America's Bank: The Epic Struggle to Create the Federal Reserve (10 page)

Aldrich focused on
the big three of European banking
—England, Germany, and France. Each of their central banks was owned by private shareholders and held the national reserve, but in important ways they differed. The Bank of France possessed far more gold—more, in fact, than the other two combined. Also, the French bank was controlled by the state; England’s was defiantly independent. Surprisingly, directors of the latter were wealthy merchants rather than
bankers.
In Germany, management was in the hands
of trained professionals—experts such as Warburg. The German chancellor held supreme power over the Reichsbank but rarely used it.

The Aldrich mission docked at Plymouth, England, on August 10, 1908, and was welcomed to dinner at Morgan’s London home, with Lord Rothschild present.
Morgan lost no time in requesting
a favor, complaining to Aldrich that the tariff on importing art was interfering with his plan to donate European treasures to the Metropolitan Museum in New York.
Interviews at the Bank of England
got off to a slow start. The commission group was unwieldy; the Americans struck their hosts as
naïve and unprepared
.
Matters improved after a few days
, when two commissioners returned home and several of the others struck out on their own. From then on, Aldrich worked with a core group including Andrew and Davison. Knowing he would need the support of western bankers,
Aldrich also enlisted George Reynolds
, a former Iowa store clerk and head of the Continental National Bank of Chicago, who cut short a vacation in Italy to join them. (In turn-of-the-century America, Chicago was still considered “western.”)
Davison took the lead
in interrogating foreign bankers and leavened the sessions with his playfulness and wit.

The resilience of British banking made a strong impression on Aldrich.
Commercial banks kept
very little cash; they didn’t feel the need. Even the Bank of England
had relatively little gold
, but faith in the institution obviated the need for more. The Americans could not help but notice how the monetary landscape was inverted from their own: the United States had far more bullion, but confidence in the national currency was greater in England. Also, as a businessman with investments in Mexico and Africa, Aldrich appreciated the ease with which British merchants financed trade. After their interview sessions, Aldrich and Andrew went rummaging through London bookstores,
Aldrich liberally buying economics books
for the library he was planning for Warwick. He also hunted down a print of Sir Robert Peel, the British prime minister responsible for the 1844 law
that gave the Bank of England the exclusive right to issue notes. Why did Aldrich want a picture of Peel? Andrew had the strong sense that the senator had discovered his purpose; he wanted to become America’s Robert Peel.

At the end of August,
the group ventured to Berlin
, where Andrew and Davison took in the Turkish baths, Andrew went to a production of the Strauss opera
Salome,
and more rounds of interviews commenced. Then they took a train to Paris. In the City of Light, Aldrich gazed wistfully at
a dispatch written by Napoleon
, just after the battle of Austerlitz, in which the general advised that the Bank of France was as critical to the Republic as were his victories in battle. The Aldrich group dined with James Stillman, the most distinguished American banker in Paris, who
suggested that Aldrich gather
some trusted bankers at Warwick and draw up a plan in secret. The next day,
Andrew and the Davisons
motored out to the country château of the U.S. ambassador.

At each central bank, the Americans were given to feel like the representatives of a primitive system, one barely above contempt. Their astonishment at what they heard was palpable (
the interviews
in Germany and France were assisted by an interpreter). The Europeans portrayed their institutions as effortlessly superseding parochial or private interests; their policies seemed universally accepted. The interviews, of course, took place at the apogee of the social harmony of prewar Europe. Had Aldrich gone to Europe in the 1920s, much less in the 1930s, the picture would not have been so harmonious.

Davison and Aldrich pressed their hosts
on the question of reserves: Who held them? What were the requirements? What were the rules regarding the holding of cash? The Europeans’ consistent response, phrased in varying ways, was that the confidence reposed in their centralized systems obviated the need for the rigid regulations of American banking. London bankers could not relate to the American fetish with “elasticity.” How then, the Americans
wondered, did the Bank of England adjust the currency supply to meet demand? A Bank official, rather a delphic one, said this occurred “automatically.” (He meant that as bills of trade were discounted—that is, accepted by the Bank England in return for its notes—Bank notes entered circulation.) At the Reichsbank, the mechanics of discounting were gone over in detail. Exchanging bankers’ loans for notes of the Reichsbank was a critical function, an official explained: “We could not stop it.” On form, once a central bank was established, the other banks adapted—became dependent. The German continued, “If we did [stop] it would bring about the greatest panic that we ever experienced.”

It was in France where the visitors were truly humbled. Davison explained that, in the United States, “the question of the proper relation between cash in hand and liabilities is considered very important.” What, he inquired, was the rule in France: What portion of deposits were backed by cash reserves?

M. Pallain, the governor of the Bank of France, shook his head with a weary sigh. “I think you pay more attention to the quantity [of reserves] than to the quality.”

But surely France had laws, regulations, some stipulation governing the proper proportion?

“Non.”
The reserve requirements so dear to America, Pallain replied, were insignificant in France, “on account of the facilities offered by the Bank of France for the rapid conversion, in a crisis,” of portfolio assets into ready money.

The Americans persisted: What, they demanded, determined the fluctuations in the volume of notes? Pallain, despairing of his ability to explain the power of a central reserve to these stubborn Yanks, waxed philosophical. “It is the sun,” he said, “or it would perhaps be more correct to say, the alternating seasons.”

The problem that Aldrich had come to investigate did not, on this side of the Atlantic, appear to exist. Throughout
fifty-eight meetings
with central bankers as well as with diplomats, editors, and local
financiers, the overriding sense was one of internal coherence—of a system that worked. At the very least, Europe employed its reserves while America largely squandered its own. George
Reynolds, the Chicago banker, maintained
it was in Berlin, in the luxurious lobby of the Hotel Adlon, on a sofa behind the bend of the stairway facing its giant marble columns, where Aldrich “converted” to the central bank idea. At any rate, when he docked in New York on October 20, after an absence of fully eleven weeks, Aldrich was a changed man.

The November elections bolstered his sense of possibility. In the presidential contest, Taft trounced Bryan, whose appeal was confined to the South and a sprinkling of states in the West. The outgoing Roosevelt helpfully announced that he would get out of the way and leave the limelight to his successor—specifically by going on
safari in Africa
. Just as important, the Republicans won commanding majorities in both the House and the Senate. Aldrich’s timing could not have been better.

That fall, the Monetary Commission held a hearing at the Metropolitan Club of New York, a perfect opportunity for Aldrich to unveil his agenda. The interregnum between election and inauguration was traditionally a period for showcasing new ideas. But Aldrich revealed nothing. Paul Warburg, invited to present his thoughts, noticed that some of the other commissioners looked downright drowsy—almost comatose. After the session, though, Aldrich summoned the banker.

“Mr. Warburg,” he began, “
I like your ideas
. I have only one fault to find with them.”

Warburg, momentarily stunned, asked about the fault.

Aldrich shot back, “You are too timid about it. You say we cannot have a central bank, and I say we can.”

As Warburg was to recall in poignant terms, “
It is easy to imagine
, but hard to describe, the mixed feelings of joy and bewilderment into which this remark threw me, for suddenly I found our roles reversed.” Whereas previously the banker despaired of persuading
Aldrich of the merit of a central bank, now he feared that Aldrich would jeopardize the project by being too ambitious. Warburg explained that a bank with broad powers, such as existed in Europe, was politically impossible due to Americans’ deep-seated prejudices against federal power. They debated the point, without resolution. Their difference notwithstanding, Warburg left elated. “For the first time,” he would write, “I felt confident that genuine banking reform was within grasp of the United States.”

Warburg jumped into the fray
with his trademark energy. In the short space of a couple of months, he wrote an essay on the discount system in Europe, read a paper on central banking before the American Economic Association, and joined the currency committee of the Merchants’ Association of New York. Business groups were becoming interested in currency reform because the panic had wreaked such havoc on trade. Even though the Merchants’ Association did not favor central banking, Warburg became a fifth column, relentlessly indoctrinating the other members. “Many an afternoon and night I sat with them,” Warburg was to write, “struggling to win them over to the gospel of centralized reserves.”

Aldrich, meanwhile, began telling friends he would not run for another term in 1910, and that he would focus, during the time left to him in office, on monetary reform. He had visions of a central bank as the crowning work of his career—
a monument to his decades
in the Senate. The truth about his decision to retire was more complicated. Vilified for opposing progressive causes, and tarnished in the public eye ever since the “Treason of the Senate” exposé in
Cosmopolitan
,
the senator was growing weary of divisive battles. The ugly political cartoons (invariably showing corporate money slushing in his pockets) had taken a toll. A perceptive reporter observed that, despite Aldrich’s image of implacability, “
he doesn’t like being pilloried continually
in newspapers and cartoons as a corporation Senator, the representative of ‘special interests.’”

Aldrich intended to devote
a full two years to crafting a bill. He
wanted to work at a safe remove from politics, studying banking as if it were a purely academic or technical subject.
The commission certainly had plenty
to do; it had to hire writers and gather facts and figures on banking and money in each of forty-six states and overseas. Such information was difficult to obtain; New York’s banking department did not even have a spare copy of the state’s banking laws.

Nonetheless, Aldrich should have set a brisker pace; politics is always a question of seizing the hour. He believed he could legislate at leisure, but he misjudged the gathering strength of progressives, who were pushing for reforms such as an income tax, direct election of senators, labor protections, corporate regulation, and (taking dead aim at Aldrich) reduction of the tariff. These forces were challenging Aldrich’s dominion in the Senate and redefining the national agenda. Aldrich overlooked the need to engage the public, even on what he hoped would become his capstone achievement. In a stopover in Milwaukee, soon after he returned from Europe, his response to a reporter’s question about his commission work ran to seven words: “
Really, gentlemen, I have nothing to say
.”

Aldrich’s aloofness chipped away at his eroding political strength. Murray Butler, the president of Columbia University, hosted a dinner at which Aldrich was to discuss his progress. Interest was so great that
Butler asked whether Aldrich
would mind if a reporter or two were present. The senator replied that he would
very much
mind—another opportunity squandered.

Within the Democratic Party, Aldrich was already toxic.
Woodrow Wilson turned down an invitation
to another dinner, this one hosted by Vanderlip, with Lord Revelstoke, a prominent British banker—purely because Aldrich was on the guest list. In theory, the Democrats were irrelevant for the next two and probably the next four years, but monetary reformers needed the Republicans to stick together. And Republican cohesion was under threat from the tectonic forces of progressivism.

The departing Roosevelt had been veering more stridently into
the progressive camp—more so than Taft. This put Republican cohesion in some doubt. The two men had an intensely personal friendship, dating to the early 1890s, when both had been appointed to posts in the administration of Benjamin Harrison, and their friendship had deepened through scores of intimate letters and by Taft’s steadfast service in Roosevelt’s cabinet, including the difficult post of governor general of the Philippines. However, their temperaments were dissimilar. Taft, who hailed from a political family in Ohio, was not a crowd-pleaser like the endlessly quotable and ever charismatic Roosevelt. Taft’s ambition had been to become a judge—to preside in the quiet of a courtroom. He shared none of Roosevelt’s affinity for leading a crusade. “
What I am anxious to do
,” he noted shortly before he took the oath of office, “is to
do
something, and not to make a pronunciamento.” Although Taft professed an eagerness to carry on the Roosevelt agenda, he declined to retain certain members of Roosevelt’s cabinet, which
bruised his mentor’s ego
. When the Tafts stayed at the White House March 3, the night before the inauguration, the
conversation at dinner was strained
. Even in late January—five weeks ahead of inauguration day—Vanderlip was writing, “
It is coming to be an open secret
that there has been a distinct break between the President and the President-Elect.” This was ominous for Republican cohesion and ominous for the Aldrich agenda.