What Came First: The Federal Reserve Or Economic Bubbles? A Brief History Of The Federal Reserve's Creation

Tyler Durden's picture

A fantastic history of the reasons for, and the creation of, the Federal Reserve, courtesy of Murray Rothbard and our friends at Mises Institute, with the article originally appearing in Quarterly Journal of Austrian Economics, Vol. 2, No. 3 (Fall 1999), pp. 3–51. It is also reprinted in A History of Money and Banking in the United States and as a monograph. This is a must read for anyone who is curious why the Federal Reserve (with or without Goldman) is the sole organization responsible for not only perpetuating the interests of a select few of financial oligarchs, but in essence shaping monetary, fiscal, financial and political policy in the entire developed world. If after reading this, one is not convinced that the Fed screams a need for at least some supervision or accountability, one is likely a borderline-corrupt Senator who is on the payroll of Citi, Bank of America and/or Goldman Sachs (or, what may be worse, infinitely naive).

Origins of the Federal Reserve

Mises Daily:
Friday, November 13, 2009


The Progressive Movement

The Federal Reserve Act of December 23, 1913, was part and parcel of
the wave of Progressive legislation on local, state, and federal levels
of government that began about 1900. Progressivism was a bipartisan
movement that, in the course of the first two decades of the 20th
century, transformed the American economy and society from one of
roughly laissez-faire to one of centralized statism.

Until the 1960s, historians had established the myth that
Progressivism was a virtual uprising of workers and farmers who, guided
by a new generation of altruistic experts and intellectuals, surmounted
fierce big business opposition in order to curb, regulate, and control
what had been a system of accelerating monopoly in the late 19th
century. A generation of research and scholarship, however, has now
exploded that myth for all parts of the American polity, and it has
become all too clear that the truth is the reverse of this well-worn

In contrast, what actually happened was that business became
increasingly competitive during the late 19th century, and that various
big-business interests, led by the powerful financial house of J. P.
Morgan and Company, tried desperately to establish successful cartels
on the free market. The first wave of such cartels was in the first
large-scale business — railroads. In every case, the attempt to
increase profits — by cutting sales with a quota system — and thereby
to raise prices or rates, collapsed quickly from internal competition
within the cartel and from external competition by new competitors
eager to undercut the cartel.

During the 1890s, in the new field of large-scale industrial
corporations, big-business interests tried to establish high prices and
reduced production via mergers, and again, in every case, the merger
collapsed from the winds of new competition. In both sets of cartel
attempts, J. P. Morgan and Company had taken the lead, and in both sets
of cases, the market, hampered though it was by high protective, tariff
walls, managed to nullify these attempts at voluntary cartelization.

It then became clear to these big-business interests that the only
way to establish a cartelized economy, an economy that would ensure
their continued economic dominance and high profits, would be to use
the powers of government to establish and maintain cartels by coercion,
in other words, to transform the economy from roughly laissez-faire to
centralized, coordinated statism. But how could the American people,
steeped in a long tradition of fierce opposition to government-imposed
monopoly, go along with this program? How could the public's consent to
the New Order be engineered?

Fortunately for the cartelists, a solution to this vexing problem
lay at hand. Monopoly could be put over in the name of opposition to
monopoly! In that way, using the rhetoric beloved by Americans, the
form of the political economy could be maintained, while the content
could be totally reversed.

Monopoly had always been defined, in the popular parlance and among
economists, as "grants of exclusive privilege" by the government. It
was now simply redefined as "big business" or business competitive
practices, such as price-cutting, so that regulatory commissions, from
the Interstate Commerce Commission (ICC) to the Federal Trade
Commission (FTC) to state insurance commissions, were lobbied for and
staffed with big-business men from the regulated industry, all done in
the name of curbing "big-business monopoly" on the free market.

In that way, the regulatory commissions could subsidize, restrict,
and cartelize in the name of "opposing monopoly," as well as promoting
the general welfare and national security. Once again, it was railroad
monopoly that paved the way.

For this intellectual shell game, the cartelists needed the support
of the nation's intellectuals, the class of professional opinion
molders in society. The Morgans needed a smokescreen of ideology,
setting forth the rationale and the apologetics for the New Order.
Again, fortunately for them, the intellectuals were ready and eager for
the new alliance.

The enormous growth of intellectuals, academics, social scientists,
technocrats, engineers, social workers, physicians, and occupational
"guilds" of all types in the late 19th century led most of these groups
to organize for a far greater share of the pie than they could possibly
achieve on the free market. These intellectuals needed the State to
license, restrict, and cartelize their occupations, so as to raise the
incomes for the fortunate people already in these fields.

In return for their serving as apologists for the new statism, the
State was prepared to offer not only cartelized occupations, but also
ever-increasing and cushier jobs in the bureaucracy to plan and
propagandize for the newly statized society. And the intellectuals were
ready for it, having learned in graduate schools in Germany the glories
of statism and organicist socialism, of a harmonious "middle way"
between dog-eat-dog laissez-faire on the one hand and proletarian
Marxism on the other. Big government, staffed by intellectuals and
technocrats, steered by big business, and aided by unions organizing a
subservient labor force, would impose a cooperative commonwealth for
the alleged benefit of all.

Unhappiness with the National-Banking System

The previous big push for statism in America had occurred during the
Civil War, when the virtual one-party Congress after secession of the
South emboldened the Republicans to enact their cherished statist
program under cover of the war. The alliance of big business and big
government with the Republican party drove through an income tax, heavy
excise taxes on such sinful products as tobacco and alcohol, high
protective tariffs, and huge land grants and other subsidies to
transcontinental railroads.

The overbuilding of railroads led directly to Morgan's failed
attempts at railroad pools, and finally to the creation, promoted by
Morgan and Morgan-controlled railroads, of the Interstate Commerce
Commission in 1887. The result of that was the long secular decline of
the railroads, beginning before 1900. The income tax was annulled by
Supreme Court action, but was reinstated during the Progressive period.

The most interventionist of the Civil War actions was in the vital
field of money and banking. The approach toward hard money and free
banking that had been achieved during the 1840s and 1850s was swept
away by two pernicious inflationist measures of the wartime Republican
administration. One was fiat money greenbacks, which depreciated by
half by the middle of the Civil War. These were finally replaced by the
gold standard after urgent pressure by hard-money Democrats, but not
until 1879, 14 full years after the end of the war.

A second, and more lasting, intervention was the National Banking
Acts of 1863, 1864, and 1865, which destroyed the issue of bank notes
by state-chartered (or "state") banks by a prohibitory tax, and then
monopolized the issue of bank notes in the hands of a few large,
federally chartered "national banks," mainly centered on Wall Street.
In a typical cartelization, national banks were compelled by law to
accept each other's notes and demand deposits at par, negating the
process by which the free market had previously been discounting the
notes and deposits of shaky and inflationary banks.

In this way, the Wall Street–federal government establishment was
able to control the banking system, and inflate the supply of notes and
deposits in a coordinated manner.

But there were still problems. The national-banking system provided
only a halfway house between free banking and government central
banking, and by the end of the 19th century, the Wall Street banks were
becoming increasingly unhappy with the status quo.

The centralization was only limited, and, above all, there was no
governmental central bank to coordinate inflation, and to act as a
lender of last resort, bailing out banks in trouble. As soon as bank
credit generated booms, then they got into trouble; bank-created booms
turned into recessions, with banks forced to contract their loans and
assets and to deflate in order to save themselves.

Not only that, but after the initial shock of the National Banking
Acts, state banks had grown rapidly by pyramiding their loans and
demand deposits on top of national-bank notes. These state banks, free
of the high legal-capital requirements that kept entry restricted in
national banking, flourished during the 1880s and 1890s and provided
stiff competition for the national banks themselves.

Furthermore, St. Louis and Chicago, after the 1880s, provided
increasingly severe competition to Wall Street. Thus, St. Louis and
Chicago bank deposits, which had been only 16 percent of the St. Louis,
Chicago, and New York City total in 1880, rose to 33 percent of that
total by 1912. All in all, bank clearings outside of New York City,
which were 24 percent of the national total in 1882, had risen to 43
percent by 1913.

The complaints of the big banks were summed up in one word:
"inelasticity." The national-banking system, they charged, did not
provide for the proper "elasticity" of the money supply; that is, the
banks were not able to expand money and credit as much as they wished,
particularly in times of recession. In short, the national-banking
system did not provide sufficient room for inflationary expansions of
credit by the nation's banks.[1]

By the turn of the century, the political economy of the United
States was dominated by two generally clashing financial aggregations:
the previously dominant Morgan group, which began in investment banking
and then expanded into commercial banking, railroads, and mergers of
manufacturing firms; and the Rockefeller forces, which began in oil
refining and then moved into commercial banking, finally forming an
alliance with the Kuhn, Loeb Company in investment banking and the
Harriman interests in railroads.[2]

Although these two financial blocs usually clashed with each other,
they were as one on the need for a central bank. Even though the
eventual major role in forming and dominating the Federal Reserve
System was taken by the Morgans, the Rockefeller and Kuhn, Loeb forces
were equally enthusiastic in pushing, and collaborating on, what they
all considered to be an essential monetary reform.

The Beginnings of the "Reform" Movement: The Indianapolis Monetary Convention

The presidential election of 1896 was a great national referendum on
the gold standard. The Democratic party had been captured, at its 1896
convention, by the populist, ultrainflationist antigold forces, headed
by William Jennings Bryan. The older Democrats, who had been fiercely
devoted to hard money and the gold standard, either stayed home on
election day or voted, for the first time in their lives, for the hated

The Republicans had long been the party of prohibition and of
greenback inflation and opposition to gold. But since the early 1890s,
the Rockefeller forces, dominant in their home state of Ohio and
nationally in the Republican party, had decided to quietly ditch
prohibition as a political embarrassment and as a grave deterrent to
obtaining votes from the increasingly powerful bloc of German-American

In the summer of 1896, anticipating the defeat of the gold forces at
the Democratic convention, the Morgans, previously dominant in the
Democratic party, approached the McKinley–Mark Hanna–Rockefeller forces
through their rising young satrap, Congressman Henry Cabot Lodge of
Massachusetts. Lodge offered the Rockefeller forces a deal: the Morgans
would support McKinley for president, and neither sit home nor back a
third, Gold Democrat party, provided that McKinley pledged himself to a
gold standard. The deal was struck, and many previously hard-money
Democrats shifted to the Republicans.

The nature of the American political-party system was now
drastically changed: what was previously a tightly fought struggle
between hard-money, free-trade, laissez-faire Democrats on the one
hand, and inflationist, protectionist, statist Republicans on the
other, with the Democrats slowly but surely gaining ascendancy by the
early 1890s, was now a party system dominated by the Republicans until
the depression election of 1932.

The Morgans were strongly opposed to Bryanism, which was not only
populist and inflationist, but also anti–Wall Street bank; the
Bryanites, much like populists of the present day, preferred
Congressional, greenback inflationism to the more subtle, and more
privileged, big bank–controlled variety. The Morgans, in contrast,
favored a gold standard.

But, once gold was secured by the McKinley victory of 1896, they
wanted to press on to use the gold standard as a hard-money camouflage
behind which they could change the system into one less nakedly
inflationist than populism but far more effectively controlled by the
big-banker elites. In the long run, a controlled Morgan-Rockefeller
gold standard was far more pernicious to the cause of genuine
hard-money than a candid free-silver or greenback Bryanism.

As soon as McKinley was safely elected, the Morgan-Rockefeller
forces began to organize a "reform" movement to cure the "inelasticity"
of money in the existing gold standard and to move slowly toward the
establishment of a central bank. To do so, they decided to use the
techniques they had successfully employed in establishing a pro–gold
standard movement during 1895 and 1896.

The crucial point was to avoid the public suspicion of Wall Street
and banker control by acquiring the patina of a broad-based grassroots
movement. The movement, therefore, was deliberately focused in the
Middle West, the heartland of America, and organizations developed that
included not only bankers, but also businessmen, economists, and other
academics, who supplied respectability, persuasiveness, and technical
expertise to the reform cause.

Accordingly, the reform drive began just after the 1896 elections in
authentic Midwest country. Hugh Henry Hanna, president of the Atlas
Engine Works of Indianapolis, who had learned organizing tactics during
the year with the pro–gold standard Union for Sound Money, sent a
memorandum, in November, to the Indianapolis Board of Trade, urging a
grassroots, Midwestern state like Indiana to take the lead in currency

In response, the reformers moved fast. Answering the call of the
Indianapolis Board of Trade, delegates from boards of trade from 12
Midwestern cities met in Indianapolis on December 1, 1896. The
conference called for a large monetary convention of businessmen, which
accordingly met in Indianapolis on January 12, 1897. Representatives
from 26 states and the District of Columbia were present. The monetary
reform movement was now officially underway.

The influential Yale Review commended the convention for
averting the danger of arousing popular hostility to bankers. It
reported that "the conference was a gathering of businessmen in general
rather than bankers in particular" (quoted in Livingston 1986, p. 105).

The conventioneers may have been businessmen, but they were
certainly not very grassrootsy. Presiding at the Indianapolis Monetary
Convention of 1897 was C. Stuart Patterson, dean of the University of
Pennsylvania Law School and a member of the finance committee of the
powerful, Morgan-oriented Pennsylvania Railroad. The day after the
convention opened, Hugh Hanna was named chairman of an executive
committee, which he would appoint. The committee was empowered to act
for the convention after it adjourned.

The executive committee consisted of the following influential corporate and financial leaders:

John J. Mitchell of Chicago, president of the Illinois Trust and
Savings Bank, and a director of the Chicago and Alton Railroad; the
Pittsburgh, Fort Wayne, and Chicago Railroad; and the Pullman Company,
was named treasurer of the executive committee.

H. H. Kohlsaat, editor and publisher of the Chicago Times Herald and
the Chicago Ocean Herald, trustee of the Chicago Art Institute, and a
friend and advisor of Rockefeller's main man in politics, President
William McKinley.

Charles Custis Harrison, provost of the University of Pennsylvania,
who had made a fortune as a sugar refiner in partnership with the
powerful Havemeyer ("Sugar Trust") interests.

Alexander E. Orr, a New York City banker in the Morgan ambit, who
was a director of the Morgan-run Erie and Chicago, Rock Island and
Pacific railroads, the National Bank of Commerce, and the influential
publishing house of Harper Brothers. Orr was also a partner in the
country's largest grain-merchandising firm and a director of several
life-insurance companies.

Edwin O. Stanard, St. Louis grain merchant, former governor of
Missouri, and former vice president of the National Board of Trade and

E. B. Stahlman, owner of the Nashville Banner, commissioner of the
cartelist Southern Railway and Steamship Association, and former vice
president of the Louisville, New Albany, and Chicago Railroad.

A. E. Willson, influential attorney from Louisville and future governor of Kentucky.

But the two most interesting and powerful executive committee
members of the Monetary Convention were Henry C. Payne and George
Foster Peabody. Henry Payne was a Republican party leader from
Milwaukee, and president of the Morgan-dominated Wisconsin Telephone
Company, long associated with the railroad-oriented Spooner-Sawyer
Republican machine in Wisconsin politics. Payne was also heavily
involved in Milwaukee utility and banking interests, in particular as a
long-time director of the North American Company, a large public
utility–holding company headed by New York City financier Charles W.

So close was North American Company to the Morgan interests that its
board included two top Morgan financiers. One was Edmund C. Converse,
president of Morgan-run Liberty National Bank of New York City, and
soon to be founding president of Morgan's Bankers' Trust Company. The
other was Robert Bacon, a partner in J. P. Morgan and Company, and one
of Theodore Roosevelt's closest friends, whom Roosevelt would later
make assistant secretary of state.

Furthermore, when Theodore Roosevelt became president as the result
of the assassination of William McKinley, he replaced Rockefeller's top
political operative, Mark Hanna of Ohio, with Henry C. Payne as
Postmaster General of the United States. Payne, a leading Morgan
lieutenant, was reportedly appointed to what was then the major
political post in the Cabinet specifically to break Hanna's hold over
the national Republican party. It seems clear that replacing Hanna with
Payne was part of the savage assault that Theodore Roosevelt would soon
launch against Standard Oil as part of the open warfare about to break
out between the Rockefeller–Harriman–Kuhn, Loeb, and the Morgan camps
(Burch 1981, p. 189, n. 55).

Even more powerful in the Morgan ambit was the secretary of the
Indianapolis Monetary Convention's executive committee, George Foster
Peabody. The entire Peabody family of Boston Brahmins had long been
personally and financially closely associated with the Morgans. A
member of the Peabody clan had even served as best man at J. P.
Morgan's wedding in 1865.

George Peabody had long ago established an international banking
firm of which J. P. Morgan's father, Junius, had been one of the senior
partners. George Foster Peabody was an eminent New York investment
banker with extensive holdings in Mexico. He helped reorganize General
Electric for the Morgans, and was later offered the job of secretary of
the treasury during the Wilson administration. He would function
throughout that administration as a "statesman without portfolio"
(ibid., pp. 231, 233; Ware 1951, pp. 161–67).

Let the masses be hoodwinked into regarding the Indianapolis
Monetary Convention as a spontaneous, grassroots outpouring of small
Midwestern businessmen. To the cognoscenti, any organization featuring
Henry Payne, Alexander Orr, and especially George Foster Peabody meant
but one thing: J. P. Morgan.

The Indianapolis Monetary Convention quickly resolved to urge
President McKinley to (1) continue the gold standard and (2) create a
new system of "elastic" bank credit. To that end, the convention urged
the president to appoint a new Monetary Commission to prepare
legislation for a new, revised monetary system. McKinley was very much
in favor of the proposal, signaling Rockefeller agreement, and on July
24 he sent a message to Congress urging the creation of a special
monetary commission. The bill for a national monetary commission passed
the House of Representatives but died in the Senate (Kolko 1983, pp.

Disappointed but intrepid, the executive committee, failing a
presidentially appointed commission, decided in August 1897 to go ahead
and select its own. The leading role in appointing this commission was
played by George Foster Peabody, who served as liaison between the
Indianapolis members and the New York financial community. To select
the commission members, Peabody arranged for the executive committee to
meet in the Saratoga Springs summer home of his investment-banking
partner, Spencer Trask. By September, the executive committee had
selected the members of the Indianapolis Monetary Commission.

The members of the new Indianapolis Monetary Commission were as follows (Livingston 1986, pp. 106–07):

  • The chairman was former senator George F. Edmunds, Republican of Vermont, attorney, and former director of several railroads.

  • C.
    Stuart Patterson was dean of the University of Pennsylvania Law School,
    and a top official of the Morgan-controlled Pennsylvania Railroad.

  • Charles
    S. Fairchild, a leading New York banker, president of the New York
    Security and Trust Company, was a former partner in the Boston Brahmin
    investment banking firm of Lee, Higginson, and Company, and executive
    and director of two major railroads. Fairchild, a leader in New York
    state politics, had been secretary of the treasury in the first
    Cleveland Administration. In addition, Fairchild's father, Sidney T.
    Fairchild, had been a leading attorney for the Morgan-controlled New
    York Central Railroad.

  • Stuyvesant Fish,
    scion of two long-time aristocratic New York families, was a partner of
    the Morgan-dominated New York investment bank of Morton, Bliss, and
    Company, and then president of Illinois Central Railroad and a trustee
    of Mutual Life. Fish's father had been a senator, governor, and
    secretary of state.

  • Louis A. Garnett was a leading San Francisco businessman.

  • Thomas G. Bush of Alabama was a director of the Mobile and Birmingham Railroad.

  • J. W. Fries was a leading cotton manufacturer of North Carolina.

  • William
    B. Dean, merchant from St. Paul, Minnesota, and a director of the St.
    Paul–based, transcontinental Great Northern Railroad, owned by James J.
    Hill, ally with Morgan in the titanic struggle over the Northern
    Pacific Railroad with Harriman, Rockefeller, and Kuhn, Loeb.

  • George Leighton of St. Louis was an attorney for the Missouri Pacific Railroad.

  • Robert S. Taylor was an Indiana patent attorney for the Morgan-controlled General Electric Company.

  • The
    single most important working member of the commission was James
    Laurence Laughlin, head professor of political economy at the new
    Rockefeller-founded University of Chicago, and editor of its
    prestigious Journal of Political Economy. It was Laughlin who
    supervised the operations of the Commission's staff and the writing of
    the reports. Indeed, the two staff assistants to the Commission who
    wrote reports were both students of Laughlin at Chicago: former student
    L. Carroll Root, and his then-current graduate student Henry Parker

The impressive sum of $50,000 was raised throughout the nation's
banking and corporate community to finance the work of the Indianapolis
Monetary Commission. New York City's large quota was raised by Morgan
bankers Peabody and Orr, and heavy contributions to fill the quota came
promptly from mining magnate William E. Dodge, cotton and coffee trader
Henry Hentz, a director of the Mechanics National Bank, and J. P.
Morgan himself.

With the money in hand, the executive committee rented office space
in Washington, DC in mid-September and set the staff to sending out and
collating the replies to a detailed monetary questionnaire, sent to
several hundred selected experts. The Monetary Commission sat from late
September into December 1897, sifting through the replies to the
questionnaire collated by Root and Willis. The purpose of the
questionnaire was to mobilize a broad base of support for the
Commission's recommendations, which they could claim represented
hundreds of expert views.

Second, the questionnaire served as an important public-relations
device, making the Commission and its work highly visible to the
public, to the business community throughout the country, and to
members of Congress. Furthermore, through this device, the Commission
could be seen as speaking for the business community throughout the

To this end, the original idea was to publish the Monetary
Commission's preliminary report, adopted in mid-December, as well as
the questionnaire replies in a companion volume. Plans for the
questionnaire volume fell through, although it was later published as
part of a series of publications on political economy and public law by
the University of Pennsylvania (Livingston 1986, pp. 107–08).

Undaunted by the slight setback, the executive committee developed
new methods of molding public opinion using the questionnaire replies
as an organizing tool. In November, Hugh Hanna hired as his Washington
assistant financial journalist Charles A. Conant, whose task was to
propagandize and organize public opinion for the recommendations of the

The campaign to beat the drums for the forthcoming Commission report
was launched when Conant published an article in the December 1 issue
of Sound Currency magazine, taking an advanced line on the
Commission report, and bolstering the conclusions not only with his own
knowledge of monetary and banking history, but also with frequent
statements from the as-yet-unpublished replies to the staff

Over the next several months, Conant worked closely with Jules
Guthridge, the general secretary of the Commission; they first induced
newspapers throughout the country to print abstracts of the
questionnaire replies. As Guthridge wrote some Commission members, he
thereby stimulated "public curiosity" about the forthcoming report, and
he boasted that by "careful manipulation" he was able to get the
preliminary report "printed in whole or in part — principally in part —
in nearly 7,500 newspapers, large and small."

In the meantime, Guthridge and Conant orchestrated letters of
support from prominent men across the country. When the preliminary
report was published on January 3, 1898, Guthridge and Conant made
these letters available to the daily newspapers. Quickly, the two built
up a distribution system to spread the gospel of the report, organizing
nearly 100,000 correspondents "dedicated to the enactment of the
commission's plan for banking and currency reform" (Livingston 1986,
pp. 109–10).

The prime and immediate emphasis of the preliminary report of the
Monetary Commission was to complete the promise of the McKinley victory
by codifying and enacting what was already in place de facto: a single
gold standard, with silver reduced to the status of subsidiary token
currency. Completing the victory over Bryanism and free silver,
however, was just a mopping-up operation; more important in the long
run was the call raised by the report for banking reform to allow
greater elasticity.

Bank credit could then be increased in recessions and whenever
seasonal pressure for redemption by agricultural country banks forced
the large central reserve banks to contract their loans. The actual
measures called for by the Commission were of marginal importance. More
important was that the question of banking reform had been raised at

Since the public had been aroused by the preliminary report, the
executive committee decided to organize the second and final meeting of
the Indianapolis Monetary Convention, which duly met at Indianapolis on
January 25, 1898. The second convention was a far grander affair than
the first, bringing together 496 delegates from 31 states.

Furthermore, the gathering was a cross-section of America's top
corporate leaders. While the state of Indiana naturally had the largest
delegation, of 85 representatives of boards of trade and chambers of
commerce, New York sent 74, including many from the city's Board of
Trade and Transportation, Merchant's Association, and Chamber of

Such corporate leaders as Cleveland iron manufacturer Alfred A.
Pope, president of the National Malleable Castings Company, attended;
as did Virgil P. Cline, legal counsel to Rockefeller's Standard Oil
Company of Ohio; and C.A. Pillsbury, of Minneapolis–St. Paul, organizer
of the world's largest flour mills. From Chicago came such business
notables as Marshall Field and Albert A. Sprague, a director of the
Chicago Telephone Company, subsidiary of the Morgan-controlled
telephone monopoly, American Telephone and Telegraph Company.

Not to be overlooked is delegate Franklin MacVeagh, a wholesale
grocer from Chicago, an uncle of a senior partner in the Wall Street
law firm of Bangs, Stetson, Tracy, and MacVeagh, counsel to J. P.
Morgan and Company. MacVeagh, who was later to become secretary of the
treasury in the Taft administration, was wholly in the Morgan ambit.
His father-in-law, Henry F. Eames, was the founder of the Commercial
National Bank of Chicago, and his brother Wayne was soon to become a
trustee of the Morgan-dominated Mutual Life Insurance Company.

The purpose of the second convention, as former Secretary of the
Treasury Charles S. Fairchild candidly explained in his address to the
gathering, was to mobilize the nation's leading businessmen into a
mighty and influential reform movement. As he put it, "if men of
business give serious attention and study to these subjects, they will
substantially agree upon legislation, and thus agreeing, their
influence will be prevailing." He concluded that "My word to you is,
pull all together."

Presiding officer of the convention, Iowa's Governor Leslie M. Shaw,
was however, a bit disingenuous when he told the gathering, "You
represent today not the banks, for there are few bankers on this floor.
You represent the business industries and the financial interests of
the country." There were plenty of bankers there, too (Livingston 1986,
pp. 113–15).

Shaw himself, later to be secretary of the treasury under Theodore
Roosevelt, was a small-town banker in Iowa, and president of the Bank
of Denison throughout his term as governor. More important in Shaw's
outlook and career was the fact that he was a long-time close friend
and loyal supporter of the Des Moines Regency, the Iowa Republican
machine headed by the powerful Senator William Boyd Allison.

Allison, who was to obtain the Treasury post for his friend, was in
turn tied closely to Charles E. Perkins, a close Morgan ally, president
of the Chicago, Burlington, and Quincy Railroad, and kinsman of the
powerful Forbes financial group of Boston, long tied in with the Morgan
interests (Rothbard 1984, pp. 95–96).

Also serving as delegates to the second convention were several
eminent economists, each of whom, however, came not as academic
observers but as representatives of elements of the business community.
Professor Jeremiah W. Jenks of Cornell, a proponent of trust
cartelization by government and soon to become a friend and advisor of
Theodore Roosevelt as governor, came as delegate from the Ithaca
Business Men's Association.

Frank W. Taussig of Harvard University represented the Cambridge
Merchants' Association. Yale's Arthur Twining Hadley, soon to be the
president of Yale, represented the New Haven Chamber of Commerce, and
Frank M. Taylor of the University of Michigan came as representative of
the Ann Arbor Business Men's Association.

Each of these men held powerful posts in the organized economics
profession, Jenks, Taussig, and Taylor serving on the currency
committee of the American Economic Association. Hadley, a leading
railroad economist, also served on the board of directors of Morgan's
New York, New Haven, and Hartford; and Atchison, Topeka, and Santa Fe

Both Taussig and Taylor were monetary theorists who, while committed
to a gold standard, urged reform that would make the money supply more
elastic. Taussig called for an expansion of national bank notes, which
would inflate in response to the "needs of business." As Taussig
(quoted in Dorfman 1949, p. xxxvii; Parrini and Sklar 1983, p. 269) put
it, the currency would then "grow without trammels as the needs of the
community spontaneously call for increase."

Taylor, too, as one historian puts it, wanted the gold standard to
be modified by "a conscious control of the movement of money" by
government "in order to maintain the stability of the credit system."
Taylor justified governmental suspensions of specie payment to "protect
the gold reserve" (Dorfman 1949, pp. 392–93).

On January 26, the convention delegates duly endorsed the
preliminary report with virtual unanimity, after which Professor J.
Laurence Laughlin was assigned the task of drawing up a more elaborate
final report, which was published and distributed a few months later.
Laughlin's — and the convention's — final report not only came out in
favor of a broadened asset base for a greatly increased amount of
national-bank notes, but also called explicitly for a central bank that
would enjoy a monopoly of the issue of bank notes.[5]

Meanwhile, the convention delegates took the gospel of banking
reform to the length and breadth of the corporate and financial
communities. In April 1898, for example, A. Barton Hepburn, president
of the Chase National Bank of New York (at that time a flagship
commercial bank for the Morgan interests), and a man who would play a
large role in the drive to establish a central bank, invited Monetary
Commissioner Robert S. Taylor to address the New York State Bankers'
Association on the currency question, since "bankers, like other
people, need instruction upon this subject." All the monetary
commissioners, especially Taylor, were active during the first half of
1898 in exhorting groups of businessmen throughout the nation for
monetary reform.

Meanwhile, in Washington, the lobbying team of Hanna and Conant were
extremely active. A bill embodying the suggestions of the Monetary
Commission was introduced by Indiana Congressman Jesse Overstreet in
January, and was reported out by the House Banking and Currency
Committee in May. In the meantime, Conant met almost continuously with
the banking committee members. At each stage of the legislative
process, Hanna sent circular letters to the convention delegates and to
the public, urging a letter-writing campaign in support of the bill.

In this agitation, McKinley's Secretary of the Treasury Lyman J.
Gage worked closely with Hanna and his staff. Gage sponsored similar
bills, and several bills along the same lines were introduced in the
House in 1898 and 1899. Gage, a friend of several of the monetary
commissioners, was one of the top leaders of the Rockefeller interests
in the banking field. His appointment as secretary of the treasury had
been gained for him by Ohio's Mark Hanna, political mastermind and
financial backer of President McKinley, and old friend, high-school
classmate, and business associate of John D. Rockefeller, Sr.

Before his appointment to the Cabinet, Gage was president of the
powerful First National Bank of Chicago, one of the major commercial
banks in the Rockefeller ambit. During his term in office, Gage tried
to operate the Treasury as a central bank, pumping in money during
recessions by purchasing government bonds on the open market, and
depositing large funds with pet commercial banks. In 1900, Gage called
vainly for the establishment of regional central banks.

Finally, in his last annual report as secretary of the treasury in
1901, Lyman Gage let the cat completely out of the bag, calling
outright for a government central bank. Without such a central bank, he
declared in alarm, "individual banks stand isolated and apart,
separated units, with no tie of mutuality between them." Unless a
central bank establishes such ties, Gage warned, the Panic of 1893
would be repeated (Livingston 1986, p. 153). When he left office early
the next year, Lyman Gage took up his post as president of the
Rockefeller-controlled US Trust Company in New York City (Rothbard
1984, pp. 94–95).

The Gold Standard Act of 1900 and After

Any reform legislation had to wait until after the elections of
1898, for the gold forces were not yet in control of Congress. In the
autumn, the executive committee of the Indianapolis Monetary Convention
mobilized its forces, calling on no less than 97,000 correspondents
throughout the country, through whom it had distributed the preliminary
report. The executive committee urged its constituency to elect a
gold-standard Congress; when the gold forces routed the silverites in
November, the results of the election were hailed by Hanna as eminently

The decks were now cleared for the McKinley administration to submit
its bill, and the Congress that met in December 1899 quickly passed the
measure; Congress then passed the conference report of the Gold
Standard Act in March 1900.

The currency reformers had gotten their way. It is well known that
the Gold Standard Act provided for a single gold standard, with no
retention of silver money except as tokens. Less well known are the
clauses that began the march toward a more "elastic" currency. As Lyman
Gage had suggested in 1897, national banks, previously confined to
large cities, were now made possible with a small amount of capital in
small towns and rural areas.

And it was made far easier for national banks to issue notes. The
object of these clauses, as one historian put it, was to satisfy an
"increased demand for money at crop-moving time, and to meet popular
cries for 'more money' by encouraging the organization of national
banks in comparatively undeveloped regions" (Livingston 1986, p. 123).

The reformers exulted over the passage of the Gold Standard Act, but
took the line that this was only the first step on the much needed path
to fundamental banking reform. Thus, Professor Frank W. Taussig of
Harvard praised the act, and greeted the emergence of a new social and
ideological alignment, caused by "strong pressure from the business
community" through the Indianapolis Monetary Convention. He
particularly welcomed the fact that the Gold Standard Act "treats the
national banks not as grasping and dangerous corporations but as useful
institutions deserving the fostering care of the legislature."

But such tender legislative care was not enough; fundamental banking
reform was needed. For, Taussig declared, "the changes in banking
legislation are not such as to make possible any considerable expansion
of the national system or to enable it to render the community the full
service of which it is capable." In short, the changes allowed for more
and greater expansion of bank credit and the supply of money.
Therefore, Taussig (1990, p. 415) concluded, "It is well-nigh certain
that eventually Congress will have to consider once more the further
remodeling of the national bank system."

In fact, the Gold Standard Act of 1900 was only the opening gun of
the banking reform movement. Three friends and financial journalists,
two from Chicago, were to play a large role in the development of that
movement. Massachusetts-born Charles A. Conant (1861–1915) a leading
historian of banking, wrote his A History of Modern Banks of Issue in 1896, while still a Washington correspondent for the New York Journal of Commerce and an editor of Bankers Magazine.
After his stint of public relations work and lobbying for the
Indianapolis Convention, Conant moved to New York in 1902 to become
treasurer of the Morgan-oriented Morton Trust Company.

The two Chicagoans, both friends of Lyman Gage, were, along with
Gage, in the Rockefeller ambit: Frank A. Vanderlip was picked by Gage
as his assistant secretary of the treasury, and when Gage left office,
Vanderlip came to New York as a top executive at the flagship
commercial bank of the Rockefeller interests, the National City Bank of
New York.

Meanwhile, Vanderlip's close friend and former mentor at the Chicago
Tribune, Joseph French Johnson, had also moved east to become professor
of finance at the Wharton School of the University of Pennsylvania. But
no sooner had the Gold Standard Act been passed when Joseph Johnson
sounded the trump by calling for more-fundamental reform.

Professor Johnson stated flatly that the existing bank note system
was weak in not "responding to the needs of the money market," i.e.,
not supplying a sufficient amount of money. Since the national banking
system was incapable of supplying those needs, Johnson opined, there
was no reason to continue it. Johnson deplored the US banking system as
the worst in the world, and pointed to the glorious central banking
system as existed in Britain and France.[6]

But no such centralized banking system yet existed in the United
States: "In the United States, however, there is no single business
institution, and no group of large institutions, in which
self-interest, responsibility, and power naturally unite and conspire
for the protection of the monetary system against twists and strains."

In short, there was far too much freedom and decentralization in the
system. In consequence, our massive deposit credit system "trembles
whenever the foundations are disturbed," i.e., whenever the chickens of
inflationary credit expansion came home to roost in demands for cash or
gold. The result of the inelasticity of money, and of the impossibility
of interbank cooperation, Johnson opined, was that we were in danger of
losing gold abroad just at the time when gold was needed to sustain
confidence in the nation's banking system (Johnson 1900, pp. 497f).

After 1900, the banking community was split on the question of
reform, the small and rural bankers preferring the status quo. But the
large bankers were headed by A. Barton Hepburn of Morgan's Chase
National Bank, who drew up a bill as head of a commission of the
American Bankers Association, and presented it in late 1901 to
Representative Charles N. Fowler of New Jersey, chairman of the House
Banking and Currency Committee, who had introduced one of the bills
that had led to the Gold Standard Act. The Hepburn proposal was
reported out of committee in April 1902 as the Fowler Bill (Kolko 1983,
pp. 149–50).

The Fowler Bill contained three basic clauses. The first allowed the
further expansion of national bank notes based on broader assets than
government bonds.

The second, a favorite of the big banks, was to allow national banks
to establish branches at home and abroad, a step illegal under the
existing system due to fierce opposition by the small country bankers.
While branch banking is consonant with a free market and provides a
sound and efficient system for calling on other banks for redemption,
the big banks had little interest in branch banking unless accompanied
by centralization of the banking system.

Third, the Fowler Bill proposed to create a three-member board of
control within the Treasury Department to supervise the creation of the
new bank notes and to establish clearinghouse associations under its
aegis. This provision was designed to be the first step toward the
establishment of a full-fledged central bank (Livingston 1986, pp.

Although they could not control the American Bankers Association,
the multitude of country bankers, up in arms against the proposed
competition of big banks in the form of branch banking, put fierce
pressure upon Congress and managed to kill the Fowler Bill in the House
during 1902, despite the agitation of the executive committee and staff
of the Indianapolis Monetary Convention.

With the defeat of the Fowler Bill, the big bankers decided to
settle for more modest goals for the time being. Senator Nelson W.
Aldrich of Rhode Island, perennial Republican leader of the US Senate
and Rockefeller's man in Congress,[7]
submitted the Aldrich Bill the following year, allowing the large
national banks in New York to issue "emergency currency" based on
municipal and railroad bonds. But even this bill was defeated.

Meeting setbacks in Congress, the big bankers decided to regroup and
turn temporarily to the executive branch. Foreshadowing a later, more
elaborate collaboration, two powerful representatives each from the
Morgan and Rockefeller banking interests met with Comptroller of the
Currency William B. Ridgely in January 1903, to try to persuade him, by
administrative fiat, to restrict the volume of loans made by the
country banks in the New York money market.

The two Morgan men at the meeting were J. P. Morgan himself and
George F. Baker, Morgan's closest friend and associate in the banking
business.[8] The two Rockefeller men were Frank Vanderlip and James Stillman, long-time chairman of the board of the National City Bank.[9]
The close Rockefeller-Stillman alliance was cemented by the marriage of
the two daughters of Stillman to the two sons of William Rockefeller,
brother of John D. Rockefeller, Sr., and long-time board member of the
National City Bank (Burch 1981, pp. 134–35).

The meeting with the comptroller did not bear fruit, but the lead
instead was taken by the secretary of the treasury himself, Leslie
Shaw, formerly presiding officer at the second Indianapolis Monetary
Convention, whom President Roosevelt appointed to replace Lyman Gage.
The unexpected and sudden shift from McKinley to Roosevelt in the
presidency meant more than just a turnover of personnel; it meant a
fundamental shift from a Rockefeller-dominated to a Morgan-dominated
administration. The shift from Gage to Shaw was one of the many
Rockefeller-to-Morgan displacements.

On monetary and banking matters, however, the Rockefeller and Morgan
camps were as one. Secretary Shaw attempted to continue and expand
Gage's experiments in trying to make the Treasury function like a
central bank, particularly in making open-market purchases in
recessions, and in using Treasury deposits to bolster the banks and
expand the money supply.

Shaw violated the statutory institution of the independent Treasury,
which had tried to confine government revenues and expenditures to its
own coffers. Instead, he expanded the practice of depositing Treasury
funds in favored, big national banks. Indeed, even banking reformers
denounced the deposit of Treasury funds to pet banks as artificially
lowering interest rates and leading to artificial expansion of credit.
Furthermore, any government deficit would obviously throw a system
dependent on a flow of new government revenues into chaos.

All in all, the reformers agreed increasingly with the verdict of
economist Alexander Purves, that "the uncertainty as to the Secretary's
power to control the banks by arbitrary decisions and orders, and the
fact that at some future time the country may be unfortunate in its
chief Treasury official [has] … led many to doubt the wisdom" of using
the Treasury as a form of central bank (Livingston 1986, 156; Burch
1981, pp. 161–62).

In his last annual report of 1906, Secretary Shaw urged that he be
given total power to regulate all the nation's banks. But the game was
up, and by then it was clear to the reformers that Shaw's as well as
Gage's proto–central bank manipulations had failed. It was time to
undertake a struggle for a fundamental legislative overhaul of the
American banking system, to bring it under central-banking control.[10]

Charles A. Conant: Surplus Capital and Economic Imperialism

The years shortly before and after 1900 proved to be the beginnings
of the drive toward the establishment of a Federal Reserve System. It
was also the origin of the gold-exchange standard, the fateful system
imposed upon the world by the British in the 1920s and by the United
States after World War II at Bretton Woods. Even more than the case of
a gold standard with a central bank, the gold-exchange standard
establishes a system, in the name of gold, which in reality manages to
install coordinated, international, inflationary, paper money.

The idea was to replace a genuine gold standard, in which each
country (or, domestically, each bank) maintains its reserves in gold,
by a pseudo–gold standard in which the central bank of the client
country maintains its reserves in some key or base currency, say
pounds, or dollars. Thus, during the 1920s, most countries maintained
their reserves in pounds, and only Britain purported to redeem pounds
in gold.

This meant that these other countries were really on a pound rather
than a gold standard, although they were able, at least temporarily, to
acquire the prestige of gold. It also meant that when Britain inflated
pounds, there was no danger of losing gold to these other countries,
who, quite the contrary, happily inflated their own currencies on top
of their expanding balances in pounds sterling.

Thus, there was generated an unstable, inflationary system — all in
the name of gold — in which client states pyramided their own inflation
on top of Great Britain's. The system was eventually bound to collapse,
as did the gold-exchange standard in the Great Depression, and Bretton
Woods by the late 1960s. In addition, the close ties based on pounds
and then dollars meant that the key or base country was able to exert a
form of economic imperialism, joined by their common paper and
pseudogold inflation, upon the client states using the key money.

By the late 1890s, groups of theoreticians in the United States were
working on what would later be called the "Leninist" theory of
capitalist imperialism. The theory was originated, not by Lenin but by
advocates of imperialism, centering around such Morgan-oriented friends
and brain trusters of Theodore Roosevelt as Henry Adams, Brooks Adams,
Admiral Alfred T. Mahan, and Massachusetts Senator Henry Cabot Lodge.

The idea was that capitalism in the developed countries was
"overproducing," not simply in the sense that more purchasing power was
needed in recessions, but more deeply in that the rate of profit was
therefore inevitably falling. The ever-lower rate of profit from the
"surplus capital" was in danger of crippling capitalism, except that
salvation loomed in the form of foreign markets and especially foreign

New and expanded foreign markets would increase profits, at least
temporarily, while investments in undeveloped countries would be bound
to bring a high rate of profit. Hence, to save advanced capitalism, it
was necessary for Western governments to engage in outright imperialist
or neoimperialist ventures, which would force other countries to open
their markets for American products and would force open investment
opportunities abroad.

Given this doctrine — based on the fallacious Ricardian view that
the rate of profit is determined by the stock of capital investment,
instead of by the time preferences of everyone in society — there was
little for Lenin to change except to give an implicit moral
condemnation instead of approval and to emphasize the necessarily
temporary nature of the respite imperialism could furnish for

Charles Conant set forth the theory of surplus capital in his A History of Modern Banks of Issue
(1896) and developed it in subsequent essays. The existence of fixed
capital and modern technology, Conant claimed, invalidated Say's Law
and the concept of equilibrium, and led to chronic "oversavings," which
he defined as savings in excess of profitable investment outlets, in
the developed Western capitalist world.

Business cycles, claimed Conant, were inherent in the unregulated
activity of modern industrial capitalism. Hence the importance of
government-encouraged monopolies and cartels to stabilize markets and
the business cycle, and in particular the necessity of economic
imperialism to force open profitable outlets abroad for American and
other Western surplus capital.

The United States' bold venture into an imperialist war against
Spain in 1898 galvanized the energies of Conant and other theoreticians
of imperialism. Conant responded with his call for imperialism in "The
Economic Basis of Imperialism" in the September 1898 North American Review, and in other essays collected in The United States in the Orient: The Nature of the Economic Problem and published in 1900.

S. J. Chapman (1901, p. 78), a distinguished British economist,
accurately summarized Conant's argument as follows: (1) "In all
advanced countries there has been such excessive saving that no
profitable investment for capital remains." (2) Since all countries do
not practice a policy of commercial freedom, "America must be prepared
to use force if necessary" to open up profitable investment outlets
abroad, and (3) the United States possesses an advantage in the coming
struggle, since the organization of many of its industries "in the form
of trusts will assist it greatly in the fight for commercial supremacy."[12]

The war successfully won, Conant was particularly enthusiastic about
the United States keeping the Philippines, the gateway to the great
potential Asian market. The United States, he opined, should not be
held back by "an abstract theory" to adopt "extreme conclusions" on
applying the doctrines of the Founding Fathers on the importance of the
consent of the governed.

The Founding Fathers, he declared, surely meant that self-government
could only apply to those competent to exercise it, a requirement that
clearly did not apply to the backward people of the Philippines. After
all, Conant wrote, "Only by the firm hand of the responsible governing
races … can the assurance of uninterrupted progress be conveyed to the
tropical and undeveloped countries" (Healy 1970, pp. 200–01).

Conant also was bold enough to derive important domestic conclusions
from his enthusiasm for imperialism. Domestic society, he claimed,
would have to be transformed to make the nation as "efficient" as
possible. Efficiency, in particular, meant centralized concentration of
power. "Concentration of power, in order to permit prompt and efficient
action, will be an almost essential factor in the struggle for world

In particular, it was important for the United States to learn from
the magnificent centralization of power and purpose in Czarist Russia.
The government of the United States would require "a degree of harmony
and symmetry which will permit the direction of the whole power of the
state toward definite and intelligent policies." The US Constitution
would have to be amended to permit a form of Czarist absolutism, or at
the very least an enormously expanded executive power in foreign
affairs (Healy, pp. 202–03).

An interesting case study of business opinion energized and converted by the lure of imperialism was the Boston weekly, The US Investor. Before the outbreak of war with Spain in 1898, the US Investor
denounced the idea of war as a disaster to business. But after the
United States launched its war, and Commodore Dewey seized Manila Bay,
the Investor totally changed its tune. Now it hailed the war
as excellent for business, and as bringing about recovery from the
previous recession.

Soon the Investor was happily advocating a policy of
"imperialism" to make US prosperity permanent. Imperialism conveyed
marvelous benefits to the country. At home, a big army and navy would
be valuable in curbing the tendency of democracy to enjoy "a too great
freedom from restraint, both of action and of thought." The Investor
added that "European experience demonstrates that the army and navy are
admirably adopted to inculcate orderly habits of thought and action."

But an even more important benefit from a policy of permanent
imperialism would be economic. To keep "capital … at work," stern
necessity requires that "an enlarged field for its product must be
discovered." Specifically, "a new field" had to be found for selling
the growing flood of goods produced by the advanced nations, and for
investment of their savings at profitable rates. The Investor
exulted in the fact that this new "field lies ready for occupancy. It
is to be found among the semicivilized and barbarian races," in
particular the beckoning country of China.

Particularly interesting is the colloquy that ensued between the Investor, and the Springfield (Mass.) Republican, which still propounded the older theory of free trade and laissez-faire. The Republican
asked why trade with undeveloped countries is not sufficient without
burdening US taxpayers with administrative and military overhead. The
Republican also attacked the new theory of surplus capital, pointing
out that only two or three years earlier, businessmen had been loudly
calling for more European capital to be invested in American ventures.

To the first charge, the Investor fell back on "the
experience of the race for, perhaps ninety centuries, [which] has been
in the direction of foreign acquisitions as a means of national
prosperity." But, more practically, the Investor delighted
over the goodies that imperialism would bring to American business in
the way of government contracts and the governmental development of
what would now be called the "infrastructure" of the colonies.
Furthermore, as in Britain, a greatly expanded diplomatic service would
provide "a new calling for our young men of education and ability."

To the Republican's second charge, on surplus capital, the Investor,
like Conant, developed the idea of a new age that had just arrived in
American affairs: an age of large-scale manufacture and hence
overproduction, an age of a low rate of profit, and consequent
formation of trusts in a quest for higher profits through suppression
of competition.

As the Investor put it, "The excess of capital has resulted
in an unprofitable competition. To employ Franklin's witticism, the
owners of capital are of the opinion they must hang together or else
they will all hang separately." But while trusts may solve the problem
of specific industries, they do not solve the great problem of a
general "congestion of capital." Indeed, wrote the Investor, "finding employment for capital … is now the greatest of all economic problems that confront us."

To the Investor, the way out was clear:

The logical path to be
pursued is that of the development of the natural riches of the
tropical countries. These countries are now peopled by races incapable
on their own initiative of extracting its full riches from their own
soil.… This will be attained in some cases by the mere stimulus of
government and direction by men of the temperate zones; but it will be
attained also by the application of modern machinery and methods of
culture to the agricultural and mineral resources of the undeveloped
countries. (Quoted in Etherington 1984, p. 17)

By the spring of 1901, even the eminent economic theorist John Bates
Clark, of Columbia University, was able to embrace the new creed.
Reviewing proimperialist works by Conant, Brooks Adams, and the
Reverend Josiah Strong in a single celebratory review in March 1901 in
the Political Science Quarterly, Clark emphasized the
importance of opening foreign markets and particularly of investing
American capital "with an even larger and more permanent profit"
(Parrini and Sklar 1983, p. 565, n. 16).

J. B. Clark was not the only economist ready to join in apologia for
the strong state. Throughout the land by the turn of the 20th century,
a legion of economists and other social scientists had arisen, many of
them trained in graduate schools in Germany to learn of the virtues of
the inductive method, the German Historical School,
and a collectivist, organicist state. Eager for positions and power
commensurate with their graduate training, these new social scientists,
in the name of professionalism and technical expertise, prepared to
abandon the old laissez-faire creed and take their places as apologists
and planners in a new, centrally-planned state.

Professor Edwin R. A. Seligman of Columbia University, of the
prominent Wall Street investment banking family of J. and W. Seligman
and Company, spoke for many of these social scientists when, in a
presidential address before the American Economic Association in 1903,
he hailed the "new industrial order."[13]
Seligman prophesied that in the new, 20th century, the possession of
economic knowledge would grant economists the power "to control … and
mold" the material forces of progress. As the economist proved able to
forecast more accurately, he would be installed as "the real
philosopher of social life," and the public would pay "deference to his

In his 1899 presidential address, Arthur Twining Hadley of Yale also
saw economists developing as society's philosopher kings. The most
important application of economic knowledge, declared Hadley, was
leadership in public life, becoming advisers and leaders of national
policy. "I believe," opined Hadley,

that their [economists']
largest opportunity in the immediate future lies not in theories but in
practice, not with students but with statesmen, not in the education of
individual citizens, however widespread and salutary, but in the
leadership of an organized body politic. (Silva and Slaughter 1984, p.

Hadley perceptively saw the executive branch of the government as
particularly amenable to providing access to position and influence for
economic advisers and planners. Previously, executives were hampered in
seeking such expert counsel by the importance of political parties,
their ideological commitments, and their mass base in the voting

But now, fortunately, the growing municipal reform (soon to be
called the Progressive) movement was taking power away from political
parties and putting it into the hands of administrators and experts.
The "increased centralization of administrative power [was giving] …
the expert a fair chance."

And now, on the national scene, the new American leap into
imperialism in the Spanish-American War was providing an opportunity
for increased centralization, executive power, and therefore for
administrative and expert planning. Even though Hadley declared himself
personally opposed to imperialism, he urged economists to leap at this
great opportunity for access to power (Silva and Slaughter 1984, pp.

The organized economic profession was not slow to grasp this new
opportunity. Quickly, the executive and nominating committees of the
American Economic Association (AEA) created a five-man special
committee to organize and publish a volume on colonial finance. As
Silva and Slaughter put it, this new, rapidly put together volume
permitted the AEA to show the power elite how the new social science
could serve the interests of those who made imperialism a national
policy by offering technical solutions to the immediate fiscal problems
of colonies, as well as providing ideological justifications for
acquiring them. (Silva and Slaughter, p. 133)

The chairman of the special committee was Professor Jeremiah W.
Jenks of Cornell, the major economic adviser to Governor Theodore
Roosevelt. Another member was Professor E. R. A. Seligman, another key
adviser to Roosevelt. A third colleague was Dr. Albert Shaw,
influential editor of the Review of Reviews, progressive
reformer and social scientist, and long-time crony of Roosevelt's. All
three were long-time leaders of the American Economic Association.

The other two, non-AEA leaders, on the committee were Edward R.
Strobel, former assistant secretary of state and adviser to colonial
governments, and Charles S. Hamlin, wealthy Boston lawyer and assistant
secretary of the treasury, who had long been in the Morgan ambit, and
whose wife was a member of the Pruyn family, longtime investors in two
Morgan-dominated concerns: the New York Central Railroad and the Mutual
Life Insurance Company of New York.

Essays in Colonial Finance (Jenks et al. 1900), the volume
quickly put together by these five leaders, tried to advise the United
States how best to run its newly-acquired empire.

First, just as the British government insisted when the North
American states were its colonies, the colonies should support their
imperial government through taxation, whereas control should be tightly
exercised by the US imperial center. Second, the imperial center should
build and maintain the economic infrastructure of the colony: canals,
railroads, and communications. Third, where — as was clearly
anticipated — native labor is inefficient or incapable of management,
the imperial government should import (white) labor from the imperial
center. And, finally, as Silva and Slaughter put it,

the committee's fiscal
recommendations strongly intimated that trained economists were
necessary for a successful empire. It was they who must make a thorough
study of local conditions to determine the correct fiscal system,
gather data, create the appropriate administrative design and perhaps
even implement it. In this way, the committee seconded Hadley's views
in seeing imperialism as an opportunity for economists by identifying a
large number of professional positions best filled by themselves.
(Silva and Slaughter 1984, p. 135)

With the volume written, the AEA cast about for financial support
for its publication and distribution. The point was not simply to
obtain the financing, but to do so in such a way as to gain the
imprimatur of leading members of the power elite on this bold move to
empower economists as technocratic expert advisers and administrators
in the imperial nation-state.

The American Economic Association found five wealthy businessmen to put up two-fifths the full cost of publishing Essays in Colonial Finance.
By compiling the volume and then accepting corporate sponsors, several
of whom had an economic stake in the new American empire, the AEA was
signaling that the nation's organized economists were (1)
wholeheartedly in favor of the new American empire; and (2) were
willing and eager to play a strong role in advising and administering
the empire, a role which they promptly and happily filled, as we shall
see in the following section.

In view of the symbolic as well as practical role for the sponsors,
a list of the five donors for the colonial-finance volume is

One was Isaac N. Seligman, head of the investment-banking house of J
and W Seligman and Company, a company with extensive overseas
interests, especially in Latin America. Isaac's brother E. R. A.
Seligman was a member of the special committee on Colonial Finance and
an author of one of the essays in the volume.

Another was William E. Dodge, a partner of the copper mining firm of
Phelps, Dodge, and Company, and member of a powerful mining family
allied to the Morgans.

A third donor was Theodore Marburg, an economist who was vice
president of the AEA at the time, and also an ardent advocate of
imperialism as well as heir to a substantial American Tobacco Company

Fourth was Thomas Shearman, a single-taxer and an attorney for the powerful railroad magnate Jay Gould.

And last but not least, was Stuart Wood, a manufacturer who had a PhD in economics and had been a vice president of the AEA.

Conant: Monetary Imperialism and the Gold-Exchange Standard

The leap into political imperialism by the United States in the late
1890s was accompanied by economic imperialism, and one key to economic
imperialism was monetary imperialism. In brief, the developed Western
countries by this time were on the gold standard, while most of the
Third World nations were on the silver standard. For the past several
decades, the value of silver in relation to gold had been steadily
falling, due to

  1. an increasing world supply of silver relative to gold, and
  2. the
    subsequent shift of many Western nations from silver or bimetallism to
    gold, thereby lowering the world's demand for silver as a monetary

The fall of silver values meant monetary depreciation and inflation
in the Third World, and it would have been a reasonable policy to shift
from a silver-coin to a gold-coin standard. But the new imperialists
among US bankers, economists, and politicians were far less interested
in the welfare of Third World countries than in foisting a monetary
imperialism upon them.

For not only would the economies of the imperial center and the
client states then be tied together, but they would be tied in such a
way that these economies could pyramid their own monetary and bank
credit inflation on top of inflation in the United States. Hence, what
the new imperialists set out to do was pressure or coerce Third World
countries to adopt, not a genuine gold-coin standard, but a newly
conceived "gold-exchange" or dollar standard.

Instead of silver currency fluctuating freely in terms of gold, the
silver to gold rate would then be fixed by arbitrary government
price-fixing. The silver countries would be silver in name only; the
country's monetary reserve would be held, not in silver, but in dollars
allegedly redeemable in gold; and these reserves would be held, not in
the country itself, but as dollars piled up in New York City.

In that way, if US banks inflated their credit, there would be no
danger of losing gold abroad, as would happen under a genuine gold
standard. For under a true gold standard, no one and no country would
be interested in piling up claims to dollars overseas. Instead, they
would demand payment of dollar claims in gold. So that even though
these American bankers and economists were all too aware, after many
decades of experience, of the fallacies and evils of bimetallism, they
were willing to impose a form of bimetallism upon client states in
order to tie them into US economic imperialism, and to pressure them
into inflating their own money supplies on top of dollar reserves
supposedly, but not de facto, redeemable in gold.

The United States first confronted the problem of silver currencies
in a Third World country when it seized control of Puerto Rico from
Spain in 1898 and occupied it as a permanent colony. Fortunately for
the imperialists, Puerto Rico was already ripe for currency
manipulation. Only three years earlier, in 1895, Spain had destroyed
the full-bodied Mexican silver currency that its colony had previously
enjoyed, and replaced it with a heavily debased silver "dollar," worth
only 41 cents in US currency. The Spanish government had pocketed the
large seigniorage profits from that debasement.

The United States was therefore easily able to substitute its own
debased silver dollar, worth only 45.6 cents in gold. Thus, the United
States' silver currency replaced an even more debased one, and also the
Puerto Ricans had no tradition of loyalty to a currency only recently
imposed by the Spaniards. There was therefore little or no opposition
in Puerto Rico to the US monetary takeover.[14]

The major controversial question was what exchange rate the American
authorities would fix between the two debased coins: the old Puerto
Rican silver peso and the US silver dollar. This was the rate at which
the US authorities would compel the Puerto Ricans to exchange their
existing coinage for the new American coins.

The treasurer in charge of the currency reform for the US government
was the prominent Johns Hopkins economist, Jacob H. Hollander, who had
been special commissioner to revise Puerto Rican tax laws, and who was
one of the new breed of academic economists repudiating laissez-faire
for comprehensive statism.

The heavy debtors in Puerto Rico — mainly the large sugar planters —
naturally wanted to pay their peso obligations at as cheap a rate as
possible; they lobbied for a peso worth 50 cents American. In contrast,
the Puerto Rican banker-creditors wanted the rate fixed at 75 cents.
Since the exchange rate was arbitrary anyway, Hollander and the other
American officials decided in the time-honored way of governments: more
or less splitting the difference, and fixing a peso equal to 60 cents.[15]

The Philippines, the other Spanish colony grabbed by the United
States, posed a far more difficult problem. As in most of the Far East,
the Philippines was happily using a perfectly sound silver currency,
the Mexican silver dollar. But the United States was anxious for a
rapid reform, because its large armed forces establishment suppressing
Filipino nationalism required heavy expenses in US dollars, which it of
course declared to be legal tender for payments. Since the Mexican
silver coin was also legal tender and was cheaper than the US gold
dollar, the US military occupation found its revenues being paid in
unwanted and cheaper Mexican coins.

Delicacy was required, and in 1901, for the task of currency
takeover the Bureau of Insular Affairs (BIA) of the War Department —
the agency running the US occupation of the Philippines — hired Charles
A. Conant for the task. Secretary of War Elihu Root was a redoubtable
Wall Street lawyer in the Morgan ambit who sometimes served as J. P.
Morgan's personal attorney. Root took a personal hand in sending Conant
to the Philippines. Conant, fresh from the Indianapolis Monetary
Commission and before going to New York as a leading investment banker,
was, as might be expected, an ardent gold-exchange-standard imperialist
as well as the leading theoretician of economic imperialism.

Realizing that the Filipino people loved their silver coins, Conant
devised a way to impose a gold US dollar currency upon the country.
Under his cunning plan, the Filipinos would continue to have a silver
currency; but replacing the full-bodied Mexican silver coin would be an
American silver coin tied to gold at a debased value far less than the
market exchange value of silver in terms of gold. In this imposed,
debased bimetallism, since the silver coin was deliberately overvalued
in relation to gold by the US government, Gresham's law went
inexorably into effect. The overvalued silver would keep circulating in
the Philippines, and undervalued gold would be kept sharply out of

The seigniorage profit that the Treasury would reap from the
debasement would be happily deposited at a New York bank, which would
then function as a "reserve" for the US silver currency in the
Philippines. Thus, the New York funds would be used for payment outside
the Philippines instead of as coin or specie. Moreover, the US
government could issue paper dollars based on its new reserve fund.

It should be noted that Conant originated the gold-exchange scheme
as a way of exploiting and controlling Third World economies based on
silver. At the same time, Great Britain was introducing similar schemes
in its colonial areas in Egypt, the Straits Settlements in Asia, and
particularly in India.

Congress, however, pressured by the silver lobby, balked at the
BIA's plan. And so the BIA again turned to the seasoned public
relations and lobbying skills of Charles A. Conant. Conant swung into
action. Meeting with editors of the top financial journals, he secured
their promises to write editorials pushing for the Conant plan, many of
which he obligingly wrote himself.

He was already backed by the American banks of Manila. Recalcitrant
US bankers were warned by Conant that they could no longer expect large
government deposits from the War Department if they continued to oppose
the plan. Furthermore, Conant won the support of the major enemies of
his plan, the American silver companies and prosilver bankers,
promising them that if the Philippine currency reform went through, the
federal government would buy silver for the new US coinage in the
Philippines from these same companies. Finally, the tireless lobbying,
and the mixture of bribery and threats by Conant, paid off. Congress
passed the Philippine Currency Bill in March 1903.

In the Philippines, however, the United States could not simply
duplicate the Puerto Rican example and coerce the conversion of the old
for the new silver coinage. For the Mexican silver coin was a dominant
coin not only in the Far East but throughout the world, and the coerced
conversion would have been endless.

The United States tried; it removed the legal tender privilege from
the Mexican coins, and decreed the new US coins to be used for taxes,
government salaries, and other government payments. But this time the
Filipinos happily used the old Mexican coins as money, while the US
silver coins disappeared from circulation into payment of taxes and
transactions to the United States.

The War Department was beside itself: how could it drive Mexican
silver coinage out of the Philippines? In desperation, it turned to the
indefatigable Conant, but Conant couldn't join the colonial government
in the Philippines because he had just been appointed to a more
far-flung presidential commission on international exchange for
pressuring Mexico and China to go on a similar gold-exchange standard.

Hollander, fresh from his Puerto Rican triumph, was ill. Who else?
Conant, Hollander, and several leading bankers told the War Department
they could recommend no one for the job, so new then was the profession
of technical expert in monetary imperialism.

But there was one more hope, the other procartelist and financial
imperialist, Cornell's Jeremiah W. Jenks, a fellow member with Conant
of President Roosevelt's new Commission on International Exchange
(CIE). Jenks had already paved the way for Conant by visiting English
and Dutch colonies in the Far East in 1901 to gain information about
running the Philippines. Jenks finally came up with a name, his former
graduate student at Cornell, Edwin W. Kemmerer.

Young Kemmerer went to the Philippines from 1903 to 1906, to
implement the Conant plan. Based on the theories of Jenks and Conant,
and on his own experience in the Philippines, Kemmerer went on to teach
at Cornell and then at Princeton, and gained fame throughout the 1920s
as the "money doctor," busily imposing the gold-exchange standard on
country after country abroad.

Relying on Conant's behind-the-scenes advice, Kemmerer and his
associates finally came out with a successful scheme to drive out the
Mexican silver coins. It was a plan that relied heavily on government
coercion. The United States imposed a legal prohibition on the
importation of the Mexican coins, followed by severe taxes on any
private Philippine transactions daring to use the Mexican currency.

Luckily for the planners, their scheme was aided by a large-scale
demand at the time for Mexican silver in northern China, which absorbed
silver that was in the Philippines or that would have been smuggled
into the islands. The US success was aided by the fact that the new US
silver coins, perceptively called "conants" by the Filipinos, were made
up to look very much like the cherished old Mexican coins. By 1905,
force, luck, and trickery had prevailed, and the conants (worth 50
cents in US money) were the dominant currency in the Philippines. Soon
the US authorities were confident enough to add token copper coins and
paper conants as well.[16]

By 1903, the currency reformers felt emboldened enough to move
against the Mexican silver dollar throughout the world. In Mexico
itself, US industrialists who wanted to invest there pressured the
Mexicans to shift from silver to gold, and they found an ally in
powerful finance minister Jose Limantour. But tackling the Mexican
silver peso at home would not be an easy task, for the coin was known
and used throughout the world, particularly in China, where it formed
the bulk of the circulating coinage.

Finally, after three-way talks between US, Mexican, and Chinese
officials, the Mexicans and Chinese were induced to send identical
notes to the US Secretary of State, urging the United States to appoint
financial advisers to bring about a currency reform and stabilized
exchange rates with the gold countries (Parrini and Sklar 1983, pp.
573–77; Rosenberg 1985, p. 184).

These requests gave President Roosevelt, upon securing Congressional
approval, the excuse to appoint in March 1903 a three-man Commission on
International Exchange to bring about currency reform in Mexico, China,
and the rest of the silver-using world. The aim was "to bring about a
fixed relationship between the moneys of the gold-standard countries
and the present silver-using countries," in order to foster "export
trade and investment opportunities" in the gold countries and economic
development in the silver countries.

The three members of the CIE were old friends and like-minded
colleagues. The chairman was Hugh H. Hanna, of the Indianapolis
Monetary Commission, the others were his former chief aide at that
Commission, Charles A. Conant, and Professor Jeremiah W. Jenks. Conant,
as usual, was the major theoretician and finagler. He realized that
major opposition to Mexico and China's shift to a gold standard would
come from the important Mexican-silver industry, and he devised a
scheme to get European countries to purchase large amounts of Mexican
silver to ease the pain of the shift.

In a trip to European nations in the summer of 1903, however, Conant
and the CIE found the Europeans less than enthusiastic about making
Mexican silver purchases as well as subsidizing US exports and
investments in China, a land whose market they too were coveting. In
the United States, on the other hand, major newspapers and financial
periodicals, prodded by Conant's public relations work, warmly endorsed
the new currency scheme.

In the meantime, however, the United States faced similar currency
problems in its two new Caribbean protectorates, Cuba and Panama.
Panama was easy. The United States occupied the Canal Zone, and would
be importing vast amounts of equipment to build the canal, and so it
decided to impose the American gold dollar as the currency in the
nominally independent Republic of Panama.

While the gold dollar was the official currency of Panama, the
United States imposed as the actual medium of exchange a new debased
silver peso worth 50 cents. Fortunately, the new peso was almost the
same in value as the old Colombian silver coin it forcibly displaced,
and so, like Puerto Rico, the takeover could go without a hitch.

Among the US colonies or protectorates, Cuba proved the toughest nut
to crack. Despite all of Conant's ministrations, Cuba's currency
remained unreformed. Spanish gold and silver coins, French coins, and
US currency all circulated side by side, freely fluctuating in response
to supply and demand. Furthermore, similar to the prereformed
Philippines, a fixed bimetallic exchange rate between the cheaper US,
and the more valuable Spanish and French, coins led the Cubans to
return cheaper US coins to the US customs authorities in fees and

Why then did Conant fail in Cuba? In the first place, strong Cuban
nationalism resented US plans for seizing control of their currency.
Conant's repeated request in 1903 for a Cuban invitation for the CIE to
visit the island met stern rejections from the Cuban government.
Moreover, the charismatic US military commander in Cuba, Leonard Wood,
wanted to avoid giving the Cubans the impression that plans were afoot
to reduce Cuba to colonial status.

The second objection was economic. The powerful sugar industry in
Cuba depended on exports to the United States, and a shift from
depreciated silver to higher-valued gold money would increase the cost
of sugar exports, by an amount Leonard Wood estimated to be about 20

While the same problem had existed for the sugar planters in Puerto
Rico, American economic interests, in Puerto Rico and in other
countries such as the Philippines favored forcing formerly silver
countries onto a gold-based standard so as to stimulate US exports into
those countries. In Cuba, on the other hand, there was increasing US
investment capital pouring into the Cuban sugar plantations, so that
powerful and even dominant US economic interests existed on the other
side of the currency reform question. Indeed, by World War I, American
investments in Cuban sugar reached the sum of $95 million.

Thus, when Charles Conant resumed his pressure for a Cuban
gold-exchange standard in 1907, he was strongly opposed by the US
Governor of Cuba, Charles Magoon, who raised the problem of a
gold-based standard crippling the sugar planters. The CIE never managed
to visit Cuba, and ironically, Charles Conant died in Cuba, in 1915,
trying in vain to convince the Cubans of the virtues of the
gold-exchange standard (Rosenberg 1985, pp. 186–88).

The Mexican shift from silver to gold was more gratifying to Conant,
but here the reform was effected by Foreign Minister Limantour and his
indigenous technicians, with the CIE taking a back seat. However, the
success of this shift, in the Mexican Currency Reform Act of 1905, was
assured by a world rise in the price of silver, starting the following
year, which made gold coins cheaper than silver, with Gresham's law
bringing about a successful gold coin currency in Mexico.

But the US silver coinage in the Philippines ran into trouble
because of the rise in the world silver price. Here, the US silver
currency in the Philippines was bailed out by coordinated action by the
Mexican government, which sold silver in the Philippines to lower the
value of silver sufficiently so that the Conants could be brought back
into circulation.[17]

But the big failure of Conant/CIE monetary imperialism was in China.
In 1900, Britain, Japan, and the United States intervened in China to
put down the Boxer Rebellion. The three countries thereupon forced
defeated China to agree to pay them and all major European powers an
indemnity of $333 million.

The United States interpreted the treaty as an obligation to pay in
gold, but China, on a depreciated silver standard, began to pay in
silver in 1903, an action that enraged the three treaty powers. The US
minister to China reported that Britain might declare China's payment
in silver a violation of the treaty, which would presage military

Emboldened by the United States' success in the Philippines, Panama,
and Mexico, Secretary of War Root sent Jeremiah W. Jenks on a mission
to China in early 1904 to try to transform China from a silver- to a
gold-exchange standard. Jenks also wrote to President Roosevelt from
China urging that the Chinese indemnity to the United States from the
Boxer Rebellion be used to fund exchange professorships for 30 years.

Jenks's mission, however, was a total failure. The Chinese
understood the CIE currency scheme all too well. They saw and denounced
the seigniorage of the gold-exchange standard as an irresponsible and
immoral debasement of Chinese currency, an act that would impoverish
China while adding to the profits of US banks where seigniorage reserve
funds would be deposited.

Moreover, the Chinese officials saw that shifting the indemnity from
silver to gold would enrich the European governments at the expense of
the Chinese economy. They also noted that the CIE scheme would
establish a foreign controller of the Chinese currency to impose
banking regulations and economic reforms on the Chinese economy. We
need not wonder at the Chinese outrage. China's reaction was its own
nationalistic currency reform in 1905 to replace the Mexican silver
coin with a new Chinese silver coin, the tael (Rosenberg 1985, pp.

Jenks's ignominious failure in China put an end to any formal role for the Commission on International Exchange.[18]
An immediately following fiasco blocked the US government's use of
economic and financial advisers to spread the gold-exchange standard
abroad. In 1905, the State Department hired Jacob Hollander to move
another of its Latin American client states, the Dominican Republic,
onto the gold-exchange standard.

When Hollander accomplished this task by the end of the year, the
State Department asked the Dominican government to hire Hollander to
work out a plan for financial reform, including a US loan, and a
customs service run by the United States to collect taxes for repayment
of the loan. Hollander, son-in-law of prominent Baltimore merchant
Abraham Hutzler, used his connection with Kuhn, Loeb and Company to
place Dominican bonds with that investment bank.

Hollander also engaged happily in double dipping for the same work,
collecting fees for the same job from the State Department and from the
Dominican government. When this peccadillo was discovered in 1911, the
scandal made it impossible for the US government to use its own
employees and its own funds to push for gold-exchange experts abroad.
From then on, there was more of a public-private partnership between
the US government and the investment bankers, with the bankers
supplying their own funds, and the State Department supplying good will
and more concrete resources.

Thus, in 1911–1912, the United States, over great opposition,
imposed a gold-exchange standard on Nicaragua. The State Department
formally stepped aside, but approved Charles Conant's hiring by the
powerful investment-banking firm of Brown Brothers to bring about a
loan and the currency reform. The State Department lent not only its
approval to the project, but also its official wires, for Conant and
Brown Brothers to conduct the negotiations with the Nicaraguan

By the time he died in Cuba in 1915, Charles Conant had made himself
the chief theoretician and practitioner of the gold-exchange and the
economic-imperialist movements. Aside from his successes in the
Philippines, Panama, and Mexico, and his failures in Cuba and China,
Conant led in pushing for gold-exchange reform and gold-dollar
imperialism in Liberia, Bolivia, Guatemala, and Honduras. His magnum
opus in favor of the gold-exchange standard, the two-volume The Principles of Money and Banking
(1905), as well as his pathbreaking success in the Philippines, were
followed by a myriad of books, articles, pamphlets, and editorials,
always backed up by his personal propaganda efforts.

Particularly interesting were Conant's arguments in favor of a
gold-exchange, rather than a genuine gold-coin, standard. A straight
gold-coin standard, Conant believed, did not provide a sufficient
amount of gold to provide for the world's monetary needs.

Hence, by tying the existing silver standards in the undeveloped
countries to gold, the "shortage" of gold could be overcome, and also
the economies of the undeveloped countries could be integrated into
those of the dominant imperial power. All this could only be done if
the gold-exchange standard were "designed and implemented by careful
government policy," but of course Conant himself and his friends and
disciples always stood ready to advise and provide such implementation
(Rosenberg 1985, p. 197).

In addition, adopting a government-managed gold-exchange standard
was superior to either genuine gold or bimetallism because it left each
state the flexibility of adapting its currency to local needs. As
Conant asserted,

It leaves each state
free to choose the means of exchange which conform best to its local
conditions. Rich nations are free to choose gold, nations less rich
silver, and those whose financial methods are most advanced are free to
choose paper.

It is interesting that for Conant, paper was the most "advanced"
form of money. It is clear that the devotion to the gold standard of
Conant and of his colleagues was only to a debased and inflationary
standard controlled and manipulated by the US government, with gold
really serving as a facade of allegedly hard money.

And one of the critical forms of government manipulation and control
in Conant's proposed system was the existence and active functioning of
a central bank. As a founder of the "science" of financial advising to
governments, Conant, followed by his colleagues and disciples, not only
pushed a gold-exchange standard wherever he could do so, but also a
central bank to manage and control that standard. As Emily Rosenberg
points out,

Conant thus did not
neglect … one of the major revolutionary changes implicit in his
system: a new, important role for a central bank as a currency
stabilizer. Conant strongly supported the American banking reform that
culminated in the Federal Reserve System … and American financial
advisers who followed Conant would spread central banking systems,
along with gold-standard currency reforms, to the countries they
advised. (Rosenberg 1985, p. 198)

Along with a managed gold-exchange standard would come, as
replacement for the old free-trade, unmanaged, gold-coin standard, a
world of imperial currency blocs, which "would necessarily come into
being as lesser countries deposited their gold stabilization funds in
the banking systems of more advanced countries" (ibid.). New York and
London banks, in particular, shaped up as the major reserve fundholders
in the developing new world monetary order.

It is no accident that the United States' major financial and
imperial rival, Great Britain, which was pioneering in imposing
gold-exchange standards in its own colonial area at this time, built
upon this experience to impose a gold-exchange standard, marked by all
European currencies pyramiding on top of British inflation, during the
1920s. That disastrous inflationary experiment led straight to the
worldwide banking crash and the general shift to fiat paper moneys in
the early 1930s. After World War II, the United States took up the
torch of a world gold-exchange standard at Bretton Woods, with the
dollar replacing the pound sterling in a worldwide inflationary system
that lasted approximately 25 years.

Nor should it be thought that Charles A. Conant was the purely
disinterested scientist he claimed to be. His currency reforms directly
benefitted his investment banker employers. Thus, Conant was treasurer,
from 1902 to 1906, of the Morgan-run Morton Trust Company of New York,
and it was surely no coincidence that Morton Trust was the bank that
held the reserve funds for the governments of the Philippines, Panama,
and the Dominican Republic, after their respective currency reforms. In
the Nicaragua negotiations, Conant was employed by the investment bank
of Brown Brothers, and in pressuring other countries he was working for
Speyer and Company and other investment bankers.

After Conant died in 1915, there were few to pick up the mantle of
foreign financial advising. Hollander was in disgrace after the
Dominican debacle. Jenks was aging, and lived in the shadow of his
China failure, but the State Department did appoint Jenks to serve as a
director of the Nicaraguan National Bank in 1917, and also hired him to
study the Nicaraguan financial picture in 1925.

But the true successor of Conant was Edwin W. Kemmerer, the "money
doctor." After his Philippine experience, Kemmerer joined his old
Professor Jenks at Cornell, and then moved to Princeton in 1912,
publishing his book Modern Currency Reforms in 1916. As the
leading foreign financial adviser of the 1920s, Kemmerer not only
imposed central banks and a gold-exchange standard on Third World
countries, but also got them to levy higher taxes.

Kemmerer, too, combined his public employment with service to
leading international bankers. During the 1920s, Kemmerer worked as a
banking expert for the US government's Dawes Commission, headed special
financial advisory missions to over a dozen countries, and was kept on
a handsome retainer by the distinguished investment banking firm of
Dillon and Read from 1922 to 1929. In that era, Kemmerer and his mentor
Jenks were the only foreign-currency-reform experts available for
advising. In the late 1920s, Kemmerer helped establish a chair of
international economics at Princeton, which he occupied, and from which
he could train students like Arthur N. Young and William W. Cumberland.
In the mid-1920s, the money doctor served as president of the American
Economic Association.[19]

Jacob Schiff Ignites the Drive for a Central Bank

The defeat of the Fowler Bill for broader asset currency and branch
banking in 1902, coupled with the failure of Secretary of Treasury
Shaw's attempts of 1903–1905 to use the Treasury as a central bank, led
the big bankers and their economist allies to adopt a new solution: the
frank imposition of a central bank in the United States.

The campaign for a central bank was kicked off by a fateful speech
in January 1906 by the powerful Jacob H. Schiff, head of the Wall
Street investment bank of Kuhn, Loeb and Co., before the New York
Chamber of Commerce. Schiff complained that, in the autumn of 1905,
when "the country needed money," the Treasury, instead of working to
expand the money supply, reduced government deposits in the national
banks, thereby precipitating a financial crisis, a "disgrace" in which
the New York clearinghouse banks had been forced to contract their
loans drastically, sending interest rates sky-high. An "elastic
currency" for the nation was therefore imperative, and Schiff urged the
New York Chamber's committee on finance to draw up a comprehensive plan
for a modern banking system to provide for an elastic currency (Bankers Magazine 1906, pp. 114–15).

A colleague who had already been agitating behind the scenes for a
central bank was Schiff's partner, Paul Moritz Warburg, who had
suggested the plan to Schiff as early as 1903. Warburg had emigrated
from the German investment firm of M. M. Warburg and Company in 1897,
and before long his major function at Kuhn, Loeb was to agitate to
bring the blessings of European central banking to the United States.[20]

It took less than a month for the finance committee of the New York
Chamber to issue its report, but the bank reformers were furious,
denouncing it as remarkably ignorant. When Frank A. Vanderlip, of
Rockefeller's flagship bank, the National City Bank of New York,
reported on this development, his boss, James Stillman, suggested that
a new five-man special commission be set up by the New York Chamber to
come back with a plan for currency reform.

In response, Vanderlip proposed that the five-man commission consist
of himself; Schiff; J. P. Morgan; George Baker of the First National
Bank of New York, Morgan's closest and longest associate; and former
Secretary of the Treasury Lyman Gage, now president of the
Rockefeller-controlled US Trust Company. Thus, the commission would
consist of two Rockefeller men (Vanderlip and Gage), two Morgan men
(Morgan and Baker), and one representative from Kuhn, Loeb.

Only Vanderlip was available to serve, however, so the commission
had to be redrawn. In addition to Vanderlip, beginning in March 1906,
there sat, instead of Schiff, his close friend Isidore Straus, a
director of R. H. Macy and Company. Instead of Morgan and Baker there
now served two Morgan men: Dumont Clarke, president of the American
Exchange National Bank and a personal adviser to J. P. Morgan and
Charles A. Conant, treasurer of Morton and Company. The fifth man was a
veteran of the Indianapolis Monetary Convention, John Claflin, of H. B.
Claflin and Company, a large integrated wholesaling concern. Coming on
board as secretary of the new currency committee was Vanderlip's old
friend Joseph French Johnson, now of New York University, who had been
calling for a central bank since 1900.

The commission used the old Indianapolis questionnaire technique:
acquiring legitimacy by sending out a detailed questionnaire on
currency to a number of financial leaders. With Johnson in charge of
mailing and collating the questionnaire replies, Conant spent his time
visiting and interviewing the heads of the central banks in Europe.

The special commission delivered its report to the New York Chamber
in October, 1906. To eliminate instability and the danger of an
inelastic currency, the commission called for the creation of a
"central bank of issue under the control of the government." In keeping
with other bank reformers, such as Professor Abram Piatt Andrew of
Harvard University, Thomas Nixon Carver of Harvard, and Albert Strauss,
partner of J. P. Morgan and Company, the commission was scornful of
Secretary Shaw's attempt to use the Treasury as a central bank. Shaw
was particularly obnoxious because he was still insisting, in his last
annual report of 1906, that the Treasury, under his aegis, had
constituted a "great central bank."

The commission, along with the other reformers, denounced the
Treasury for overinflating by keeping interest rates excessively low; a
central bank, in contrast, would have much larger capital and
undisputed control over the money market, and thus would be able to
manipulate the discount rate effectively to keep the economy under
proper control. The important point, declared the committee, is that
there be "centralization of financial responsibility." In the meantime,
short of establishing a central bank, the committee urged that, at the
least, the national bank's powers to issue notes be expanded to include
being based on general assets as well as government bonds (Livingston
1986, pp. 159–64).

After drafting and publishing this "Currency Report," the reformers
used the report as the lever for expanding the agitation for a central
bank and broader note-issue powers to other corporate and financial
institutions. The next step was the powerful American Bankers
Association (ABA). In 1905, the executive council of the ABA had
appointed a currency committee which, the following year, recommended
an emergency-assets currency that would be issued by a federal
commission, resembling an embryonic central bank.

In a tumultuous plenary session of the ABA convention in October,
1906, the ABA rejected this plan, but agreed to appoint a 15-man
currency commission that was instructed to meet with the New York
Chamber currency committee and attempt to agree on appropriate

Particularly prominent on the ABA currency commission were,

Arthur Reynolds, president of the Des Moines National Bank, close to
the Morgan-oriented Des Moines Regency, and brother of the prominent
Chicago banker, George M. Reynolds, formerly of Des Moines and then
president of the Morgan-oriented Continental National Bank of Chicago
and the powerful chairman of the executive council of the ABA.

James B. Forgan, president of the Rockefeller-run First National
Bank of Chicago, and close friend of Jacob Schiff of Kuhn, Loeb, as
well as of Vanderlip.

Joseph T. Talbert, vice president of the Rockefeller-dominated
Commercial National Bank of Chicago, and soon to become vice president
of Rockefeller's flagship bank, the National City Bank of New York.

Myron T. Herrick, one of the most prominent Rockefeller politicians
and businessmen in the country. Herrick was the head of the Cleveland
Society of Savings, and was one of the small team of close Rockefeller
business allies who, along with Mark Hanna, bailed out Governor William
McKinley from bankruptcy in 1893. Herrick was a previous president of
the ABA, had just finished a two-year stint as Governor of Ohio, and
was later to become Ambassador to France under his old friend and
political ally William Howard Taft as well as later under President
Warren G. Harding, also a recipient of Herrick's political support and
financial largesse.

Chairman of the ABA commission was A. Barton Hepburn, president of
one of the leading Morgan commercial banks, the Chase National Bank of
New York, and author of the well-regarded History of Coinage and Currency in the United States.

After meeting with Vanderlip and Conant as the representatives from
the New York Chamber committee, the ABA commission, along with
Vanderlip and Conant, agreed on at least the transition demands of the
reformers. The ABA commission presented proposals to the public, the
press, and the Congress in December 1906, for a broader-asset currency
as well as provisions for emergency issue of banknotes by national

But just as sentiment for a broader-assets currency became
prominent, the bank reformers began to worry about an uncontrolled
adoption of such a currency. For that would mean that national-bank
credit and notes would expand, and that, in the existing system, small
state banks would be able to pyramid and inflate credit on top of the
national credit, using the expanded national bank notes as their

The reformers wanted a credit inflation controlled by and confined
to the large national banks; they most emphatically did not want
uncontrolled state-bank inflation that would siphon resources to small
entrepreneurs and "speculative" marginal producers. The problem was
aggravated by the accelerated rate of increase in the number of small
southern and western state banks after 1900.

Another grave problem for the reformers was that commercial paper
was a different system from that of Europe. In Europe, commercial
paper, and hence bank assets, were two-name notes endorsed by a small
group of wealthy acceptance banks. In contrast to this acceptance paper
system, commercial paper in the United States was unendorsed
single-name paper, with the bank taking a chance on the
creditworthiness of the business borrower. Hence, a decentralized
financial system in the United States was not subject to big-banker

Worries about the existing system and hence about uncontrolled asset
currency were voiced by the top bank reformers. Thus, Vanderlip
expressed concern that "there are so many state banks that might count
these [national-bank] notes in their reserves." Schiff warned that "it
will prove unwise, if not dangerous, to clothe six thousand banks or
more with the privilege to issue independently a purely credit
currency." And, from the Morgan side, a similar concern was voiced by
Victor Morawetz, the powerful chairman of the board of the Atchison,
Topeka and Santa Fe Railroad (Livingston 1986, pp. 168–69).

Taking the lead in approaching this problem of small banks and
decentralization was Paul Moritz Warburg, of Kuhn, Loeb, fresh from his
banking experience in Europe. In January 1907, Warburg began years of
tireless agitation for central banking with two articles, "Defects and
Needs of our Banking System," and "A Plan for a Modified Central Bank."[21]

Calling openly for a central bank, Warburg pointed out that one of
the important functions of such a bank would be to restrict the
eligibility of bank assets to be used for expansion of bank deposits.
Presumably, too, the central bank could move to require banks to use
acceptance paper or otherwise try to create an acceptance market in the
United States.[22]

By the summer of 1907, the Bankers Magazine was reporting a
decline in influential banker support for broadening asset currency and
a strong move toward the "central bank project." Bankers Magazine
(1907, pp. 314–15) noted as a crucial reason the fact that asset
currency would be expanding bank services to "small producers and

It was surely no accident that Warburg himself was the principal
beneficiary of this policy. Warburg became Chairman of the Board, from
its founding in 1920, of the International Acceptance Bank, the world's
largest acceptance bank, as well as director of the Westinghouse
Acceptance Bank and of several other acceptance houses. In 1919,
Warburg was the chief founder and chairman of the executive committee
of the American Acceptance Council, the trade association of acceptance
houses. (See Rothbard 1983, pp. 119–23).

The Panic of 1907 and Mobilization for a Central Bank

A severe financial crisis, the Panic of 1907, struck in early
October. Not only was there a general recession and contraction, but
the major banks in New York and Chicago were, as in most other
depressions in American history, allowed by the government to suspend
specie payments; that is, to continue in operation while being relieved
of their contractual obligation to redeem their notes and deposits in
cash or in gold.

While the Treasury had stimulated inflation during 1905–1907, there
was nothing it could do to prevent suspensions of payment, or to
alleviate "the competitive hoarding of currency" after the panic; that
is, the attempt to demand cash in return for increasingly shaky bank
notes and deposits.

Very quickly after the panic, banker and business opinion
consolidated on behalf of a central bank, an institution that could
regulate the economy and serve as a lender of last resort to bail banks
out of trouble. The reformers now faced a two-fold task: hammering out
details of a new central bank, and more importantly, mobilizing public
opinion on its behalf.

The first step in such mobilization was to win the support of the
nation's academics and experts. The task was made easier by the growing
alliance and symbiosis between academia and the power elite. Two
organizations that proved particularly useful for this mobilization
were the American Academy of Political and Social Science (AAPSS) of
Philadelphia, and the Academy of Political Science (APS) of Columbia
University, both of which included in their ranks leading
corporate-liberal businessmen, financiers, attorneys, and academics.

Nicholas Murray Butler, the highly influential president of Columbia
University, explained that the Academy of Political Science "is an
intermediary between … the scholars and the men of affairs, those who
may perhaps be said to be amateurs in scholarship." Here, he pointed
out, is where they "come together" (Livingston 1986, p. 175, n. 30).

It is not surprising, then, that the American Academy of Political
and Social Science, the American Association for the Advancement of
Science (AAAS), and Columbia University held three symposia during the
winter of 1907–1908, each calling for a central bank, and thereby
disseminating the message of a central bank to a carefully selected
elite public. Not surprisingly, too, E. R. A. Seligman was the
organizer of the Columbia conference, gratified that his university was
providing a platform for leading bankers and financial journalists to
advocate a central bank, especially, he added, because "it is
proverbially difficult in a democracy to secure a hearing for the
conclusions of experts." Then in 1908 Seligman collected the addresses
into a volume, The Currency Problem.

Professor Seligman set the tone for the gathering in his opening
address. The Panic of 1907, he alleged, was moderate because its
effects had been tempered by the growth of industrial trusts, which
provided a more controlled and "more correct adjustment of present
investment to future needs" than would a "horde of small competitors."
In that way, Seligman displayed no comprehension of how competitive
markets facilitate adjustments.

One big problem, however, still remained for Seligman. The horde of
small competitors, for whom Seligman had so much contempt, still
prevailed in the field of currency and banking. The problem was that
the banking system was still decentralized. As Seligman declared, "Even
more important than the inelasticity of our note issue is its
decentralization. The struggle which has been victoriously fought out
everywhere else [in creating trusts] must be undertaken here in earnest
and with vigor" (Livingston 1986, p. 177).

The next address was that of Frank Vanderlip. To Vanderlip, in
contrast to Seligman, the Panic of 1907 was "one of the great
calamities of history" — the result of a decentralized, competitive
American banking system, with 15,000 banks all competing vigorously for
control of cash reserves. The terrible thing is that "each institution
stands alone, concerned first with its own safety, and using every
endeavor to pile up reserves without regard" to the effect of such
actions on other banking institutions.

This backward system must be changed, to follow the lead of other
great nations, where a central bank is able to mobilize and centralize
reserves, and create an elastic currency system. Putting the situation
in virtually Marxian terms, Vanderlip declared that the alien, external
power of the free and competitive market must be replaced by central
control following modern, allegedly scientific principles of banking.

Thomas Wheelock, editor of the Wall Street Journal, then
rung the changes on the common theme by applying it to the volatile
call-loan market in New York. The market is volatile, Wheelock claimed,
because the small country banks are able to lend on that market, and
their deposits in New York banks then rise and fall in uncontrolled
fashion. Therefore, there must be central, corporate control over
country-bank money in the call-loan market.

A. Barton Hepburn, head of Morgan's Chase National Bank, came next,
and spoke of the great importance of having a central bank that would
issue a monopoly of bank notes. It was particularly important that the
central bank be able to discount the assets of national banks, and thus
supply an elastic currency.

The last speaker was Paul Warburg, who lectured his audience on the
superiority of European over American banking, particularly in (1)
having a central bank, as against decentralized American banking; and
(2) — his old hobby horse — enjoying "modern" acceptance paper instead
of single-name promissory notes. Warburg emphasized that these two
institutions must function together. In particular, tight government
central-bank control must replace competition and decentralization:
"Small banks constitute a danger."

The other two symposia were very similar. At the AAPSS symposium in
Philadelphia, in December 1907, several leading investment bankers and
Comptroller of the Currency William B. Ridgely came out in favor of a
central bank. It was no accident that members of the AAPSS's advisory
committee on currency included A. Barton Hepburn; Morgan attorney and
statesman Elihu Root; Morgan's long-time personal attorney Francis
Lynde Stetson; and J. P. Morgan himself.

Meanwhile, the AAAS symposium in January 1908 was organized by none
other than Charles A. Conant, who happened to be chairman of the AAAS's
social and economic section for the year. Speakers included Columbia
economist J. B. Clark, Frank Vanderlip, Conant, and Vanderlip's friend
George E. Roberts, head of the Rockefeller-oriented Commercial National
Bank of Chicago, who would later wind up at the National City Bank.

All in all, the task of the bank reformers was well summed up by J.
R. Duffield, secretary of the Bankers Publishing Company, in January
1908: "It is recognized generally that before legislation can be had
there must be an educational campaign carried on, first among the
bankers, and later among commercial organizations, and finally among
the people as a whole." That strategy was well under way.

During the same month, the legislative lead in banking reform was
taken by the formidable Senator Nelson W. Aldrich, (Republican, Rhode
Island), head of the Senate Finance Committee, and, as the
father-in-law of John D. Rockefeller, Jr., Rockefeller's man in the US
Senate. He introduced the Aldrich Bill, which focused on a relatively
minor interbank dispute about whether and on what basis the national
banks could issue special emergency currency. A compromise was finally
hammered out and passed, as the Aldrich-Vreeland Act, in 1908.[23]

But the important part of the Aldrich-Vreeland Act, which got very
little public attention, but was perceptively hailed by the bank
reformers, was the establishment of a National Monetary Commission that
would investigate the currency question and suggest proposals for
comprehensive banking reform. Two enthusiastic comments on the Monetary
Commission were particularly perceptive and prophetic.

One was that of Sereno S. Pratt of the Wall Street Journal.
Pratt virtually conceded that the purpose of the commission was to
swamp the public with supposed expertise and thereby "educate" them
into supporting banking reform:

Reform can only be
brought about by educating the people up to it, and such education must
necessarily take much time. In no other way can such education be
effected more thoroughly and rapidly than by means of a commission …
[that] would make an international study of the subject and present an
exhaustive report, which could be made the basis for an intelligent

The results of the "study" were of course predetermined, as would be the membership of the allegedly impartial study commission.

Another function of the commission, as stated by Festus J. Wade, St.
Louis banker and member of the currency commission of the American
Bankers Association, was to "keep the financial issue out of politics"
and put it squarely in the safe custody of carefully selected "experts"
(Livingston 1986, pp. 182–83). Thus the National Monetary Commission
was the apotheosis of the clever commission concept, launched in
Indianapolis a decade earlier.

Aldrich lost no time setting up the National Monetary Commission
(NMC), which was launched in June 1908. The official members were an
equal number of Senators and Representatives, but these were mere
window dressing. The real work would be done by the copious staff,
appointed and directed by Aldrich, who told his counterpart in the
House, Cleveland Republican Theodore Burton, "My idea is, of course,
that everything shall be done in the most quiet manner possible, and
without any public announcement." From the beginning, Aldrich
determined that the NMC would be run as an alliance of Rockefeller,
Morgan, and Kuhn, Loeb people. The two top expert posts advising or
joining the commission were both suggested by Morgan leaders.

On the advice of J. P. Morgan, seconded by Jacob Schiff, Aldrich
picked as his top adviser the formidable Henry P. Davison, Morgan
partner, founder of Morgan's Bankers' Trust Company, and vice president
of George F. Baker's First National Bank of New York. It would be
Davison who, on the outbreak of World War I, would rush to England to
cement J. P. Morgan and Company's close ties with the Bank of England,
and to receive an appointment as monopoly underwriter for all British
and French government bonds to be floated in the United States for the
duration of the war.

For technical economic expertise, Aldrich accepted the
recommendation of President Roosevelt's close friend and fellow Morgan
man, Charles Eliot, president of Harvard University, who urged the
appointment of Harvard economist A. Piatt Andrew. And an ex officio
commission member chosen by Aldrich himself was George M. Reynolds,
president of the Rockefeller-oriented Continental National Bank of

The NMC spent the fall touring Europe and conferring on information
and strategy with heads of large European banks and central banks. As
director of research, A. Piatt Andrew began to organize American
banking experts and to commission reports and studies. The National
City Bank's foreign exchange department was commissioned to write
papers on bankers' acceptances and foreign debt, while Warburg and
Bankers' Trust official Fred Kent wrote on the European discount market.

Having gathered information and advice in Europe in the fall of
1908, the NMC was ready to go into high gear by the end of the year. In
December, the commission hired the inevitable Charles A. Conant for
research, public relations, and agitprop. Behind the facade of the
Congressmen and Senators on the commission, Senator Aldrich began to
form and expand his inner circle, which soon included Warburg and

Warburg formed around him a subcircle of friends and acquaintances
from the currency committee of the New York Merchants' Association,
headed by Irving T. Bush, and from the top ranks of the American
Economic Association, to whom he had delivered an address advocating
central banking in December 1908.

Warburg met and corresponded frequently with leading academic
economists advocating banking reform, including E. R. A. Seligman;
Thomas Nixon Carver of Harvard; Henry R. Seager of Columbia; Davis R.
Dewey, historian of banking at MIT, long-time secretary-treasurer of
the AEA and brother of the progressive philosopher John Dewey; Oliver
M. W. Sprague, professor of banking at Harvard, of the Morgan-connected
Sprague family; Frank W. Taussig of Harvard; and Irving Fisher of Yale.

During 1909, however, the reformers faced an important problem: they
had to bring such leading bankers as James B. Forgan, head of the
Rockefeller-oriented First National Bank of Chicago, solidly into line
in support of a central bank. It was not that Forgan objected to
centralized reserves or a lender of last resort — quite the contrary.
It was rather that Forgan recognized that, under the National Banking
System, large banks such as his own were already performing
quasi-central-banking functions with their own country-bank depositors;
and he didn't want his bank deprived of such functions by a new central

The bank reformers therefore went out of their way to bring such men
as Forgan into enthusiastic support for the new scheme. In his
presidential address to the powerful American Bankers Association in
mid-September, 1909, George M. Reynolds not only came out flatly in
favor of a central bank in America, to be modeled after the German
Reichsbank; he also assured Forgan and others that such a central bank
would act as depository of reserves only for the large national banks
in the central reserve cities, while the national banks would continue
to hold deposits for the country banks.

Mollified, Forgan held a private conference with Aldrich's inner
circle and came fully on board for the central bank. As an outgrowth of
Forgan's concerns, the reformers decided to cloak their new central
bank in a spurious veil of "regionalism" and "decentralism" through
establishing regional reserve centers, which would provide the
appearance of virtually independent regional central banks to cover the
reality of an orthodox, European, central-bank monolith.

As a result, noted railroad attorney Victor Morawetz made his famous
speech in November 1909, calling for regional banking districts under
the ultimate direction of one central control board. Thus, reserves and
note issue would be supposedly decentralized in the hands of the
regional reserve banks, while they would really be centralized and
coordinated by the central control board. This, of course, was the
scheme eventually adopted in the Federal Reserve System.[24]

On September 14, at the same time as Reynolds's address to the
nation's bankers, another significant address took place. President
William Howard Taft, speaking in Boston, suggested that the country
seriously consider establishing a central bank. Taft had been close to
the reformers — especially his Rockefeller-oriented friends Aldrich and
Burton — since 1900. But the business press understood the great
significance of this public address: that it was, as the Wall Street Journal
put it, a crucial step, "towards removing the subject from the realm of
theory to that of practical politics" (quoted in Livingston 1986, p.

One week later, a fateful event in American history occurred. The
banking reformers moved to escalate their agitation by creating a
virtual government-bank-press complex to drive through a central bank.
On September 22, 1909, the Wall Street Journal took the lead
in this development by beginning a notable, front-page, 14-part series
on "A Central Bank of Issue." These were unsigned editorials by the
Journal, but they were actually written by the ubiquitous Charles A.
Conant, from his vantage point as salaried chief propagandist of the US
government's National Monetary Commission.

The series was a summary of the reformers' position, also going out
of the way to assure the Forgans of this world that the new central
bank "would probably deal directly only with the larger national banks,
leaving it for the latter to rediscount for their more remote
correspondents" (ibid.).

To the standard arguments for the central bank: "elasticity" of the
money supply, protecting bank reserves by manipulating the discount
rate and the international flow of gold, and combating crises by
bailing out individual banks, Conant added a Conant twist: the
importance of regulating interest rates and the flow of capital in a
world marked by surplus capital. Government debt would, for Conant,
provide the important function of sopping up surplus capital; that is,
providing profitable outlets for savings by financing government

The Wall Street Journal series inaugurated a shrewd and
successful campaign by Conant to manipulate the nation's press and get
it behind the idea of a central bank. Building on his experience in
1898, Conant, along with Aldrich's secretary, Arthur B. Shelton,
prepared abstracts of commission materials for the newspapers during
February and March of 1910. Soon Shelton recruited J. P. Gavitt, head
of the Washington bureau of the Associated Press, to scan commission
abstracts, articles, and forthcoming books for "newsy paragraphs" to
catch the eye of newspaper editors.

The academic organizations proved particularly helpful to the NMC,
lending their cloak of disinterested expertise to the endeavor. In
February, Robert E. Ely, the secretary of the APS, proposed to Aldrich
that a special volume of its Proceedings be devoted to
banking and currency reform, to be published in cooperation with the
NMC, in order to "popularize in the best sense, some of the valuable
work of [the] Commission" (quoted in Livingston 1986, p. 194).

And yet, Ely had the gall to add that, even though the APS would
advertise the NMC's arguments and conclusions, it would retain its
"objectivity" by avoiding its own specific policy recommendations. As
Ely put it, "We shall not advocate a central bank, but we shall only
give the best results of your work in condensed form and untechnical

The AAPSS, too, weighed in with its own special volume, Banking Problems
(1910), featuring an introduction by A. Piatt Andrew of Harvard and the
NMC, and articles by veteran bank reformers such as Joseph French
Johnson, Horace White, and Morgan Bankers' Trust official Fred I. Kent.
But most of the articles were from leaders of Rockefeller's National
City Bank of New York, including George E. Roberts, former Chicago
banker and US Mint official about to join National City.

Meanwhile, Paul M. Warburg capped his lengthy campaign for a central
bank in a famous speech to the New York YMCA on March 23, on "A United
Reserve Bank for the United States." Warburg basically outlined the
structure of his beloved German Reichsbank, but he was careful to begin
his talk by noting a recent poll in the Banking Law Journal that 60
percent of the nation's bankers favored a central bank provided it was
"not controlled by 'Wall Street' or any monopolistic interest."

To calm this fear, Warburg insisted that, semantically, the new
Reserve Bank not be called a central bank, and that the Reserve Bank's
governing board be chosen by government officials, merchants, and
bankers — with bankers, of course, dominating the choices. He also
provided a distinctive Warburg-twist by insisting that the Reserve Bank
replace the hated single-name paper system of commercial credit
dominant in the United States, by the European system whereby a reserve
bank provided a guaranteed and subsidized market for two-named
commercial paper endorsed by acceptance banks. In this way, the United
Reserve Bank would correct the "complete lack of modern bills of
exchange [i.e., acceptances]" in the United States.

Warburg added that the entire idea of a free and self-regulating
market was obsolete, particularly in the money market. Instead, the
action of the market must be replaced by "the best judgment of the best
experts." And guess who was slated to be one of the best of those best

The greatest cheerleader for the Warburg plan, and the man who
introduced Warburg's volume on banking reform (1911) was his kinsman
and member of the Seligman investment-banking family, Columbia
economist E. R. A. Seligman (Rothbard 1984, pp. 98–99; Livingston 1986,
pp. 194–98).

So delighted was the Merchants' Association of New York with
Warburg's speech that it distributed 30,000 copies during the spring of
1910. Warburg had paved the way for this support by regularly meeting
with the currency committee of the Merchants Association since October
1908, and his efforts were aided by the fact that the resident expert
for the merchants committee was none other than Joseph French Johnson.

At the same time, in the spring of 1910, the numerous research
volumes published by the NMC poured onto the market. The object was to
swamp public opinion with a parade of impressive analytic and
historical scholarship, all allegedly "scientific" and "value-free,"
but all designed to aid in furthering the common agenda of a central

Typical was E. W. Kemmerer's mammoth statistical study of seasonal
variations in the demand for money. Emphasis was placed on the problem
of the "inelasticity" of the supply of cash, in particular the
difficulty of expanding that supply when needed. While Kemmerer felt
precluded from spelling out the policy implications — establishing a
central bank — in the book, his acknowledgments in the preface to Fred
Kent and the inevitable Charles Conant were a tip-off to the
cognoscenti, and Kemmerer himself disclosed them in his address to the
Academy of Political Science the following November.

Now that the theoretical and scholarly groundwork had been laid, by
the latter half of 1910 it was time to formulate a concrete practical
plan and put on a mighty putsch on its behalf. In the book on Reform of the Currency,
published by the APS, Warburg made the point with crystal clarity:
"Advance is possible only by outlining a tangible plan" that would set
the terms of the debate from then on (p. 203).

The tangible-plan phase of the central-bank movement was launched by
the ever-pliant APS, which held a monetary conference in November 1910,
in conjunction with the New York Chamber of Commerce and the Merchants'
Association of New York. The members of the NMC were the guests of
honor at this conclave, and delegates were chosen by governors of 22
states, as well as presidents of 24 chambers of commerce.

Also attending were a large number of economists, monetary analysts,
and representatives of most of the top banks in the country. Attendants
at the conference included Frank Vanderlip, Elihu Root, Thomas W.
Lamont of the Morgans, Jacob Schiff, and J. P. Morgan.

The formal sessions of the conference were organized around papers
by Kemmerer, Laughlin, Johnson, Bush, Warburg, and Conant, and the
general atmosphere was that bankers and businessmen were to take their
general guidance from the attendant scholars. As James B. Forgan, the
Chicago banker who was now solidly in the central-banking camp, put it,
"Let the theorists, those who … can study from past history and from
present conditions the effect of what we are doing, lay down principles
for us, and let us help them with the details."

C. Stuart Patterson pointed to the great lessons of the Indianapolis
Monetary Commission, and the way in which its proposals triumphed in
action because "we went home and organized an aggressive and active
movement." Patterson then laid down the marching orders of what this
would mean concretely for the assembled troops: "That is just what you
must do in this case, you must uphold the hands of Senator Aldrich. You
have got to see that the bill which he formulates … obtains the support
of every part of this country" (Livingston 1986, pp. 205–07).

With the New York monetary conference over, it was now time for
Aldrich, surrounded by a few of the topmost leaders of the financial
elite, to go off in seclusion and hammer out a detailed plan around
which all parts of the central-bank movement could rally. Someone in
the Aldrich inner circle, probably Morgan partner Henry P. Davison, got
the idea of convening a small group of top leaders in a super-secret
conclave to draft the central-bank bill. On November 22, 1910, Senator
Aldrich, with a handful of companions, set forth in a privately
chartered railroad car from Hoboken, New Jersey to the coast of
Georgia, where they sailed to an exclusive retreat, the Jekyll Island

Facilities for their meeting were arranged by club member and
coowner J. P. Morgan. The cover story released to the press was that
this was a simple duck-hunting expedition, and the conferees took
elaborate precautions on the trips there and back to preserve their
secrecy. Thus, the attendees addressed each other only by first name,
and the railroad car was kept dark and closed off from reporters or
other travelers on the train. One reporter apparently caught on to the
purpose of the meeting, but was in some way persuaded by Henry P.
Davison to maintain silence.

The conferees worked for a solid week at Jekyll Island to hammer out
the draft of the Federal Reserve bill. In addition to Aldrich, the
conferees included Henry P. Davison, Morgan partner; Paul Warburg,
whose address in the spring had greatly impressed Aldrich; Frank A.
Vanderlip, vice president of the National City Bank of New York; and
finally, A. Piatt Andrew, head of the NMC staff, who had recently been
made assistant secretary of the treasury by President Taft.

After a week of meetings, the six men had forged a plan for a
central bank, which eventually became the Aldrich Bill. Vanderlip acted
as secretary of the meeting and contributed the final writing.

The only substantial disagreement was tactical, with Aldrich
attempting to hold out for a straightforward central bank on the
European model, while Warburg and the other bankers insisted that the
reality of central control be cloaked in the politically palatable
camouflage of "decentralization." It is amusing that the bankers were
the more politically astute, while the politician Aldrich wanted to
waive political considerations. Warburg and the bankers won out, and
the final draft was basically the Warburg plan with a decentralized
patina taken from Morawetz.

The financial power elite now had themselves a bill. The
significance of the composition of the small meeting must be stressed:
two Rockefeller men (Aldrich, Vanderlip), two Morgans (Davison and
Norton), one Kuhn, Loeb person (Warburg), and one economist friendly to
both camps (Andrew) (Rothbard 1984, pp. 99–101; Vanderlip 1935, pp.

After working on some revisions of the Jekyll Island draft with
Forgan and George Reynolds, Aldrich presented the Jekyll Island draft
as the Aldrich Plan to the full NMC in January 1911. But here an
unusual event occurred. Instead of quickly presenting this Aldrich Bill
to the Congress, its drafters waited for a full year, until January
1912. Why the unprecedented year's delay?

The problem was that the Democrats swept the Congressional elections
in 1910, and Aldrich, disheartened, decided not to run for reelection
to the Senate the following year. The Democratic triumph meant that the
reformers had to devote a year of intensive agitation to convert the
Democrats, and to intensify propaganda to the rest of banking,
business, and the public. In short, the reformers needed to regroup and
accelerate their agitation.

The Final Phase: Coping with the Democratic Ascendancy

The final phase of the drive for a central bank began in January
1911. At the previous January's meeting of the National Board of Trade,
Paul Warburg had put through a resolution setting aside January 18,
1911, as a "monetary day" devoted to a "Business Men's Monetary
Conference." This conference, run by the National Board of Trade, and
featuring delegates from metropolitan mercantile organizations from all
over the country, had C. Stuart Patterson as its chairman.

The New York Chamber of Commerce, the Merchants' Association of New
York, and the New York Produce Exchange, each of which had been pushing
for banking reform for the past five years, introduced a joint
resolution to the monetary conference supporting the Aldrich Plan, and
proposing the establishment of a new "business men's monetary reform
league" to lead the public struggle for a central bank. After a speech
in favor of the plan by A. Piatt Andrew, the entire conference adopted
the resolution. In response, C. Stuart Patterson appointed none other
than Paul M. Warburg to head a committee of seven to establish the
reform league.

The committee of seven shrewdly decided, following the lead of the
old Indianapolis convention, to establish the National Citizens' League
for the Creation of a Sound Banking System at Chicago rather than in
New York, where the control really resided. The idea was to acquire the
bogus patina of a "grassroots" heartland operation and to convince the
public that the league was free of dreaded Wall Street control. As a
result, the official heads of the League were Chicago businessmen John
V. Farwell and Harry A. Wheeler, president of the US Chamber of
Commerce. The director was University of Chicago monetary economist J.
Laurence Laughlin, assisted by his former student, Professor H. Parker

In keeping with its Midwestern aura, most of the directors of the
Citizens' League were Chicago nonbanker industrialists: men such as B.
E. Sunny of the Chicago Telephone Company, Cyrus McCormick of
International Harvester (both companies in the Morgan ambit), John G.
Shedd of Marshall Field and Company, Frederic A. Delano of the Wabash
Railroad Company (Rockefeller-controlled), and Julius Rosenwald of
Sears, Roebuck. Over a decade later, however, H. Parker Willis frankly
conceded that the Citizens' League had been a propaganda organ of the
nation's bankers.[25]

The Citizens' League swung into high gear during the spring and summer of 1911, issuing a periodical, Banking and Reform,
designed to reach newspaper editors, and subsidizing pamphlets by such
proreform experts as John Perrin, head of the American National Bank of
Indianapolis, and George E. Roberts of the National City Bank of New

A consultant on the newspaper campaign was H. H. Kohlsaat, former
executive committee member of the Indianapolis Monetary Convention.
Laughlin himself worked on a book on the Aldrich Plan, to be similar to
his own Report of 1898 for the Indianapolis Convention.

Meanwhile, a parallel campaign was launched to bring the nation's
bankers into camp. The first step was to convert the banking elite. For
that purpose, the Aldrich inner circle organized a closed-door
conference of 23 top bankers in Atlantic City in early February, which
included several members of the currency commission of the American
Bankers Association, along with bank presidents from nine leading
cities of the country. After making a few minor revisions, the
conference warmly endorsed the Aldrich Plan.

After this meeting, Chicago banker James B. Forgan, president of the
Rockefeller-dominated First National Bank of Chicago, emerged as the
most effective banker spokesman for the central-bank movement. Not only
was his presentation of the Aldrich Plan before the executive council
of the ABA in May considered particularly impressive, it was especially
effective coming from someone who had been a leading critic (if on
relatively minor grounds) of the plan. As a result, the top bankers
managed to get the ABA to violate its own bylaws and make Forgan
chairman of its executive council.

At the Atlantic City conference, James Forgan had succinctly
explained the purpose of the Aldrich Plan and of the conference itself.
As Kolko sums up,

the real purpose of the
conference was to discuss winning the banking community over to
government control directly by the bankers for their own ends.… It was
generally appreciated that the [Aldrich Plan] would increase the power
of the big national banks to compete with the rapidly growing state
banks, help bring the state banks under control, and strengthen the
position of the national banks in foreign banking activities. (Kolko
1983, p. 186)

By November 1911, it was easy pickings to have the full American
Bankers Association endorse the Aldrich Plan. The nation's banking
community was now solidly lined up behind the drive for a central bank.

However, 1912 and 1913 were years of some confusion and backing and
filling, as the Republican party split between its insurgents and
regulars, and the Democrats won increasing control over the federal
government, culminating in Woodrow Wilson's gaining the presidency in
the November 1912 elections. The Aldrich Plan, introduced into the
Senate by Theodore Burton in January 1912, died a quick death, but the
reformers saw that what they had to do was to drop the fiercely
Republican partisan name of Aldrich from the bill, and with a few minor
adjustments, rebaptize it as a Democratic measure.

Fortunately for the reformers, this process of transformation was
eased greatly in early 1912, when H. Parker Willis was appointed
administrative assistant to Carter Glass, the Democrat from Virginia
who now headed the House Banking and Currency Committee. In an accident
of history, Willis had taught economics to the two sons of Carter Glass
at Washington and Lee University, and they recommended him to their
father when the Democrats assumed control of the House.

The minutiae of the splits and maneuvers in the banking-reform camp
during 1912 and 1913, which have long fascinated historians, are
fundamentally trivial to the basic story. They largely revolved around
the successful efforts by Laughlin, Willis, and the Democrats to
jettison the name Aldrich.

Moreover, while the bankers had preferred the Federal Reserve Board
to be appointed by the bankers themselves, it was clear to most of the
reformers that this was politically unpalatable. They realized that the
same result of a government-coordinated cartel could be achieved by
having the president and Congress appoint the Board, balanced by the
bankers electing most of the officials of the regional Federal Reserve
Banks and electing an advisory council to the Fed.

However, much would depend on whom the president would appoint to
the board. The reformers did not have to wait long. Control was
promptly handed to Morgan men, led by Benjamin Strong of Bankers' Trust
as all-powerful head of the Federal Reserve Bank of New York. The
reformers had gotten the point by the end of congressional wrangling
over the Glass bill, and by the time the Federal Reserve Act was passed
in December 1913, the bill enjoyed overwhelming support from the
banking community.

As A. Barton Hepburn of the Chase National Bank persuasively told
the American Bankers Association at the annual meeting of August 1913:
"The measure recognizes and adopts the principles of a central bank.
Indeed … it will make all incorporated banks together joint owners of a
central dominating power" (Kolko 1983, p. 235). In fact, there was very
little substantive difference between the Aldrich and Glass bills: the
goal of the bank reformers had been triumphantly achieved.[26]


The financial elites of this country, notably the Morgan,
Rockefeller, and Kuhn, Loeb interests, were responsible for putting
through the Federal Reserve System as a governmentally created and
sanctioned cartel device to enable the nation's banks to inflate the
money supply in a coordinated fashion, without suffering quick
retribution from depositors or noteholders demanding cash.

Recent researchers, however, have also highlighted the vital
supporting role of the growing number of technocratic experts and
academics, who were happy to lend the patina of their allegedly
scientific expertise to the elite's drive for a central bank. To
achieve a regime of big government and government control, power elites
cannot achieve their goal of privilege through statism without the
vital legitimizing support of the supposedly disinterested experts and
the professoriate. To achieve the Leviathan State, interests seeking
special privilege and intellectuals offering scholarship and ideology
must work hand in hand.