Roger Lowenstein, America’s Bank: The Epic Struggle to Create the Federal Reserve. New York: Penguin Press, 2015. 368 pp. $30 (hardcover), ISBN: 978-1-594-20549-1.
Reviewed for EH.Net by Gary Richardson, Federal Reserve Bank of Richmond and Department of Economics, University of California at Irvine.
Roger Lowenstein, author of a series of New York Times’ best-selling books on recent financial history, including one of my favorite homilies on hubris, When Genius Failed, has written a new book on the foundation of the Federal Reserve, America’s Bank. The book illuminates the long and painful birth of the United States’ central banking system, which involved more than a century of debate about how to structure our nation’s financial system. America’s Bank is cogent, informed, and opinionated, but also polished, enlightening, and entertaining. The book is a work of scholarship based upon primary sources and demonstrating mastery of the academic literature. It could have been submitted as a doctoral dissertation in history at most universities in the United Sates, but it captures readers’ imaginations in ways that academic writing seldom does. It tells a story with heroes, like Paul Warburg, and ghosts, like Andrew Jackson, and brings to life politicians whose names every school child in the United States remembers, like Woodrow Wilson and William Jennings Bryan, and that most people have forgotten, like Carter Glass and Nelson Aldrich.
The introduction’s first paragraph establishes that the author is not an apologist for the Fed, with some offhand skepticism about recent Fed decisions. The author notes that the Fed today has enormous influence around the world, and that it “manages, sometimes adroitly and sometimes wantingly, the supply of credit whose ebb and flow alternately buoys and batters business. It supervises — or it is supposed to supervise — the nation’s banks” (p. 1).
After that, the book describes the Fed’s creation as a crowning achievement of Progressive politics circa 1913. The Federal Reserve Act reconciled ideas and ideals of three main streams of turn-of-the-century political thought — progressive, populist, and laissez-faire. The leaders of all of these movements in both political parties contributed ideas to and advocated passage of the final legislation. This reconciliation bridged intellectual and political divides between those in favor of and hostile to centralization and federalism which had bedeviled the American republic since its birth after the revolution from England.
The book’s introduction recounts Alexander Hamilton and Thomas Jefferson’s debate over the first Bank of the United States. Their debate sets the stage for “The Road to Jeykyl Island,” which is Part One of the book. Chapter 1 tells how “national bank” and “central bank” became phrases of condemnation in America’s political lexicon. The chapter explains the monetary babel of colonial and antebellum America, when thousands of currencies, all denominated in dollars of different potential values were issued by thousands of privately owned and operated commercial banks. This monetary chaos impeded commerce and bred panics, which every fifteen years or so shut down the financial system, triggering long and painful recessions. Each recession inspired a flurry of reform proposals by businessmen and politicians. The reiteration of recession and reform fills much of Chapters 2 and 3. These chapters also introduce the protagonists of this part of the narrative: Republican senator Nelson Aldrich, the chair of the Senate Finance Committee; Frank Vanderlip, president of National City Bank of New York (now Citibank) and a former Treasury official; and Paul Warburg, a successful, German-born financier who was a partner at the leading investment bank Kuhn, Loeb, and Co (which merged with Lehman Brothers in the 1970s). While these well-intentioned men and many others hoped to reform financial institutions which they believed impeded American commerce and industry, political tensions kept all of their plans on the drawing board. Chapters 4 through 6 focus on the Panic of 1907, the political response, the National Monetary Commission, and the realization rising in the minds of many businessmen and politicians that America should and could create a central bank. These efforts culminated in the Aldrich Plan to create a National Reserve Association, which the National Monetary Commission submitted to Congress without informing them that the initial draft of the plan had been written, secretly, by a cabal consisting of Aldrich, Vanderlip, Warburg, A. Piatt Andrew (an economics professor from Harvard and Assistant Secretary of Treasury), and Henry Davison (a senior partner at J.P. Morgan, a founder of Bankers Trust, and an adviser to the National Monetary Commission). Their infamous vacation on Jekyll Island, when they pretended to be on a duck hunt but actually wrote a proposal for a central bank, is the topic of Chapter 7.
My review skims over these chapters, because the content in them is well known, at least among economic historians. Elmus Wicker (2005) details the recession-reform dynamic in his monograph entitled The Great Debate on Banking Reform. Wicker elucidates the roles of Aldrich and Warburg and the conclave at Jekyll Island. That story has been known for nearly one hundred years. In 1916, B.C. Forbes wrote about it in articles published in Leslie’s Weekly and the magazine Current Opinion. The participants themselves denied the Jekyll Island caucus had occurred for twenty years, until the publication of Aldrich’s biography in 1930, after which all of the participants revealed their roles in drafting the blueprint for the Federal Reserve. From these personal accounts and the conventional academic literature, Lowenstein has crafted a compelling narrative that is accurate, informative, and fun to read. I’ve recommend this section of the book to students and relatives, including my brother and a cousin, who received copies for Christmas and found every page fascinating. A specialist who has read Wicker or the original sources will find pleasurable prose and a source to assign to students, but few historical revelations.
Why then, do I believe Lowenstein’s work merits substantial scholarly praise? The second part of the book, entitled “The Legislative Arena,” crafts a new and coherent account of the Jekyll Island proposal’s tumultuous transition into Congressional legislation acceptable to the American electorate. Numerous accounts exist, but often disagree, even on basic points, due to the cacophony of competing claims over authorship of the Federal Reserve Act. In 1914, Edwin Seligman, a prominent professor at Columbia University, wrote that “in its fundamental features the Federal Reserve Act is the work of Mr. Warburg more than any other man.” In the 1920s in his memoir, An Adventure in Constructive Finance, in speeches, and in submissions to prominent publications including the New York Evening Post and the New York Times, Carter Glass claimed credit for the key ideas in the Act. Critics responded. One example is Samuel Untermyer, former counsel to the House Committee on Banking and Currency. He published a pamphlet titled “Who is Entitled to the Credit for the Federal Reserve Act? An Answer to Senator Carter Glass,” in which he asserted that Glass’s claim of primary authorship was “fiction,” “fable,” and a “work of imagination.” Glass, he argued, claimed credit for many ideas advocated by Senator Robert Owen and Congressional staff. Another example is Paul Warburg. In reply to Glass’s memoir, Warburg published a two-volume tome describing his “recollections of certain events in the history of banking reform,” including copies of correspondence between himself and other founders of the Federal Reserve, and a line-by-line comparison of the Aldrich Plan, originally drafted at Jekyll Island and submitted to Congress in the final report of the National Monetary Commission, and the final Federal Reserve Act, which evolved from bills introduced in the House by Carter Glass and the Senate by Robert Owen in the spring of 1913. Warburg demonstrated that much of the text of the Federal Reserve Act was identical to text of the bill submitted by the National Monetary Commission and also to text of reform proposals that he had written single-handedly and published prior to the conclave on Jekyll Island.
As a professor of economics and professional historian, I had despaired at the confusion concerning who should receive credit for the creation of the Federal Reserve, confusion literally carved in stone on statues in the foyer of the Federal Reserve Building. I knew of one account, a chapter in a biography of Woodrow Wilson, which covered part of this ground, but I feared a comprehensive and coherent account would never emerge.
The second part of Lowenstein’s book fills this void. Chapter 8, “Into the Crucible,” tells how Warburg and other allies of Aldrich advocated for financial reform. They circulated the plan among bankers, incorporated suggestions, and established the National Citizens’ League for the Promotion of a Sounding Banking System, which sought to popularize reform on Main Street as well as Wall Street. Opposition solidified among progressives and Democrats, who feared the Aldrich Plan to create a National Reserve Association was a Trojan horse destined to create a national banking monopoly. Chapters 9 and 10 cover the 1912 presidential campaign, when opposition to the creation of a central bank appeared as a key plank in the Democratic Platform, and William Jennings Byran required Woodrow Wilson to publicly repudiate the Aldrich Plan in return for political support. Chapters 10 through 13 tell how after winning the election, the Democrats adopted the mantle of reform, and turned the Republican plan to create a National Reserve Association into their own plan to create a Federal Reserve Association, based upon similar scientific principles but with a different political superstructure. President Wilson then convinced Republicans and Democrats as well as progressives and populists to vote for the proposal, which was signed into law two days before the first Christmas of Wilson’s presidency.
Lowenstein’s novel narrative is a substantial scholarly achievement. I checked many of his sources, and over the phone and in person, I questioned him about how he came to key conclusions. Future historians may revisit aspects of his story, but I believe the core of his work will stand the test of time. I recommended this part of the book to members of the Federal Open Market Committee, to my Ph.D. advisor (who told me he had learned little from the first half of the book and stopped reading) — and I recommend it to readers of my review.
The epilogue discusses how our nation’s perpetual debates about centralization versus local autonomy, Main Street versus Wall Street, and elastic versus stagnant monetary systems continue today. While reiterating these core concepts may be useful, the epilogue is the weakest part of the manuscript. It begins by stating that “The Federal Reserve System established in 1913 was identical in its framework to the system today. The federalist structure enacted a century ago remains in force; so does the essential purpose … along with setting short-term interest rates … the Fed is in charge of the nation’s monetary policy.” These statements seem misleading or incorrect. The Banking Act of 1935 replaced the Fed’s federalist structure of regional Reserve Banks with authority to operate independently with a national central bank controlled from Washington via the Board of Governors and Federal Open Market Committee. When the Fed was founded, its essential purpose was not monetary policy. The original Fed determined neither the inflation rate nor the exchange rate. Those aggregate prices were set by the gold standard, which had been de jure since the Gold Act of 1900 and de facto for several decades before. The original Fed did not alter interest rates to influence levels of employment, unemployment, or output. Despite my qualms about the epilogue (and a quibble about the inconsistent and inaccurate use of the term “fiat money” throughout the manuscript), I think America’s Bank is worth reading repeatedly. I will assign it to undergraduates when I teach about the history of the Federal Reserve, and I will keep a copy on my bookshelf next Alan Meltzer’s three-volume History of the Federal Reserve and Milton Friedman and Anna Schwartz’s Monetary History of the United States.
Reference:
Elmus Wicker, The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed, Columbus: Ohio State University Press, 2005.
Gary Richardson is the Historian of the Federal Reserve System, a research economist at the Federal Reserve Bank of Richmond, a professor of economics at the University of California at Irvine, and Research Associate at the National Bureau of Economic Research.
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