Read Online The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin - Free Book Online
Authors: Neil Irwin
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Jekyll drafted legislation to create this National Reserve Association, which Aldrich, the most influential senator of his day on financial matters, introduced in Congress three months later.
It landed with a thud. Even though the First Name Club managed to keep its involvement secret for years to come, in a country experiencing a populist resurgence—in no small part due to the anger at the trusts generated by the Panic of 1907 and the subsequent recession—the idea of a set of powerful new institutions controlled by the banks was a nonstarter, particularly after Democrats took control of Congress following the 1912 elections. Yet the central problems that Aldrich and the First Name Club were trying to solve were still very much there.
Aldrich’s initial proposal failed, but he had set the terms of the debate. There would be some form of centralized power, but also branches around the country. And what soon became clear was that the basic plan he’d laid out—power simultaneously centralized and distributed across the country and shared among bankers, elected officials, and business and agricultural interests—was the only viable political solution. The debate over a central bank came down to how to balance power among regional banks and a central authority and among those different constituencies.
Carter Glass , a Virginia newspaper publisher and future treasury secretary, took the lead on crafting a bill in the House, one that emphasized the power and primacy of the branches away from Washington and New York. He wanted up to twenty reserve banks around the country, each making decisions autonomously, with no centralized board. The country was just too big, with too many diverse economic conditions, to warrant putting a group of appointees in Washington in charge of the whole thing, Glass argued. President Woodrow Wilson, by contrast, wanted clearer political control and more centralization—he figured the institution would have democratic legitimacy only if political appointees in Washington were put in charge. The Senate, meanwhile, dabbled with approaches that would put the Federal Reserve even more directly under the thumb of political authorities, with the regional banks run by political appointees as well.
But for all the apparent disagreement in 1913, there were some basic things that most lawmakers seemed to be in harmony about: There needed to be a central bank to backstop the banking system. It would consist of decentralized regional banks. And its governance would be shared—among politicians, bankers, and agricultural and commercial interests. The task was to hammer out the details.
Who would govern the reserve banks? A board of directors comprising local bankers, businesspeople chosen by those bankers, and a third group chosen to represent the public. The Board of Governors in Washington would include both the treasury secretary and Federal Reserve governors appointed by the president and confirmed by the Senate.
How many reserve banks would there be, and where? Eight to twelve, the compromise legislation said, not the twenty that Glass had envisioned. An elaborate committee process was designed to determine where those should be located. Some sites were obvious—New York, Chicago. But in the end, many of the decisions came down to politics. Glass was from Virginia, and not so mysteriously, its capital of Richmond—neither one of the country’s largest cities nor one of its biggest banking centers—was chosen.
The vote over the Federal Reserve Act in a Senate committee came down to a single tiebreaking vote, that of James A. Reed, a senator from Missouri. Also not so mysteriously, Missouri became the only state with two Federal Reserve banks, in St. Louis and Kansas City. The locations of Federal Reserve districts have been frozen in place ever since, rather than evolving with the U.S. population—by 2000, the San Francisco district contained 20 percent of the U.S. population, compared with 3
It landed with a thud. Even though the First Name Club managed to keep its involvement secret for years to come, in a country experiencing a populist resurgence—in no small part due to the anger at the trusts generated by the Panic of 1907 and the subsequent recession—the idea of a set of powerful new institutions controlled by the banks was a nonstarter, particularly after Democrats took control of Congress following the 1912 elections. Yet the central problems that Aldrich and the First Name Club were trying to solve were still very much there.
Aldrich’s initial proposal failed, but he had set the terms of the debate. There would be some form of centralized power, but also branches around the country. And what soon became clear was that the basic plan he’d laid out—power simultaneously centralized and distributed across the country and shared among bankers, elected officials, and business and agricultural interests—was the only viable political solution. The debate over a central bank came down to how to balance power among regional banks and a central authority and among those different constituencies.
Carter Glass , a Virginia newspaper publisher and future treasury secretary, took the lead on crafting a bill in the House, one that emphasized the power and primacy of the branches away from Washington and New York. He wanted up to twenty reserve banks around the country, each making decisions autonomously, with no centralized board. The country was just too big, with too many diverse economic conditions, to warrant putting a group of appointees in Washington in charge of the whole thing, Glass argued. President Woodrow Wilson, by contrast, wanted clearer political control and more centralization—he figured the institution would have democratic legitimacy only if political appointees in Washington were put in charge. The Senate, meanwhile, dabbled with approaches that would put the Federal Reserve even more directly under the thumb of political authorities, with the regional banks run by political appointees as well.
But for all the apparent disagreement in 1913, there were some basic things that most lawmakers seemed to be in harmony about: There needed to be a central bank to backstop the banking system. It would consist of decentralized regional banks. And its governance would be shared—among politicians, bankers, and agricultural and commercial interests. The task was to hammer out the details.
Who would govern the reserve banks? A board of directors comprising local bankers, businesspeople chosen by those bankers, and a third group chosen to represent the public. The Board of Governors in Washington would include both the treasury secretary and Federal Reserve governors appointed by the president and confirmed by the Senate.
How many reserve banks would there be, and where? Eight to twelve, the compromise legislation said, not the twenty that Glass had envisioned. An elaborate committee process was designed to determine where those should be located. Some sites were obvious—New York, Chicago. But in the end, many of the decisions came down to politics. Glass was from Virginia, and not so mysteriously, its capital of Richmond—neither one of the country’s largest cities nor one of its biggest banking centers—was chosen.
The vote over the Federal Reserve Act in a Senate committee came down to a single tiebreaking vote, that of James A. Reed, a senator from Missouri. Also not so mysteriously, Missouri became the only state with two Federal Reserve banks, in St. Louis and Kansas City. The locations of Federal Reserve districts have been frozen in place ever since, rather than evolving with the U.S. population—by 2000, the San Francisco district contained 20 percent of the U.S. population, compared with 3
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