The National Monetary Commission: American Banking’S Debt to Europe

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The National Monetary Commission: American Banking’S Debt to Europe 1 The National Monetary Commission: American Banking’s Debt to Europe Zack Saravay Honors Thesis Submitted to the Department of History, Georgetown University Advisor: Professor Katherine Benton-Cohen Honors Program Chairs: Professors Amy Leonard and Katherine Benton-Cohen 8 May 2017 2 Table of Contents ACKNOWLEDGEMENTS ........................................................................................................................ 3 INTRODUCTION ....................................................................................................................................... 4 HISTORIOGRAPHICAL REVIEW .................................................................................................................. 6 Creation of the Federal Reserve ........................................................................................................... 7 Progressive Era Economics ................................................................................................................ 13 BACKGROUND – THE NATIONAL BANKING SYSTEM (1863-1908) ......................................................... 15 CHAPTER I. ORIGINS OF THE NMC (1908) ...................................................................................... 25 THE BATTLE FOR CURRENCY REFORM ................................................................................................... 25 THE ALDRICH-VREELAND ACT ............................................................................................................... 28 COMPOSITION AND SCOPE OF THE NMC ................................................................................................. 35 CHAPTER II. THE NMC TURNS TOWARD EUROPE (1908-1910) ................................................ 40 ACQUISITION OF MATERIALS .................................................................................................................. 40 THE NMC INTERVIEWS GERMAN BANKERS ........................................................................................... 53 NMC VOLUMES ON GERMANY AND THE REICHSBANK.......................................................................... 57 CHAPTER III. FINAL REPORT OF THE NMC (1911-1912)............................................................. 63 THE PRINCIPAL DEFECTS OF THE AMERICAN BANKING SYSTEM ........................................................... 66 THE ALDRICH PLAN................................................................................................................................. 72 THE ALDRICH PLAN IN CONGRESS .......................................................................................................... 78 CONCLUSION .......................................................................................................................................... 83 THE FEDERAL RESERVE ACT AND THE ALDRICH PLAN .......................................................................... 83 LASTING SIGNIFICANCE OF THE NMC .................................................................................................... 88 APPENDIX ................................................................................................................................................. 92 BIBLIOGRAPHY ...................................................................................................................................... 94 3 Acknowledgements Thank you to my advisor, Professor Katherine Benton-Cohen, for consistently providing brilliant feedback, for pushing me to become a better writer and historian, and for providing levity during stressful times. Thank you to Professor Amy Leonard, who did an excellent job directing the seminar and guiding me and my classmates through this process. Thank you to my mom, who instilled in me a passion for history, and to my dad, who taught me how to construct good arguments and write clearly. Both of you have supported me at every step of my academic journey. Thank you to all of my friends who have put up with me as I bored them about obscure details of economic history. Thank you in particular to my girlfriend, Nicole, whose support and advice have been invaluable. Thank you to the reference staff at the Library of Congress Manuscript Reading Room, who helped me to explore the Aldrich Papers and assisted me when I struggled to use the microfilm reels. And thank you to my thesis seminar classmates, for your comments and suggestions, which have been immensely helpful, and also for your friendship, which has made this process a lot more enjoyable. I give permission to Lauinger Library to make this thesis available to the public. 4 Introduction In 1907, the United States experienced one of the worst financial depressions in its history. As the economy grew rapidly during the first years of the 20th century, burgeoning businesses and ambitious merchants turned to banks for loans. As the boom continued, American banks relied upon the Bank of England to help finance the ongoing expansion. But the British soon became worried that American banks were loaning money too freely – a bubble was forming. In late 1906, the Bank of England pulled the rug out from under the American financial system, hiking interest rates by 2.5 percent. As capital flowed out of the United States and back to Europe, Wall Street grew worried. Over the next year, the economic growth slowed to a crawl, but disaster did not strike until the fall of 1907. As the demand for money surged during harvest season, the already strained banks were unable to meet customers’ withdrawal requests.1 According to Frank Vanderlip, vice president of National City Bank, the country’s largest bank, a “sudden, unreasonable, and overpowering fright” quickly spread through “all the human herd.”2 As consumers lost confidence in the banks, the situation worsened. The stock market plunged and cash became scarce. A November 24 New York Times article said, “The thing which is hardest for the average man to understand is why there should be such a scarcity of money at a time when prosperity is abroad in the land, … the crops of the country are good, and the price of labor high.”3 Unfortunately, the leaders of the country understood the problem little better than the average man. 1 Details about the Panic of 1907 from Myron T. Herrick, “The Panic of 1907 and Some of Its Lessons,” Annals of the American Academy of Political and Social Science, 31(March 1908): 308-325; Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (Hoboken, NJ: John Wiley, 2007). 2 Roger Lowenstein, America's Bank: The Epic Struggle to Create the Federal Reserve (New York: Penguin, 2015), 60. 3 “All Records Broken in the Making of Money,” NY Times, November 24, 1907. 5 By the early twentieth century, the United States had grown into one of the industrial superpowers of the world, with output rivaling that of Britain. However, America’s highly localized banking system was unable to meet the needs of its surging economy, as evinced by the many financial panics in the late nineteenth and early twentieth centuries. The Panic of 1907 served as a jarring reminder of the deficiencies of the National Banking system. Congress’ response, the Aldrich-Vreeland Act of 1908, which only slightly increased the power of national banks, was a temporary fix rather than a permanent solution. The one bright spot in the otherwise underwhelming legislation was the establishment of the National Monetary Commission, a study group headed by Senator Nelson Aldrich (d. 1915), a towering and controversial figure in Progressive Era politics. The NMC faced an enormous challenge: fixing a fragmented, outdated banking system that was supposed to serve the world’s largest economy. To meet this challenge, the commission members did not start from scratch, but instead turned toward Europe for answers. During the next two years, the commission produced a prodigious amount of literature about banking systems in Europe, the United States, and around the world. The commission’s publications are among the most comprehensive sources about nineteenth- and twentieth-century banking systems and its recommendations were integral to the establishment of the Federal Reserve. In their final report, the commissioners included a bill, commonly known as the Aldrich Plan, which proposed a central banking authority called the National Reserve Association. Because of the American public’s deep-seated skepticism of central banking, Aldrich and his colleagues took pains to distance their legislation from European-style central banking, portraying it as an “essentially American” plan.4 Although the 4 Report of the National Monetary Commission (Washington, DC: Government Printing Office, 1912), 41. 6 Aldrich bill failed to pass through Congress, it served as the foundation for the Federal Reserve Act that passed two years later. Scholars have largely taken the commissioners’ words at face value, reiterating the claim that the Federal Reserve was a uniquely American institution. While it is true that the Federal Reserve’s structure was the product of American political compromises, it is misleading to say that it was an essentially American institution. This thesis will argue that European banking systems, particularly that of Germany, served as an invaluable model for the members of the National Monetary Commission and heavily influenced its recommendations. Further, it will demonstrate that the National Monetary Commission’s European research and subsequent banking reform
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