Epilogue – Part II

The following is an excellent excerpt from the book “AMERICA’S BANK: The Epic Struggle to Create the Federal Reserve” by Roger Lowenstein from Chapter Fourteen “Epilogue” on page 261 and I quote: “Even as the Fed got going, it remained under the Treasury’s thumb. Due to the war, [William] McAdoo exercised czarlike powers. He repeatedly clashed with [Paul] Warburg, who thought the central bank should be independent from the executive, and who attempted to persuade the board to seek greater powers from Congress. A third party emerged in the power struggle: the Reserve Bank of New York, run by Benjamin Strong, the Wall Street insider and intimate of the Jekyl Island group. Because the Act did not make clear exactly where the levers of authority lay, the Fed’s first years were marked by a profound competition among the Reserve Banks, the board, and the Treasury Department.
Various members of the founding generation did battle to ensure that the Act was implemented according to their designs. [Carter] Glass warily monitored the Fed from Congress and was often at odds with Warburg, as was H. Parker Willis, who had been appointed secretary to the board. The debate over whether the Fed would be a so-called central bank was replayed in repeated battles for control over the discount rate (the benchmark interest rate). According to the statute, each Reserve Bank was entitled to set the rate in its district, but they were subject to board “review and determination.” This language provided a fertile field for disputes. Glass was active on each side. As a congressional overseer, Glass favored the periphery over the center. Then, in 1918, he was appointed Treasury secretary and evidenced an unseen Hamiltonian impulse when he blocked the Reserve Banks from hiking rates. In 1927, when in the Senate, Glass reverted to Jeffersonian form, protesting that an imperious board was behaving too much like, in his words, a “central bank.”
After America entered the war, McAdoo leaned on the board to keep rates low and the Fed dutifully complied. The Reserve Banks further assisted war finance by purchasing bank credits backed by Treasury notes and bonds. They also bought government securities on the open market. This tacitly redirected the Fed from its intended method of operation. As the Reserve Banks fell in step with war finance, their assets became concentrated in government securities rather than the bank commercial paper to which the framers had devoted so much energy.
However, if the war temporarily thrust the Fed into a subservient role, it also broadened its field of action. Many people had envisioned that, apart from emergencies, the agency would play a passive role–as the Act put it, simply “discount[ing] notes, drafts, and bills of exchange arising out of actual commercial transactions.” Harvard’s Oliver Sprague had predicted an extreme degree of passivity, testifying just before enactment, “After the institution has been going ten or fifteen years it will almost run itself.” This would soon seem ludicrous. In fairness, centralizers such as Warburg always wanted a more dynamic agency. Within a year of the Fed’s founding, so did the board. In its first annual report, the board signaled its disposition to be proactive. Its duty, it asserted, “is not to await emergencies but by anticipation to do what it can to prevent them.”
Just as Wall Street had hoped, the Fed’s emergence, coupled with the war, catapulted America’s standing in world finance. By keeping Britain and France afloat, the United States, long a debtor nation, suddenly became a significant creditor. In return for exports of food, arms, and other supplies, gold poured into American harbors. After America’s entry into the war, Congress fulfilled Warburg’s insistent demands and amended the Act to widen the board’s powers. The amendments greatly increased the Fed’s note-issuing capacity; notes in circulation doubled within months. And the Reserve Banks, by issuing more notes, were able to soak up much of the bullion previously stashed in people’s pockets and in the vaults of member banks. The Fed’s enlarged and unified gold cache elevated the dollar’s status as an international currency.
However, the war put Warburg in a awkward spot. Given that he had two banker brothers still in Hamburg–one an adviser to the German government–Warburg became an easy target for international conspiracy theorists and closet anti-Semites, groups that would hound the Fed in the future. In May 1918, to spare Wilson the embarrassment of a prolonged renomination battle, Warburg offered his resignation. [FOOTNOTE: The original Reserve Board members were appointed to terms of varying lengths; Warburg’s term expired that year.] He stressed his utter allegiance to the United States and indicated he would continue to serve if the President desired. No doubt, Warburg was hoping that Wilson would insist. There was no question of his loyalty, and bankers rallied to his cause. But his tussles with McAdoo had damaged his standing in the administration, and he faced opposition on the Senate Banking Committee, in particular from the mercurial chairman, Robert Owen. After letting Warburg dangle for months, in August Wilson accepted his resignation. For Warburg, it was a devastating, and an irrecuperable, loss.
For the next decade the Fed’s most effective leader (and its last connection to the founding generation) was Benjamin Strong. His first task was to nip inflation, which skyrocketed after the war. After a battle with the Treasury Department, Strong hiked the discount rate, leading to a severe but brief depression. Bank failures rose sharply; however, there was no money shortage and no liquidity crisis. The mechanism of 1913 worked.
In the 1920s, the Reserve Banks shifted their emphasis from making discount loans to individual member banks to so-called open market interventions. Trading by Reserve Banks developed a liquid market in short-term Treasury securities. Such interventions became the Banks’ chief tool for influencing interest rates and credit conditions–and not just on an emergency basis, but as an ongoing ballast to the economy. Significantly, in 1923, the Reserve Banks formed the Open Market Investment Committee, which attempted to conduct monetary policy on a coordinated basis. Although still a good distance from the bureaucratic giant of later years, such concerted action nudged the Fed closer toward being a central bank. Nonetheless, confusion over the board’s and the Reserve Banks’ respective powers persisted. The uncertainty would do serious harm; it contributed to the Fed’s ineffectualness during the Great Depression.
The Fed’s framers had assumed that the new institution would take its place, with other central banks, in a world in which exchange rates and capital flows were regulated and kept reasonably stable by international gold movements. But after World War I, with Europe hobbled by debts (and in Germany’s case, reparations), this system broke down. Europe’s insolvency put America under a severe strain.
Strong attempted to navigate these turbulent monetary seas, but his death in 1928 left the Fed without a capable hand at the tiller. The next year, Warburg, who monitored the Fed like an anxious parent, criticized the agency’s weakened leadership for letting stock market operators seize the reins of money creation. He warned that if their “orgies of unrestrained speculation” were permitted to spread–that is, if credit continued to flow to the stock market and to other speculative assets–it would lead to a general depression throughout the country. Three years later, during the depths of the Great Depression, the sixty-four-year-old Warburg died in New York City. The Fed would face the tempestuous 1930s without the cream of its founding generation, and without anyone else of equal caliber.
The other sojourners to Jekyl Island were, by then, gone from the scene. Harry Davison had remained the dominant partner at Morgan’s, but shifted his focus after the war to philanthropic ideas for reconstruction and relief. In 1922 he succumbed, his grace intact, to a lethal brain tumor. During the war, Piatt Andrew went to Europe and organized an ambulance squadron, the American Field Service, to serve with French divisions at the front. He was awarded the Croix de Guerre from France. In 1920, he was elected to Congress, where he later became a staunch enemy of the New Deal, but the professor was never again influential in banking. Frank Vanderlip, ever the eager international financier, seized on the Federal Reserve Act to build a vast network of overseas lending offices. But he fell out with James Stillman, who did not approve of National City’s expansion, especially when the Russian Revolution led to losses. After the war, Vanderlip became passionately interested in European recovery schemes, to the displeasure of the bank’s directors, who replaced him with Stillman’s son. Two years before his death in 1937, Vanderlip published a memoir in which he recalled the week on Jekyl Island as “the highest pitch of intellectual awareness that I have ever experienced.”
Nelson Aldrich did not shake his bitterness that Glass’s bill, rather than his, was embraced by the public and enacted by Congress. He clung to his belief that banks should be supervised by bankers–not by government. Improbably, he was hoping for a Republican revival and new legislation when, in April 1915, he died, leaving an estate worth approximately $16 million. Aldrich’s heirs, as if shadowed by the patriarch’s sullied reputation, were more self-conscience aristocrats. His daughter, Abby Aldrich Rockefeller, became a noted collector. Far more progressive than her father, she helped to found the Museum of Modern Art. Her son Nelson, a liberal Republican, was a big-spending governor of New York and vice president of the United States; another of the senator’s grandsons, David Rockefeller, chief executive of Chase Manhattan, was the quintessential banker in the postwar era, when globe-trotting bankers were willing, and subject, partners to government.
William McAdoo married Wilson’s daughter Eleanor, in a White House ceremony, in the spring of 1914. Since Wilson was counting on McAdoo to shape the Federal Reserve, he refused to accept his son-in-law’s offer to resign. After the war, the ambitious McAdoo left the government and ran, unsuccessfully, for president.
Colonel House accompanied Wilson to Paris in 1918 to represent the United States in the peace negotiations at Versailles. His eagerness to accede to French and Italian demands, at a time when Wilson was ailing, led to a rift. The two men were never friends again.
Historians regard Woodrow Wilson’s first term as one of the most successful ever, and the Federal Reserve Act as its crowning achievement. Wilson’s fear that early success would be followed by controversy proved prophetic. In 1916, widowed and already happily remarried he narrowly won reelection, campaigning on the slogan “He kept us out of war.” A month into his second term, America joined the fight. Full of postwar ideals, Wilson negotiated the Treaty of Versailles and earnestly sought its approval by the Senate. Then he suffered a debilitating stroke. Senator James Reed, beaten by Wilson during the Federal Reserve legislation, helped to thwart his dream of an American-led League of Nations–a bitter disappointment. Wilson died in 1924.”
(THE FOLLOWING IS THE FIRST PART ON THE INSIDE OF THE JACKET COVER AND I QUOTE:
“A tour de force of historical reportage, America’s Bank illuminates the tumultuous era and remarkable personalities that spurred the unlikely birth of America’s modern central bank, the Federal Reserve. today, the Fed is the bedrock of the financial landscape, yet the fight to create it was so protracted and divisive that it seems as small miracle that it was ever established.
For nearly a century, America, along among developed nations, refused to consider any central or organizing agency in its financial system. Americans’ mistrust of big government and of big banks–a legacy of the country’s Jeffersonian, small-government traditions–was so wide-spread that modernizing reform was deemed impossible. Each bank was left to stand on its own, with no central reserve or lender of last resort. The real-world consequences of this chaotic and provincial system were frequent financial panics, bank runs, money shortages, and depressions. by the first decade of the twentieth century, it had become plain that the outmoded banking system was ill equipped to finance America’s burgeoning industry. But political will for reform was lacking. It took an economic meltdown, a high-level tour of Europe, and –improbably–a conspiratorial effort by vilified captains of Wall Street to overcome popular resistance. Finally, in 1913, Congress conceived a federalist and quintessentially American solution to the conflict that had divided bankers, farmers, populists, and ordinary Americans, and enacted the landmark Federal Reserve Act.”
(CHAPTER 12 AND 13 GIVES THE DETAILS OF HOW THE FEDERAL RESERVE WAS FORMED AND THE MAIN CHARACTERS DOING SO. TWO OF THE MOST IMPORTANT ONES BEING– PRESIDENT WOODROW WILSON AND CONGRESSMAN CARTER GLASS. THEY SEEMED TO THINK FORMING A FEDERAL RESERVE OVER THE PRIVATE BANKS, HAD MORE OF AN ADVANTAGE BUT IN THE LONG RUN, IT DEPENDS ON WHO IT IS HELPING AND WHO IT IS HURTING. JUST LIKE THE SEGMENT I’VE BEEN WATCHING ON THE PBS SERIES NOVA CONCERNING THE MELTING OF THE ICE CAPS AND WHO GETS HURT. I CAN’T PUT EVERYTHING ON MY BLOG (WORDPRESS) BUT I THINK READING THIS ENTIRE BOOK WOULD BE AN ASSET TO MANY PERSONS, ESPECIALLY POLITICIANS AND ECONOMISTS BECAUSE GOING THROUGH THESE WILD SWINGS OF FEAST OR FAMINE IS REALLY NOT AN INTELLIGENT WAY TO EVEN IT OUT OVER THE LONG HAUL, AND EVERYONE WOULD BE BETTER OFF. IF THE REPUBLICAN PARTY SHATTERS, AND SOME OF THE CANDIDATES RUN AS INDEPENDENTS, IT WAS MAINLY CAUSED BECAUSE THEY REALLY HAVE NO WAY OF HOW TO PRESERVE THE MIDDLE CLASS OR CONTROL THE BIG INVESTMENT BANKS.
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran

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About tim074

I'm a retired dairy farmer that was a member of the National Farmer's Organization (NFO). Before going farming, I spent 4 years in the United States Air Force where I saved up enough money to get my down payment to go farming. I also enjoy writing and reading biographies and I write about myself as well as articles and excerpts I find interesting. I'm specifically interested in finances, particularly in the banking industry because if it wasn't for help from my local Community Bank, I never could have started farming which I was successful at. So, I'm real interested in the Small Business Administration and I know they are the ones creating jobs. I have been a member of Common Cause and am now a member of Public Citizen as well as AARP. I have, in the past, written over 150 articles on the Obama Blog (my.barackobama.com) and I'd like to tie these two sites together. I'm also on Twitter, MySpace and Facebook and find these outlets terrifically interesting particularly what many of these people did concerning the uprising in the Arab world. I believe this is a smaller world than we think it is and my goal is to try to bring people together to live in peace because management needs labor like labor needs management. Up to now, that hasn't been so easy to find.
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