How a secret meeting at a secluded resort led to creation of Federal Reserve

A nice article by Jessie Romero of Richmond Fed.

The biggest irony of Fed is how it rose from being really an unwanted organisation to the most powerful central bank in the world. Econs/experts ridicule when some politician makes a case for ending the Fed. But the bigger point is this is the history of central banking in the country. A country which was built by states uniting together has always been sceptical of centralised finance. They had two editions of central banks (1791-1911 and 1916-36) but allowed the 20 year charters of both to expire. Whereas in UK, BoE was also on a charter but it kept getting renewed. So from 1836 onwards there was no central bank in the country and hardly any talk of having one was entertained.

Given the scepticism, any such effort to form a central bank in US is likely to be a highly secretive clubby affair. This was indeed the case as the central bank was given shape in Jekyll Island in 1910. A group of financial elite got together and planned a central bank for US in a meeting so secretive that its list of members is not fully known. Also, the members actually addressed each other by first names to ensure no one notices/overhears them.

The name of Jekyll Island is also ironical given the setting as one immediately connects to the story of Dr Jekyll and Mr Hyde. Most econs present the Fed as Dr Jekyll which has done a lot of good to US economy. But then there are people from Austrian school and some politicos who feel Fed is just Mr. Hyde which has caused far more harm than is visible.

Even the name suggested for Fed was given to hide the fact that it was a central bank. The first proposed name was Reserve Association of America which was later changed to National Reserve Association and finally to Federal Reserve.

So this piece by Romero gives a broad account of how things piled up at the famous island.

On Nov. 24, 1910, a select group of men enjoyed a Thanksgiving dinner of wild turkey with oyster stuffing at the luxurious Jekyll Island Club, off the coast of Georgia. The resort offered a host of leisurely pursuits, but the men weren’t there to golf or ride horses. Instead, the group was there to devise a plan to remake the nation’s banking system. The meeting was a closely guarded secret and would not become widely known until the 1930s. But the plan developed on Jekyll Island laid the foundation for what would eventually be the Federal Reserve System.

What got them going was the panic of 1907. It is not as if US did not have crises earlier. There were quite a few but Panic of 1907 disturbed the cream of NY finance:

The Panic of 1907 wasn’t the worst financial crisis of the National Banking era, but it got the attention of the older generation of New York bankers, who began to come around to their young colleagues’ point of view. That’s because it was fundamentally different from previous pan­ics, according to research by Jon Moen of the University of Mississippi and Ellis Tallman, now at the Cleveland Fed. “The Panic of 1907 happened in trusts, in a group of interme­diaries outside the New York Clearinghouse and outside the purview of the national banks,” says Moen. “The New York bankers realized that if the next panic were any bigger, their banks wouldn’t collectively have enough assets to stop it. A lot of the older bankers hadn’t thought a central bank was necessary, but they changed their tune very quickly.”

The Panic of 1907 also got the attention of Republican Sen. Nelson Aldrich, the chair of the Senate Finance Committee. Aldrich was one of the most powerful politi­cians of his time: President Theodore Roosevelt dubbed him the “kingpin” of the Republicans, and journalists called him (not fondly) the “boss of the United States.” Aldrich was a key political ally of Morgan, and many of his fellow legislators were suspicious of his wealth and his ties to busi­ness and finance, including his daughter’s marriage to John D. Rockefeller Jr.

In response to the panic, Aldrich pushed through a bill in 1908 that, among other things, created the National Monetary Commission to study reforms to the financial system. (The bill was co-sponsored by Republican Rep. Edward Vreeland.) The Commission included eight senators and eight represen­tatives, with Aldrich as chair. But in Aldrich’s opinion, “The drafting of a bill was a matter for experts, not members of Congress inexperienced in banking and financial matters,” as economic historian Elmus Wicker wrote in The Great Debate on Banking Reform. So Aldrich hired several advisers, includ­ing Davison and A. Piatt Andrew, an economics professor at Harvard University, and set off to meet with bankers and cen­tral bankers in Europe. “He had been very shrewd in making up the commission,” wrote Nathaniel Wright Stephenson in a 1930 biography of Aldrich. “It had three parts: those whose names were valuable but who would not want to go to Europe and so would not hamper the work; those who would like to go to Europe but would be willing enough to be excused from real work; those who meant business.”

When Aldrich left for Europe, he supported the existing bond-backed currency and was skeptical about the necessity of a central bank. But his meetings persuaded him that the European system was worth emulating, and after returning home he asked Paul Warburg to give a presentation at the Metropolitan Club of New York. Warburg had written Aldrich several letters about his views on financial reform and was surprised by the senator’s change of heart. But Warburg was also doubtful the American public would accept a central bank, no matter the benefits. Aldrich was more optimistic. “I like your ideas — I have only one fault to find with them,” he told Warburg. “You say that we cannot have a central bank, and I say we can.”

The secretive meeting:

By the fall of 1910, Aldrich had learned a great deal, but he didn’t actually have a plan for a central bank. Nor did he have a bill to present to Congress, which would begin meeting in just a few weeks. So Aldrich — most likely at Davison’s suggestion — decided to convene a small group to hash out the details. The group included Aldrich, his private secretary Arthur Shelton, Davison, Andrew (who by 1910 had been appointed assistant Treasury secretary), Vanderlip, and Warburg.

A member of the exclusive Jekyll Island Club, proba­bly J.P. Morgan, arranged for the group to use the club’s facilities. Founded in 1886, the club’s membership boasted elites such as Morgan, Marshall Field, and William Kissam Vanderbilt I, whose mansion-sized “cottages” dotted the island. Munsey’s Magazine described it in 1904 as “the richest, the most exclusive, the most inaccessible” club in the world.

Aldrich and Davison chose the attendees for their bank­ing expertise, but Aldrich knew their ties to Wall Street would arouse suspicion about their motives. “Knowledge of who wrote the plan could have influenced people’s perception of the value of the ideas and the likelihood of its political passage,” says Gary Richardson, the Federal Reserve System historian and an economics professor at the University of California, Irvine. So Aldrich went to great lengths to keep the meeting secret, adopting the ruse of a duck hunting trip. He instructed the men to come one at a time to a train terminal in New Jersey, where they could board his private train car. Warburg went so far as to bring all the trappings of a duck hunter, when in fact he had never shot a duck in his life. Andrew didn’t even tell his boss, the Treasury secretary, where he was going.

So secretive was the meeting that even the exact list of participants is lost to history. In his autobiography, Vanderlip says Benjamin Strong attended and recalls him horseback riding before breakfast. But Strong is absent from other historical accounts, including Warburg’s first-person recollections. Strong was named the first president (then called governor) of the New York Fed, and “during the 1920s he was heralded as being the only person who really knew what a central bank was supposed to do,” says Moen. “So it was assumed later he was there, but there really isn’t any evidence he took part in the meeting.”

Once aboard the train, the men used only their first names with each other. Vanderlip and Davison went even further, as Vanderlip wrote in his autobiography: “Davison and I adopted even deeper disguises, abandoning our own first names. On the theory that we were always right, he became Wilbur and I became Orville.” Vanderlip and Davison would continue to call each other Wilbur and Orville for years, and the men referred to themselves as the “First Name Club” for decades.

Just like those secretive meetings you read as a kid in Famous Five/Secret Seven type novels.

The author than goes onto show how Senator Glass joined the debate and how the Bill sponsored by Glass-Aldrich led to what it known as “the Fed” today. There is also an interesting description of the details of the meeting spilled out to public. As is usually the case in such events, it was due to egos and ego clashes:

In 1917, the journalist B.C. Forbes, the founder of Forbes magazine, somehow learned about the Jekyll Island trip and wrote about it in Men Who Are Making America, a collection of short biographies of prominent financiers, including Davison, Vanderlip, and Warburg. But not many people noticed the revelation, and those who did dismissed it as “a mere yarn,” according to Aldrich’s biographer.

The participants themselves denied the meeting had occurred for 20 years, until Andrew, Vanderlip, and Warburg shared the story with Aldrich’s biographer in 1930. (Aldrich died in 1915 and Davison in 1922.) The impetus for coming clean was probably the publication in 1927 of Carter Glass’ memoir, An Adventure in Constructive Finance. In it, Glass, by now a senator, had claimed all the credit for the ideas in the Federal Reserve Act. After that, Richardson says, “The other people who contributed, particularly the Jekyll Island guys, came out with books and articles to talk about their role in creating the Aldrich plan.”

Warburg was especially critical of Glass’ description of events. In 1930, he published a two-volume book describing the origins of the Fed, including a line-by-line comparison of the Aldrich bill and the Glass-Owen bill to prove their similarity. In the introduction, he wrote, “I had gone to California for a three months’ rest when the appearance of a series of articles written by Senator Glass … impelled me to lay down in black and white my recollections of certain events in the history of banking reform.” (Warburg’s book does not mention Jekyll Island specifically, although he alludes to a secret meeting with Aldrich.)

The Jekyll Island Club never bounced back from the Great Depression, when many of its members resigned, and it closed in 1942. Today, its former clubhouse and cottages are National Historic Landmarks, and the secret meeting that launched the Federal Reserve is a historical curiosity for the many tourists who visit the island. But the issues Aldrich and his colleagues wrestled with over Thanksgiving more than 100 years ago remain relevant today, as policymakers and the public continue to debate the structure and powers of the Fed.

Superbly retold history of the central bank. The debates over whether to have or not have Fed continue even till date given such a fragile history..

 

 

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