Wilson, then, who perceived a way of reconciling the radicals' demands for decentralization with the practical necessity for centralized control-the idea of the Federal Reserve Board. At the end of January 1913, Willis and Glass presented their revised plan to Wilson. The reserve system was to include 15 or more regional banks, owned and controlled by the member banks, which would hold a portion of member-bank reserves, issue currency against gold and commercial assets, and be controlled by a Federal Reserve Board of six public members and three bankers chosen by the directors of the regional banks. Wilson was delighted; but the Democratic Party was almost split in the ensuing storm of protest, for Glass and Willis had merely drafted a somewhat decentralized Aldrich Plan, with control once again in the hands of bankers. In response, the left wing of the Party demanded public control of the Board and complete government responsibility for the issue of currency. Both Secretary of State Bryan and Robert L. Owen, Chairman of the Senate Committee on Banking and Currency, were adamant on these two points, and Owen made it known that he had drafted a bill of his own. Secretary of the Treasury William McAdoo, fearing that the scheme would die in intra-Party squabbling, resolved to find a solution. With the help of John Skelton Williams, soon to be Comptroller, and Senator Owen he prepared the outline of a new bill, which called for a National Reserve Bank in the Treasury Department, to have 15 branches and be administered by a National Reserve Board of political appointees. A National Currency Commission functioning in the Treasury would issue the currency. Glass was dismayed upon reading the bill, for he was convinced that Williams and Owen were the real authors. When he asked McAdoo if he were serious about the proposal, the Secretary bluntly replied: "Hell, yes!” Glass now felt that hope for currency reform was dim, for to Party opposition on the left was added the hostility of the nation's leading bankers on the right. Backed by James B. Forgan and A. Barton Hepburn, former Comptroller of the Currency and president of the ABA's Currency Commission, Glass had a showdown with the President. Wilson agreed to support the Glass bill and to insist upon two provisions calculated to mollify the Democratic radicals-governmental control of the Federal Reserve Board and a currency issue that would consist of obligations of the United States. The Glass-Owen bill still had to confront the hostility of the banking community. At a last-minute conference held on June 25, attended by McAdoo, Glass, Owen, and five members of the Currency Commission, the President agreed to several changes demanded by the bankers. Among 4 3 See Gerald T. Dunne, “A Christmas Present for the President," Business Horizons, 6, Winter 1963, especially pp. 47-54. 4 Members of the ABA Currency Commission in attendance were James B. Forgan, George M. Reynolds, Festus J. Wade, Sol Wexler, and John Perrin. Federal Reserve Bank notes were provided originally as a replacement for national-bank currency. Three-times issued (for various reasons) and three-times withdrawn, Federal Reserve Bank notes (as distinguished from Federal Reserve notes) are no longer in circulation. them was a change in the provision to end the bond-secured note circulation of national banks. In order to protect the banks' large investment in the 2 percent bonds that supported the national currency, it was agreed that national-bank notes would be gradually retired, the 2 percent bonds redeemed, and new notes issued to replace them. More important was the President's concession to establish a Federal Advisory Council, composed of representatives of the banks in each region, in lieu of banker representation on the Federal Reserve Board. Banker opposition nevertheless remained almost unanimous. Many wrote Hepburn and Forgan protesting the disposition of the national-bank notes and the principle of coercion embodied in the bill. Bank executives did not understand the reason for retiring the national-bank notes, which as late as 1913 seemed to be part of a bank's public image. The issue of coercion was emotionally charged. One banker wrote: "I am unwilling to be forced into taking stock in a bank or anything else that I have no active voice in managing." The growing disposition on the part of the Administration to force national banks into system membership also disturbed the Currency Commission. On December 9, two weeks after the bill had been brought to the Senate floor, John Perrin wrote Senator Owen: Two alternatives must be faced: Either the possibility must be considered of the Government promoting the establishment of an entirely new banking system with a view to driving out of existence in considerable measure the existing banks, or, on the other hand, present banks generally must be influenced either by compulsion or inducement into participation.5 A compromise proposal would have extended the transition period by six years to 1920. But two days later the Glass-Owen bill was amended so that refusal to accept the terms of the Act within 60 days would bring punitive action. Perrin again tried to change the attitude of the bill from threatened punishment to promised rewards, arguing that special advantages should be offered to those banks subscribing early. Forgan continued to insist that there should be no compulsion requiring the national banks to comply or be dissolved. Despite the unremitting efforts of banking's leadership, coercion remained a feature of the Act. It would be mandatory for all national banks to become members of the new Federal Reserve System. National-bank officers, alarmed over these and other provisions, began talk of withdrawing from the national banking system. "After a careful reading of the Bill," wrote one irate president, "will have to say, most emphatically, I do not see a single thing to recommend it from the standpoint of our little Bank." Another small-town banker wrote from Texas that a large majority of the country banks would surrender their national charters. John Hamilton warned, "This measure would certainly drive 60 per cent of the national banking institutions out of business and cause them to re-organize under state charters.” In July a Boston banker wrote: “I am considering the policy of endeavoring to get the banks here to join in a statement to the powers at Washington that they might withdraw from the national system if the bill went through in its present form.” Even Forgan threatened to withdraw his powerful and financially important First National Bank of Chicago. Removing himself from the emotional impact of the law upon the national bankers, he assessed the effect of the new legislation: The fact that a large number of national banks are likely to withdraw from the system, or to put it in another way, the fact that the bill will not be sufficiently attractive to induce the national banks generally to go into it and will certainly have no attractions for State banks appears to me to be the most alarming thing in connection with the bill, and it is most desirable that the attention of the powers at Washington should be drawn to it. If the bill is not sufficiently attractive to draw the national banks generally into the system and 5 James B. Forgan Papers, The First National Bank of Chicago. 6 Ibid. to attract the larger State banks through the country the result will be a complete fiasco . . . as it would mean the complete destruction of our present national banking system because all the national banks refusing to go into it must either continue under State charters or be dissolved. .7 Forgan was in a sense correct, for events would soon prove that membership in the new system had few attractions for banks having an option. Nevertheless, confronted with the choice of giving up their national charters or staying in the new organization, most national bankers decided to remain, realizing as they did that their remonstrance had helped to forge a statute that would be tolerable. On December 23, 1913, President Wilson signed the bill establishing the Federal Reserve System. Some 80 years after they let the previous central bank die, Americans reluctantly accepted once again the idea of a central bank. In an illusory attempt to decentralize authority, a Federal Reserve Bank was organized in each of 12 districts, each district enclosing an area of similar economic activity and containing enough banking resources to support a strong Reserve Bank. The system was to be headed by a Federal Reserve Board of seven members, including ex officio the Secretary of the Treasury and the Comptroller of the Currency and five others to be appointed by the President. Membership in the System would be compulsory for national banks; state banks, upon compliance with certain requirements, might become members. Upon joining the System, a commercial bank was required to purchase shares of the capital stock of the Federal Reserve Bank of its district up to the amount of 3 percent of its combined capital and surplus (another 3 percent might be required). Thus, member banks nominally owned the Federal Reserve Banks, with a limitation on the annual return to their stock of a 6 percent cumulative dividend. But three of the nine directors of each Bank were to be appointed by the Board in Washington, one of them to be designated Chairman of the District Bank and Federal Reserve Agent. The Act originally provided that member banks might retain a part of their reserves as cash in vault, but in 1917 the rule was changed to require all the legal reserves of member banks to be in the form of deposits with the Federal Reserve Bank of its district.9 The framers of the Federal Reserve Act did not intend that the new central bank should execute a monetary policy directed toward stabilizing the economy. In fact, the Federal Reserve did not seriously undertake such responsibility for nearly four decades after its founding. Nevertheless, the 7 James B. Forgan to Thomas P. Beal, July 29, 1913, James B. Forgan Papers, The First National Bank of Chicago. 8 There is little question that the framers of the Federal Reserve Act intended Federal Reserve Agents to be the chief executive officers of the several Banks. But the district boards, six of their members elected by the member banks of the district, designated a "Governor" as chief operating officer, and the Agent gradually assumed only an advisory and ministerial role. 9 Beginning November 24, 1960, all currency and coin held by a member bank could once again be counted as reserves. |