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  Quickly on the heels of the Panic, the economic contraction deepened. As bank reserves dwindled, banks were forced to curtail loans. The stock market plunged approximately 40 percent. Iron and steel production was severely reduced. Many factories shuttered or went part-time due to the lack of currency for wages. The severity of the depression astonished businesspeople, not least because it had struck during a period of prosperity. The country’s railroads had been profitable, its farmers rich.

  Such chaos in the midst of plenty convincingly demonstrated, at least to bankers such as Warburg, that the system had to be redesigned. Morgan’s heroics notwithstanding, America’s finances were too complex to rely on a single banker or group of bankers. What Strong had witnessed on the pavement outside the Knickerbocker led him and other Wall Street bankers to strongly endorse reform.

  Morgan was disinclined to join a crusade; however, Stillman, burdened by the responsibility of propping up failing banks, experienced a change of heart. Several weeks into the Panic, he ventured the short distance to the offices of Kuhn, Loeb. Unannounced, he made his way to the émigré banker he had first met four years earlier. He found him there, as he was before.

  “Warburg,” he barked, “where is your paper?”

  “Too late now, Mr Stillman,” Warburg replied sadly. “What has to be done cannot be done in a hurry. If reform is to be secured, it will take years of educational work to bring it about.”

  Soon after this encounter, Warburg reignited the public debate with a letter to the Times in which he argued that only “a modern central bank” could cure America’s ills. By “modern,” Warburg meant “European”—that is, managed by private bankers. Warburg was mistrustful of American democracy, which was too popular (or populist) for his ordered Germanic tastes. He feared leaving banking in the hands of politicians and proposed a central bank governed by “our best trained business men.” Progressives, on the other hand, saw banking as a public trust. To farmers, westerners, and others, the Panic was proof that Wall Street and business in general were unworthy of such a trust. Critics tartly observed that even in their rescue efforts, Morgan and other bankers were seeking a profit. The farther from the Hudson River one traveled, the less benign their motives looked.

  One episode in particular soured the public on Wall Street. At the beginning of November, Moore & Schley, one of the most prominent brokers on the stock exchange, was suddenly threatened with bankruptcy. Since Moore & Schley owed money to banks up and down the Eastern Seaboard, Morgan had reason to fear that its failure would spark fresh waves of panic. The solution he hit upon was to unload a major asset of Moore & Schley, its holding of stock in Tennessee Coal, Iron & Railroad Company. The difficulty was that the natural buyer for Tennessee, and the one to whom Morgan turned, was the giant U.S. Steel Corporation. Morgan had a personal attachment to U.S. Steel, a prized client, which he had organized in 1901 to consolidate (some said monopolize) the steel industry. And although the sale of Tennessee achieved his aim of averting a major brokerage failure, this solution was not as disinterested as Morgan’s other rescues. Also, U.S. Steel obtained, on an expedited basis, a personal assurance from President Roosevelt that the acquisition would not be attacked on antitrust grounds. Thus, the deal reeked of political favoritism as well.

  The fairest conclusion was that private industrialists should not be entrusted with the degree of power wielded by Morgan (the deal itself, given the severity of the crisis and the lack of other buyers, was probably in the public interest). However, Morgan’s standing with the public suffered. Some critics asserted that Morgan had contrived the entire panic. Senator Robert M. La Follette, a Wisconsin progressive and enemy of corporate power, charged that a “group of financiers who withhold and dispense prosperity” had “deliberately brought on the late panic, to serve their own ends.” The President, who respected Morgan, wrote disapprovingly to his brother-in-law that the public had “passed thru the period of unreasoning trust and optimism into unreasoning distrust and pessimism.” (Such cycles are not unknown today.) People were so shocked by the repeated scandals and by the “trickery and dishonesty in high places,” Roosevelt wrote, “they have begun to be afraid that every bank really has something rotten in it.”

  Since the time of Jackson, anti-banker hysteria had been a predictable American response to financial turmoil. Wall Street was often depicted as scheming and conspiratorial and, indeed, omniscient and all-powerful. Barely had the Panic ended when Alfred Owen Crozier, a prominent Ohio attorney and critic of Wall Street, penned The Magnet, a novel that depicted the Wall Street “machine” as an “inscrutable and mysterious power” that serves “its invisible master, undetected, with . . . infallible accuracy.” Crozier was outflanked by the better-known Upton Sinclair, whose 1908 novel The Money Changers featured a Morgan-like figure who deliberately orchestrates a panic. The view of Morgan as inciting a crisis was a gross misreading of the man. His signature projects, such as consolidating bankrupt railroads and organizing trusts, always served the goal of greater order in commercial life. That his deal making tended to replace cutthroat competition with more gentlemanly collusion, and to augment profits, is without a doubt. Morgan’s business arrangements were based on his deep-seated preference for stability and his loathing for the chaos that capitalism often produces. In 1907, Morgan had done his level best to forestall the chaos, and it was not enough.

  One more nuanced analyst was Woodrow Wilson. Formerly an economics lecturer, the university president was as unsettled as were many Americans by Wall Street’s risk taking and by the concentration of Wall Street power. Bankers, he insisted, should be “statesmen”—leaders in society—rather than mere profiteers. Wilson was dismayed by corporate greed and wrongdoing, which he believed to be widespread, yet he acknowledged there was nothing in the Constitution that forbid “accumulation” by business. The only way to reconcile the conflict between human avarice and the general welfare, he suggested in an interview in the Times soon after the Panic, was to put society on a moral footing. Where Wilson differed from many progressives was that he was willing to recognize morality, or at least civic purpose, in men of business and finance. He saluted Morgan, albeit with the air of a high-minded professor looking down on the Wall Street scrum. “I am glad to see,” Wilson said puckishly, “that in the midst of all this turmoil of undefined wickedness, Mr. Morgan’s name has not been among the celebrities. He seems to have kept his hands clean and his reputation clear of any dishonor.” But not even Wilson thought morals alone could do the trick. Currency reform was long overdue, he said: “The European currency system is far better than our own.”

  Reform was suddenly the rage. Proposals poured into Congress. Over the winter of 1907–1908, Columbia University sponsored a series of lectures by prominent bankers, including Vanderlip, Perkins, and Barton Hepburn. The symposium was organized by Edwin Seligman, the professor who had prodded Warburg to publish, and who now persuaded him to appear, for the first time, on an American stage. Warburg unapologetically advised that America’s system was inferior to those in Europe. In fact, he said, it suffered in comparison with that of the ancient Babylonians. Warburg made the trenchant distinction that banks in Europe, being “fully protected” by balances with their central banks, could lend freely in times of distress, whereas, during the recent American panic, as if in some topsy-turvy universe, “the banks, instead of disbursing their cash, begin to accumulate and actually to hoard currency.” The Columbia lectures, which were published in book form, introduced the arguments for centralization to a wider public.

  However, the Warburg view remained a minority one. Even most bankers were fixated on an asset currency—the idea floated at the Indianapolis convention for a currency based on individual bank loans. Because this would further fracture the country’s money, it was the opposite of what Warburg hoped to accomplish. He recognized that the political climate was hostile to a complete remake of the system; therefore, he craftily styled
his newest plan a “modified” central bank. His “modified” bank was an attempt to split the difference—in effect, it was an umbrella organization of clearinghouses that would issue currency and provide a unified source of support for banks, even if it was less than a full central bank. The fear of arousing popular opposition tilted him toward a federal structure, a pattern that would recur down to the very day of the Fed’s enactment.

  Although Warburg’s arguments appealed to a handful of journalists and professors, he had no audience where it counted—in Congress. As a German national, Warburg had no entrée on Capitol Hill, where the asset currency notion held sway. Frustrated at being ignored, Warburg harbored a particular resentment of Senator Aldrich, who wielded the power in the upper chamber and who, as Warburg understood it, would never permit the system to truly change.

  Aldrich, now sixty-six, had spent a quarter century defending the status quo in money, tariffs, and railroad regulation. He was enamored of the system of National Bank Notes secured by government bonds, and his usual contribution to the subject of reform had been to propose more such bank notes. He had little appreciation for the system’s vulnerability, and much less had he foreseen the recent trouble. He had gone on his annual sojourn to Europe in the spring of 1907 and returned to Warwick, the magnificent estate he was building on Narragansett Bay, in July, in time to supervise the installation of a greenhouse with a multitude of orchids. His enjoyment of such labors was cut short by the sudden collapse of the banking system. The magnitude of the Panic jolted him. At a minimum, Aldrich realized that, for political reasons, legislation would be necessary. The Republicans could not face the electorate in 1908 without having enacted a reform. He also experienced, if not full-fledged doubt, a stirring of curiosity about what had gone wrong.

  With banking conditions returning to normal, in late December the senator made inquiries on Wall Street, and found his way to Kuhn, Loeb. His ostensible purpose was narrow: he wanted to question Jacob Schiff about the law under which Germany issued government bills. Schiff called in a colleague who, he said, was better informed: Paul Warburg. Gazing on Aldrich for the first time, Warburg was struck by the sharp nose, the piercing eyes, the high color framed by the bushy eyebrows and mustache, and, above all, the “strong and clear forehead, the head erect upon the broad shoulders.” In spite of his resentment, Warburg could not resist trying to engage the senator. The conversation became broader; Warburg ventured into the forbidden territory of centralization. Perhaps to quiet this simmering volcano, Aldrich said that Warburg could send him material for further reading. As Aldrich departed, Warburg mused to himself, “There goes currency reform.”

  Schiff advised that it would be a grave mistake to write to Aldrich. Warburg ignored him. The next day, he sent the senator a copy of his “A Plan for a Modified Central Bank.” Four days later he wrote to him again. Now that the volcano was uncapped, there was no restraining it. “Did not the last panic show that we are suffering from too much decentralization of our banking system and from the absolute impossibility of securing any concerted action as to the free use of our reserves?” the banker demanded. He continued with a diatribe pleading for order, coherence, centrality—all the traits he found lacking in banking in his adopted home.

  Senator Aldrich did not reply.

  CHAPTER FIVE

  THE CROSSING

  This central reserve, or whatever name we may give to it, must be a sacred institution, run for the public weal.

  —PAUL WARBURG

  Well timed reform alone averts revolution.

  —THEODORE ROOSEVELT, citing Turgot

  IN THE YEAR FOLLOWING the Panic of 1907, Congress crafted a legislative response that was, for the most part, disappointing. It had not thought to study the Panic; its legislation was guided by politics. But almost as an afterthought, Congress did move the ball forward. Before the year was out, an American delegation led by Nelson Aldrich would fan out across Europe for the purpose of understanding just how banking on the Continent differed from that in America. Aldrich himself made a remarkable swing toward reform. Somewhere between the old bookshops in London and the elegant hotels of Paris, the senator, perhaps for the first time since his youth, became inspired by the classical models of Europe. His transformation was nothing short of startling. After Aldrich’s return, Paul Warburg began to think that serious monetary reform just might be possible. Realizing he had become hooked on his mission in the New World, Warburg took the decisive step of applying for American citizenship.

  But 1908 did not start auspiciously for reformers. The two chambers of Congress—each of them, like the White House, in Republican hands—wrangled over distinct bills, Aldrich being the author of the Senate version and Representative Charles Fowler, the champion of asset currency, leading the way in the House. Neither bill had the ambition or scope that a meltdown such as the Panic of 1907 demanded. Warburg sent a congressman a copy of his “modified” central bank plan, hoping Fowler would introduce it. The gambit went nowhere. Central banking was too hot to handle even had the members favored it, which most did not.

  The Aldrich bill proposed, controversially, to let banks issue notes backed by their investments in railroad bonds. This gift to the railroads (similar to an earlier Aldrich proposal) betrayed his peculiar knack for inflaming the popular will against him. Railroads were widely resented, as much for the sumptuous mansions in Newport where industry barons summered as for their allegedly unfair rates. Western senators would not abide a favor to the rails, and the provision was stricken. That still left Congress splintered. Since Aldrich could not get his plum for the rails, he favored the status quo: currency based on government bonds. The House bill authorized currency supported by individual bank loans—precisely what La Salle Street had long demanded. Late in May, George Perkins updated J. P. Morgan, who was in London, on “the final failure” of the bill, adding, “We are all thoroughly disgusted over the condition of things in Washington.”

  But Congress fashioned a compromise after all, an odd slice of legislative sausage known as the Aldrich-Vreeland Act. The law, adopted at the end of May, authorized banks to form local currency associations and, with the approval of the Treasury secretary, to issue additional National Bank Notes in an emergency.* There was little enthusiasm for the bill among bankers, and none among the public. Warburg feared that Aldrich-Vreeland, which did little for his cherished idea of centralizing reserves, would defuse support for genuine reform. In short, it might be worse than nothing. The saving grace was that the law would expire in 1914. Thus it was a stopgap, not a solution. To underline the point, the law provided for the establishment of a National Monetary Commission, consisting of eighteen members of Congress, to study the defects in America’s banking system and offer an enduring remedy. In this circuitous way, the bill offered possibility.

  Aldrich was named the commission chairman; many assumed he would use the post to bury reform for good. On the Senate floor, however, he let slip the suggestion of bolder purpose, as if envisioning the potential for crafting a legacy as he entered the twilight of his career. “Thoughtful students of economic history,” Aldrich noted, in a clear allusion to Warburg, “who are led by the experience and practice of other commercial nations . . . favor some plan for a central bank of issue.” Although Aldrich gave himself political cover by insisting that America was not yet ready, he expressed a belief that, eventually, the country would adopt such a plan. This was a major concession.

  Given carte blanche to do as little or as much with the commission as he chose, Aldrich ordered a vast research effort, which led to the publication of a shelf of books covering the monetary history and practices of nations around the world. It was a boon to the obscure field of financial history, as the financial historian James Grant would cheekily point out, and a few volumes, such as Oliver Sprague’s History of Crises Under the National Banking System, are studied to this day. If most of the commission’s work would ultimately gat
her dust, Aldrich sensed that an ambitious project required a proper foundation, a bibliographic heft, to be treated with the requisite gravitas.

  From the beginning, Aldrich treated his fellow commissioners as ciphers. Few had either banking experience or clout on the Hill. Aldrich controlled the meeting agendas as well as press statements, which were studiously bland and designed to keep the commission out of election-year news. Aldrich did seek help—just not from the other commissioners. At the suggestion of Charles William Eliot, the long-standing president of Harvard University, Aldrich hired Piatt Andrew, the economics professor, as his assistant and in-house expert. Aldrich also sought the advice of J. P. Morgan, who urged that Aldrich enlist the services of the banker Harry Davison.

  Morgan had been so impressed by Davison’s efforts during the Panic that he sought permission, over a friendly dinner with George Baker, head of the First National, to lure Davison to Morgan’s. The move did not occur until the end of 1908, but Aldrich was fully aware that the Monetary Commission was taking on an adviser who answered to the most powerful man on Wall Street. Aldrich, of course, saw nothing wrong with government and business joining forces. Perkins, a less-than-discreet Morgan executive, let fly in a cable to the boss: “It is understood Davison is to represent our views and will be particularly close to Senator Aldrich.”

  Such a communiqué, had it become public, would have destroyed the commission before it even got started. It is worth noting that, even while one Morgan lieutenant (Davison) was teaming up with Aldrich, another (Perkins) was furiously lobbying Congress to weaken the antitrust law, imploring the administration for gentle regulatory treatment of select Morgan clients, and overseeing a collusive effort by rival railroad executives to jack up freight rates. Lending a trusted man to a public commission was wholly congruent with how moguls of the era operated. Quiet alliance with the government was always preferable to noisy confrontation.