Origins of the Federal Reserve
by Murray N. Rothbard
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 fable.
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
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
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.
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.
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 voters.
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
* 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
* 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. Wetmore.
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. 147–48).
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
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 Willis.
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
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 country.
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 questionnaire.
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.
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
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 all.
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
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.
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
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.
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
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 trumpet 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.
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).