The Federal Reserve Act — "Banks to be made the instruments, not the masters of business and of individual enterprise and initiative" — The "interests" in opposition — Would not see money kings who had vainly fought him — Importance of the Federal Reserve System in the war — Rural credits — How Wilson converted Glass
"The duty of statesmanship is not negative merely. It is constructive also." — Wilson
It would have been impossible to finance the war and loan millions to allies if provision had not been made by a sound currency system, demonstrating its flexibility, before the event. The Secretary of the Treasury, from taxation and bonds, obtained thirty-seven billion dollars to pay the expenses of America's part in the World War and to loan to allied and associated European nations. It was obtained easily. Bankers and people gave enthusiastic co‑operation, bought bonds liberally and paid taxes cheerfully. It is, perhaps, the first time in history when raising billions to carry on a war became an inspiration for mobilization and patriotism. This plain statement of how the Federal Reserve System met the unprecedented demands of war without a strain is proof of its wisdom in that emergency as well as in normal times.
Long before he was thought of for the Presidency, when he was teaching his classes in political economy, Professor Wilson made a study of the currency and banking p166 system, and pointed out the need of change. The defects of the old currency system had been seen for a generation, and there had been endless talk of reforming it, but the matter ended in talk. Following the panic of 1907, a committee headed by Senator Nelson W. Aldrich was appointed to study the banking and currency question. Experts were employed, and the commission visited Europe and held many hearings and conducted many inquiries. A program, the chief feature of which was a central bank, was worked out. But ever since Andrew Jackson smashed the central bank of his day, popular sentiment has been hostile to such a system and the Aldrich plan was dropped. The country was to worry along for seven more years, with ever-present danger of panic with all its train of unhappiness, until there should emerge a "head", a leader with the vision to see and the power and the will to do. In shaping the new legislation, the idea was to get away from anything like a central bank. The members of Mr. Wilson's party were particularly hostile to such a bank.
In his inaugural address, President Wilson placed the currency system second among "the things that ought to be altered." Briefly, he gave as the reason for proposing a change, that we had "a banking and currency system based upon the necessity of the Government to sell bonds fifty years ago and perfectly adapted to concentrating cash and restricting credits."
As soon as the first item of "the things to be done," reforming the tariff, had passed the House, President Wilson took up the second item, reforming the currency. On the very evening at the White House that he signed the tariff bill, President Wilson told the little company assembled that "we are about to take the second step." p167 Answering in advance the suggestion ready to be made that this should wait for the December session, Wilson asked: "For what do we wait? Why should we wait to crown ourselves with consummate honor? Are we so self-denying that we do not wish to complete success?"
On June 23, 1913, President Wilson, on a sweltering day, so hot that members of Congress longed to get away from Washington, read his message, urging early action on currency reform. He said, "Personal comfort, perhaps, in the case of some of us, considerations of personal health even, dictate an early conclusion of the deliberations." But he added: "There are occasions of public duty when those things that touch us privately seem very small," and he declared, "We are in the presence of such an occasion." He told Congress that, following setting business free by removing the trammels of a protective tariff, there "will follow a period of expansion and new enterprise, freshly conceived." He lucidly set forth the legislation needed: "We must have a currency, not rigid as now, but readily, elastically responsive to sound credit, the expanding and contracting credits of every day transactions, the normal ebb and flow of personal and corporate dealings. Our banking laws must mobilize reserves; must not permit the concentration anywhere in a few hands of the monetary resources of the country or their use for speculative purposes in such volume as to hinder or impede or stand in the way of other more legitimate, more fruitful uses. And the control of the system of banking and of issue which our new laws are to set up must be public, not private, must be vested in the Government itself, so that the banks may be the instruments, not the masters, of business and of individual enterprise and initiative." The legislation when enacted was in p168 line with this admirable chart which he gave to those who were to frame it and pilot it through Congress.
President Wilson did not, of course, write the Federal Reserve Act. But Senator Glass said: "The one man more responsible for the Federal Reserve System than any other living man is Woodrow Wilson. It was his infinite patience, it was his clear prescience, it was his unsurpassed courage, it was the passion of Woodrow Wilson to serve humankind that overcame every obstacle, that surmounted every difficulty, and that put the Federal Reserve banking system on the federal statute books of this country." After its preparation, but before final conferences with the leaders in Congress, he submitted it to Mr. Bryan for his suggestions and indorsement. As drawn, the measure would have permitted the banks to issue their notes. Mr. Bryan quoted the declarations of several Democratic platforms to the effect that the issuing of money was a government function and should not be exercised by banks. Wilson and Bryan went into the matter fully. Wilson examined the evidence which Bryan presented. He was convinced that the change suggested by the Secretary of State was wise. It was made, and the bill, as introduced and passed, provided for the loaning of Government notes to the banks instead of the issuing of bank notes. This agreement on the Federal Reserve System by the two leaders of the party insured a practically solid support in Congress.
Looking back upon the benefits of the Federal Reserve System and the universal approval of the policy (criticism has been heard only of its administration, and the people must be careful to see that those who administer it carry out the spirit of the system as stated by Wilson when it was proposed), it might be supposed p169 there was the same unanimity of sentiment when it was under consideration. Far from it. There was no such visible lobby in evidence fighting it as had gathered in Washington when the tariff was in the making. Wilson had driven them out as with a whipcord as polluters of the civic temple. But if the lobby was not so much in evidence, it was none the less present and active.
During the long-drawn‑out fight in the Senate, a few of the most influential big bankers of the country arrived in Washington one night. There was no announcement of their arrival. They found quarters at the Army and Navy Club. Senators and others called for conferences. Why were these magnates at the Army and Navy Club? That question interested a young naval officer. He casually mentioned their presence to a member of the Wilson administration holding an unimportant position. The names of all the visitors and the length of their stay were reported to the White House. Soon the big men, accustomed to dictate national financial policies, saw that in Wilson they had measured swords with the victor in the contest — the contest to determine whether the Government or private financiers should rule. Sensing defeat, and hoping to secure some change in the measure, they requested a conference with the President. It was declined. He sent them a studiously polite and frigid reply that he knew of their futile efforts to defeat the measure, that he had the fight won, and did not care to discuss the measure with them. It was in rather more crisp language. Perhaps the words were curt. They meant: "You tried to lick me. I have licked you to a frazzle and will accept nothing but complete victory."
The favorite weapon in legislative antagonism to a measure is to "kill it with kindness" — that is, to propose p170 some unobjectionable amendments along with a battalion of amendments that are barbed with destruction. That was the plan of opposition determined upon by the foes of currency reform. Some excellent amendments, afterwards incorporated in the measure, were offered by Senators seeking sincerely to perfect the bill. But in some great banking houses, where a Reserve system, with twelve Federal Reserve headquarters in all parts of the country to decentralize financial operations, was not received with favor, men were busy writing amendments calculated to cut the heart out of the Wilson plan. They were fired down to Washington. Some of them found their way into the hands of Senators and were offered on the floor.
Ex-Senator Aldrich, whose measure had been turned down by a previous Congress, came to Washington to oppose it. Appearing before the Senate Committee, he declared the Glass-Owen measure was "an important step toward changing the government from a democracy to an autocracy." Senators who had defeated the Aldrich plan had declared they opposed it because it would give to Wall Street dominance of the financial life of the nation — an autocracy of unregulated private wealth controlling the currency and banking of the country. If they were in any sense right, and if Aldrich had any right in his contention, the difference was this: The Aldrich measure practically created an autocracy of finance by bankers not governed by law, whereas the Glass-Owen measure placed the entire control of the currency of the nation in the hands of officials selected and paid by the Government. If it should become "autocratic", the people's representatives can regulate and change.
p171 Heads of strong banking institutions voiced opposition. For example, Frank A. Vanderlip, of the National City Bank of New York, speaking before the American Bankers' Association, October 30, said: "It starts the country on an issue of fiat currency. There is no case in our history when a nation has started an issue of fiat money but the result has been a complete breakdown of the financial system of the country." That expressed the attitude of most of the heads of the big banking institutions and that point of view was voiced by Senators in long continued debate.
Experience proves they were wrong and Wilson was right. Vanderlip, on the last day of the Victory Loan, taking him by the hand, said to Carter Glass, then Secretary of the Treasury: "Glass, I want to say to you, that but for the Federal Reserve System we would never today be consummating a Victory Loan."
Wilson's guiding and determining hand was seen from the writing to the passage of the measure. Senator Carter Glass, of Virginia, Chairman of the House Committee on Banking and Currency, gives an illuminating statement of Wilson's superior wisdom. Glass originally believed the banks of the country should have minority representation on the central board at Washington which supervises the entire system. "I thought," he said, "that inasmuch as the banks owned the system, the government not being required to put up one dollar of government funds, the stock-holding banks should have the right to name minority representation on this central board."
Glass thus describes Wilson's contrary point of view and the result of a conference in the White House:
p172 "But the President of the United States did not think so. I regarded his decision in that respect for a while as politically inexpedient and fundamentally wrong. I thought it was politically inexpedient because I conceived the notion that it would be impossible to get the legislation through if we did not let the banks have representation upon this central board. It was hard enough to get it through anyhow; it was the most terrific fight that ever was had. We got it through in the face of the opposition of near every bank in the United States.
"The President did not agree with me. I did not sleep any that night, and before I dressed the next morning I wrote him a letter telling him exactly what I thought about it. I don't reckon he ever got such a letter before in his life. His reply was that he was 'not at all disturbed about the political inexpediency of the proposition'; he did not propose to apply politics to the problem at all. But if I could convince him that it was 'fundamentally wrong,' then he would change his mind. And I tried to convince him.
"About two days afterwards I arranged for an interview with him with seven of the greatest bankers of the United States, and headed the procession to the White House to convince Woodrow Wilson that he was wrong about this thing. They stated their case with great fervor, force and persuasiveness. I said nothing, because I had written all I had to say on the subject. When we were through, Mr. Wilson quietly turned in his chair and said, "Gentlemen, I challenge any one of you to point to a government board, in this country or anywhere in any other civilized country, upon which private interests are permitted to have representation.'
"In other words the Federal Reserve Board is an p173 altruistic body representing all the people of the United States, put there for the purpose of supervising this great banking system and seeing that no section and no class is discriminated against in its administration. Its members are not permitted to have any banking affiliation or connection at all. They are not permitted to own bank stock of any description. There is no single element of acquisitiveness in the whole formation of that board or in its operation. The Board is there to represent the people of the United States; and you might as well talk about giving the railroads of this country the right of minority representation on the Interstate Commerce Commission, appointed to supervise the railroads, as to talk about giving the banks minority representation of the Federal Reserve Board — and I didn't have sense enough at first to see it."
The fact that, after the measure carrying all the essential provisions Wilson insisted upon was enacted, leading financiers in the country co‑operated to make it the great success it has been demonstrated, is proof of the best American spirit.
The long-drawn‑out fight consumed three whole months. The measure reached the Senate on September 18. It was not until December 23, at 6 o'clock, that the President signed the epoch-making measure. "It is a Christmas present for the American people," its supporters declared as the chief executive attached his name to the act. During all the hot days of summer and the long contest that ran through the autumn and into the winter, President Wilson never yielded in his determination to secure legislation that would put an end to the concentration of reserves, a policy which had been found to operate to the advantage of the speculative interests p174 at the expense of the farming and commercial interests.
For a long time there had been demand for better credit facilities for farmers. Under Wilson's leadership the Congress met this need by enactment of the Federal Farm Loan Act. Under it the farmer could for the first time negotiate loans on a long-term basis. By the terms of the act twelve Federal land banks were created, loans to be made to farmers for productive purposes only, through national farm-loan associations. Provision was also made for private land banks under government supervision. The new rural credits system is directed by a Federal Farm Loan Board on which President Wilson appointed capable officials. It has been calculated that if fully availed of, the rural credits legislation would save the farmers of the country sixty-six million dollars a year.
Credit was set free.
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