilson and the Fed, XV: The Fight for Reform

The Federal Reserve Act of 1913 was an epic struggle by progressives and populists against diehard Republicans and the financial interests to overcome the obvious weaknesses of the Aldrich Plan, and establish a long-delayed and critically needed central bank for the United States. This was an essential first step in breaking the slavery of past savings that prevented most people from becoming owners of capital.
Carter Glass: opposed Wilson
At a meeting Woodrow Wilson called at Princeton before his inauguration, to which Carter Glass of Virginia was summoned, the new president ostensibly rejected the Aldrich plan as too centralized, and thus politically unsalable.[1] The fact that it would leave existing magnates in charge of the facility does not seem to have bothered him.
Glass recommended a decentralized and privately owned reserve system, with up to twenty independent reserve banks. Wilson seemed to agree, but then proposed an addition, a general supervisory board that he characterized as the “capstone” of the system that would bring everything together under a central authority.[2]
Glass rejected Wilson’s addendum as too centralized.[3] It was, in fact, the Aldrich plan again under a different name. Wilson was, after all, a personal friend of Paul Moritz Warburg (1868-1932),[4] who had drafted the outline of the Aldrich plan during the meeting at Jekyll Island.[5]
Paul Warburg: elitist friend of Wilson
Wilson considered Warburg the country’s leading authority on banking practice.[6] The president was extremely reluctant to go against the expert advice Warburg gave so freely.
Possibly in an effort to force Congress to adopt the Aldrich plan, Warburg leaked the discussions on the reform effort to the press prematurely. This almost wrecked the endeavor,[7] yet apparently did nothing to damage Warburg’s credibility with Wilson.
Fathers of the Federal Reserve
William Jennings Bryan and Glass must be given credit for saving the Federal Reserve Act when Wilson began waffling in September of 1913, and started drifting back to the conservatives after ostensibly rejecting the Aldrich plan yet again. Bryan and Glass went to work to such effect that when the vote was taken in the House on September 18, 1913, it passed 282-85, with only three Democrats opposed.
The House had debated the bill for months before voting on the measure on September 18 and passing it on to the Senate. As for the Senate, one commentator declared that the three-month fight in the Senate made the six-month knockdown, drag-out fight in the House “look like a Sunday stroll.”
With the compromises that had to be made to pass the House, bankers, business leaders, and spokesmen in Congress had a field day. They denounced the bill as socialistic, theoretical, vicious, and the “preposterous offering of ignorance and unreason.” The American Bankers Association severely criticized the bill. Surprisingly, even “liberal” bankers opposed public control of the Reserve.
Robert Latham Owen
Hearings in the Senate lasted from September 1, 1913 to October 25, 1913. Endless lines of witnesses streamed in and out of the Capitol to testify before the committee chaired by Senator Robert Latham Owen (1856-1947) of Oklahoma.[10] The record of the testimony covers more than 3,000 pages in three volumes dealing with the Banking and Currency Hearings.
Confusingly, and demonstrating his ambivalence, Wilson accused the Republicans of using scare tactics to terrify people by giving false reports of what the bill contained. Bryan worked constantly in Wilson’s name at persuading Democratic leaders in the Senate to support the measure and resist the diversions and delays posed by the Republicans.
Despite the seemingly endless delays, the Senate passed the bill December 19, 1913, 54-34, with the support of every Democrat in the Senate. The Committee agreed and both Houses ratified the measure on December 23, 1913 with Wilson signing it into law the same day. It was a populist triumph, and a crowning achievement of Bryan’s career.
The passage of the Federal Reserve Act was not done in secret, nor was it passed with just a few Senators or Congressmen present. Nor was it blind chance, luck, or a conspiracy, conservative or otherwise. As the New York Times commented more than a decade after the event in February 1924, “It has been the habit of our people to speak of the enactment of the Federal Reserve law in December, 1913, as a piece of good luck for the country. ‘Luck’ it certainly was, when considered in the light of the possibility that without it the United States might have been swept along with Europe into depreciated paper money.”[11]
Senate Banking Committee, 1913 (Owen second from right).
As one authority described the politicking that went into the passage of the Federal Reserve Act, “The Republicans were not anxious to alter the existing order of things and the Democrats, swept into power in 1913, took advantage of their opportunity to enact currency and banking reforms which combined the principles of greater social control with a sufficient amount of decentralization to prevent any single financial group from getting too much power. As Professor Beard[12] suggests in ‘The Rise of American Civilization’[13] the Federal Reserve Act of 1913 represents the union of ‘Jacksonian hopes’ with ‘financial propriety’.”[14]
As a side comment, there appears to be no evidence that Wilson ever made the statement attributed to him in reference to the establishment of the Federal Reserve:I am a most unhappy man. I have unwittingly ruined my country.”  If Wilson did, in fact, make the comment, however, it is evident that he meant that he had failed to maintain the status quo of concentrated control over money and credit . . . which was reestablished within a few years when Wall Street took advantage of loopholes in the Act that permitted the federal government to monetize deficits — which put the government at the mercy of the financial interests, the very ones the Federal Reserve Act was intended to take out of power.  What he actually said, as reported in the New York Times of December 24, 1913, was "Gentlemen, I need not tell you that I feel a very deep gratification at being able to sign this bill. . . . I cannot say with what deep emotions of gratitude . . . I feel, that I have had a part in completing a work which I think will be of lasting benefit to the business of the country."

[1] Ibid., 45-46.
[2] Ibid., 46.
[3] Ibid.
[4] Ibid.
[5] Ibid., 44.
[6] Ibid., 46.
[7] Ibid.
[10] Robert Owen, although a Senator from Oklahoma, was born in Lynchburg, Virginia in 1856, as was Carter Glass in 1858, who spearheaded the drive to get the Federal Reserve Act through the House.
[11] Ray Baker, Woodrow Wilson, Life and Letters, Vol. III. New York: Charles Scribner’s Sons, 1946, 201.
[12] Charles A. Beard, 1874-1948. Dr. Beard was an American historian. His works included a radical reevaluation of the Founding Fathers of the United States, whom he believed were more motivated by economics than by philosophical principles — as if economics and philosophical principles are somehow disconnected.
[13] Charles A. Beard, The Rise of American Civilization. New York: Macmillan, 1927.
[14] Norman Angell, The Story of Money. New York: Frederick A. Stokes Company, 1929, 306.

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