[Reprinted from Freedom Under Siege (1987; 2007)]
The Only Disagreement That Occurred between the Conferees at Jekyll Island Was over the Issue of Partial or Total Centralization
The commission offered a 17-point criticism — with alternatives — of the then-current banking system. They complained, for example, that the current system “has no provision for the concentration of cash reserves of the banks and for their mobilization and use wherever needed in time of trouble.” What they tried to make appear as a shortcoming was actually a blessing, as we now know.
Rockefeller and Warburg played a greater role in the drafting of the commission’s actual bill than providing passive intellectual influence. Just before the release of NMC’s final legislative recommendations, someone associated with Aldrich (no one knows who) proposed getting all leading big bankers and advocates of banking reform together for a secret meeting and drafting a bill. The supersecret meeting was to be held at the Jekyll Island Club in Georgia. The press reported only that they were going there for a duck-hunting expedition. The members all assumed names and traveled on a private railroad. During that week at the luxury resort, the bill that the commission would release (what would later become the Federal Reserve Act) was drafted. Among the shady participants at the important Jekyll Island meeting were
- Senator Nelson W. Aldrich (Rockefeller in-law) Henry P. Davison (Morgan partner)
- Paul M. Warburg (Kuhn, Loeb & Co.)
Frank A. Vanderlip (VP of Rockefeller’s National City Bank) - Charles D. Norton (president of Morgan’s First National Bank of New York)
- A. Piatt Andrew (Harvard economist, assistant to Aldrich on the National Monetary Commission, and banking expert)
The result of this meeting was the commission’s bill, the Aldrich Plan, the basis of the Federal Reserve Act. The only disagreement that occurred between the conferees at Jekyll Island was over the issue of partial or total centralization. All wanted total centralization, but some were more politically astute than others and knew that Congress would never approve of a totally banker-controlled central bank.
Senator Aldrich, who strangely did not understand why centralization could not be presented outright, was overridden by the more politically astute Warburg, who endorsed the Morawetz version of regional banking centers under the cover of decentralization. The board of directors in the original Aldrich plan was to be chosen solely by bankers, but that was later changed in the spirit of decentralization to make half of them appointed by the president of the United States.
The bill was delayed for one year and finally presented before the Congress in January 1912 so that support for the bill could be consolidated. This was done by means of a conference in Atlantic City during February 1911 where 22 top bankers met to discuss the Aldrich Plan. It was warmly endorsed with the resolution written by Paul Warburg. As Gabriel Kolko says, “Indeed, the plan was endorsed at the outset. The real purpose of the conference was to discuss winning the banking community over to government control directed by the bankers for their own ends.”
There was still the stigma of the bill’s being the product of Wall Street, Rockefeller interests, and Senator Aldrich. To solve the problem, Warburg and other New York bankers created the National Citizens’ League for the Promotion of a Sound Banking System. This would be a “grassroots” lobbying group headed up by economist J. Laurence Laughlin of the University of Chicago. Its purpose was “to carry on an active campaign for monetary reform on the general principles of the Aldrich Plan without endorsing every detail.” This, of course, wasn’t a “grassroots” movement. It was a get-rich-quick scheme promoted by the top-brass bankers in the country.
For the first time, during the year 1911, academic, economic, and banking journals were overflowing with praise for the Aldrich Plan. In June, William Scott of the University of Wisconsin wrote that the Aldrich Plan would solve the “most fundamental defects in our currency system, namely: its lack of elasticity; the uneconomical use of banking reserves, their connection with the stock market, and their control by Wall Street.” The plan would “greatly increase the efficiency of our banking reserves” and would eliminate the “evil effects of our present independent Treasury system.”
According to Scott,
Persons who suspect that any measure proposed by Senator Aldrich must necessarily be designed to play into the hands of ‘the interests’ will look for a joker in his plan. They will have considerable difficulty, however, in finding it.
Further,
Wall Street could control the new institution only by absolutely controlling a majority of the banks that will purchase stock in the new institution, and even then its control would be tempered by the influence of the federal government … which will be great.
So the plan should be adopted because it would “complete and perfect our present national banking system.” It is, therefore, clear that the articles contained all the information thought most important by the League, Rockefeller, and Warburg.
Strange, isn’t it, that an academic journal wouldn’t concentrate primarily on debating the economic virtues and vices of the Fed, but would concentrate on selling it to the public?
In the same issue, Harvard economist O.M.W. Sprague, closely aligned with the commission, called the plan an “equitable means of banking reform” that reflects “the skillful handiwork of its experienced author.” Every specific objection or fear which has been expressed … has been successfully met.” The rest of the article was spent arguing for the placement of some regional banks in the West to insure that Wall Street would not control the new institution, once again reflecting what Warburg and Aldrich saw as the main obstacle to bank cartelization: the public’s fear of Wall Street.
Thornton Cooke’s echo argued for the plan in the same manner. He had glowing praise for the plan and assured the reader that “Wall Street cannot ‘make money’ out of the activities of the Association.” The bank will only “furnish sufficient reserve of credit for ordinary seasonal needs,” just as Warburg argued. In May of that year, the American Bankers Association approved the Aldrich Plan and endorsed a broader number of notes eligible for rediscounting.
Only later in the year did a split occur within the ranks. The split was not over the goals of cartelizing the banking industry, of course, but again over political tactics of doing so. President of the Citizen’s League J. Laurence Laughlin was a political realist and knew that Aldrich’s name had to be removed from the bill. H. Parker Willis, his good friend and close aide, had warned him about this earlier and now Laughlin was convinced. Even Warburg later separated himself in public from the name Aldrich but, of course, this had no bearing on the facts.
The Aldrich plan was presented to Congress in January of 1912, but with Aldrich about to retire and the Democrats about to win a victory later in the year, the bill never came to a vote; and banking reform was a dead issue for a while. The Citizens League continued, though, to function as a powerful and large-scale propagandist for banking reform, issuing pamphlets and brochures all over the country, especially in the South and West, educating people on the evils of the National Banking System and the benefits of centralized banking reform and a conglomerate banking cartel.
The league’s periodical “banking reform” was made into a book with 23 chapters dealing with all aspects of banking reform, but 11 were written by H. Parker Willis, a student of Laughlin’s, who received $1,000 (over $9,100 in real terms). Willis had taught at Washington and Lee University, and two of his ex-students recommended Parker to their father to be his administrative assistant. Their father was Carter Glass of Virginia, ranking member of the House Committee on Banking and Currency. Willis accepted. Glass needed an assistant for two reasons: first he had no technical knowledge of the banking business, and secondly, he was given responsibility of considering monetary reform and working against the efforts of Arsene P. Pujo to assign the problem of banking reform to the Pujo Subcommittee who was soon to hold hearings on the “Money Trust.”
In June of 1912, Willis drew up a bill for Glass and reported to Laughlin in a letter, “After a good deal of talk with Mr. Glass, I drew up a bill along the lines of which you and I spoke, and turned it into him.” The Pujo committee swung into high gear with its investigation into alleged abuse of power emanating from Wall Street. The result, though inconclusive, was to stir the public into a frenzy over Wall Street.
Through some remarkable “spin control,” the new Glass legislation (the Fed bill) was promoted as an anti–Wall Street bill, building on a foundation established earlier with the Aldrich Bill. The Pujo Committee never won the legislative control from the Glass Committee, which still left Glass (i.e., Willis, Laughlin, and ultimately Warburg) in charge of the bill.
A final bill setting up the Federal Reserve was passed in December 1913 by a large majority in the House (the Aldrich Plan and the Glass bill were virtually identical). As Kolko says,
The entire banking-reform movement, at all crucial stages, was centralized in the hands of a few men who for years were linked, ideologically and personally, with one another … the major function, inspiration, and direction of the measure was to serve the banking community in general, and large bankers specifically.
Who authored the bill? No one knows. The controversy sprang up immediately but was never resolved.
H. Parker Willis later denounced the institution of the Federal Reserve and its inflationary policies and became extremely critical just prior to the Great Depression. Laughlin also attacked the Fed during his later years, although like Willis, not to the extent of repudiating his own role in its establishment.
There is one reason why we have a Federal Reserve System today, and it has nothing to do with what the Fed’s publications say. The Federal Reserve exists to give a special privilege to the banking industry. And they have profited greatly from it. But at what expense? The banksters have diluted the value of the 1914 dollar to about eight cents. And its value is still shrinking.
As the Federal Reserve expands the money supply, it reduces the value of all existing dollars. The process happens, though, unevenly because not all prices rise at the same time. The first party to get the new money can spend it at its old purchasing power. Only after filtering through the economy does the money bid up prices for goods.
The Federal Reserve Exists to Give a Special Privilege to the Banking Industry
But who gets the new money first? Who experiences the boon from the credit injection? The bankers and insiders, of course. They wouldn’t have it any other way.
As Ludwig von Mises has shown, the Federal Reserve is responsible for the business cycle as we know it today. With credit injections, the Fed lowers interest rates causing businessmen to invest in new capital equipment. They produce goods that consumers can’t afford, and they eventually find that their plans don’t pan out. This process spreads throughout the entire economy and creates ever-growing waves of booms and busts. A gold standard economy wouldn’t have such a problem. There is no economic, constitutional, or moral justification for giving special privilege to big bankers over the rest of business or industry. They should be subject to competition in the free market, and the legal constraints against fraud, like everyone else.
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