The Money Answer
Morgan hadn’t been well when the hearings began, and the strain of dueling with Untermyer and dealing with reporters wore him out. He was seventy-five years old and longed to escape from the cares of business. By annual habit he updated his will as 1913 began, and he set forth on a vacation cruise shortly after. One of his private steam yachts had gone ahead to the Nile, and the vessel carried Morgan and his party south to the temples at Luxor. The craft was as fast as any afloat—Morgan regularly traded up—but its progress failed to satisfy him. He grew increasingly, and uncharacteristically for him on holiday, impatient. He couldn’t sleep and fell into a depression. The doctors he kept on retainer were summoned from New York, and the vacationers turned back down the Nile. They steamed to Italy, where the art dealers he had patronized for years prayed for his recovery. But his nervousness increased, his insomnia grew more intractable, and his heart raced and stuttered. He developed a fever from a cause the physicians couldn’t identify and took to bed at his usual suite in Rome’s Grand Hotel. He died on March 31.
Morgan’s intimates were sure they knew the cause of the death: Pujo and his inquisitors had done the great man in. “Within three or four months,” a Morgan partner recalled, “out of a seemingly clear sky, his health failed and after a two weeks’ illness, from no particular malady, he died.” The frustrated doctors agreed, with one declaring, “I wish Untermyer and the Pujo Committee were where I would like them to be!”
The reading of the Morgan will surprised many of his contemporaries. His estate, exclusive of his art collection, amounted to a mere $68 million. “And to think, he was not a rich man,” mused Andrew Carnegie, who had personally pocketed $225 million from the sale of his steel business to Morgan’s U.S. Steel trust.
NO ONE QUITE knew it at the time, but Morgan’s passing marked the end of an age. The revelation of his comparative penury made his money power all the more impressive, for it showed what reputation and connections could do. And it doubled the resolve of the progressives to curtail the influence of those money men who hankered to succeed Morgan. Within months President Wilson went to Congress to demand legislation revamping the American money system. Proposals for a new central bank had circulated since the Panic of 1907; the problem was to determine whether it should be a private bank, like the first and second Banks of the United States, or a public bank. The bankers and most capitalists favored the former; as always they feared the baleful influence of democracy on the management of money. The progressives contended that democracy was the only solution to the nation’s money woes; hadn’t the recent investigations revealed that the capitalists regularly conspired against the public interest? Money was too important to be left to the money men.
The debate raged in the press, in the corridors of Congress, and in the saloons of Washington, but in the end something remarkable occurred. After twelve decades of bitter conflict between the capitalists and the democrats over the money question, the two camps reached a compromise. Their solution wasn’t elegant; many thought it downright ugly. The Federal Reserve Act of 1913 created a hybrid system combining important elements of both capitalism and democracy. The twelve Federal Reserve banks were privately capitalized but answered to a board appointed by the White House. Gold remained the basis of the money supply, but the Federal Reserve Board, by manipulating interest rates and the reserve requirements of member banks, could strongly influence bank lending and thereby provide the “elastic currency” the drafters of the legislation agreed the country required.
Certain provisions of the act turned out to be more significant than the drafters or the debaters realized. The Reserve banks were empowered to buy and sell government securities; this power became the basis for fine-tuning the money supply. The board of governors was authorized to tax the Reserve banks to pay its operating expenses; this freed the board from dependence on Congress.
Both the capitalists and the democrats might have fretted more about what they didn’t get in the new system had greater worries—and opportunities—not emerged within months. In August 1914 Europe went to war. The capitalists soon began floating loans to the belligerents, while the democrats—or most of them, initially—tried to keep the war from sucking America in. The democrats’ avoidance strategy failed, not least because the capitalists’ lending strategy succeeded so well. By early 1917 the bankers had sent some $2.3 billion to Europe, with the overwhelming majority of the money going to Britain and France, which had stronger ties to Wall Street than Germany had (and a more successful naval blockade of enemy ports). A defeat of the British and French, whatever it might do to the balance of military and moral power in Europe, would break the American banks and likely ravage the American economy. Woodrow Wilson was no cat’s paw for the capitalists, but he couldn’t ignore reality, and his policies tilted increasingly toward Britain and France, culminating in American intervention on their side in April 1917.
The American war effort, besides securing the bankers’ portfolios, produced a revolution in federal finances. A new income tax, authorized under the recent Sixteenth Amendment, was dramatically expanded during the war. Because the part of the American workforce that received cash incomes had continued to grow dramatically—by 1915 only about three workers out of ten still toiled on farms—the modern income tax stood on a much broader base than the Civil War version, and it allowed what proved to be a permanent shift away from the tariff as the primary source of government revenue. By war’s end the tax rates on the highest incomes reached 67 percent.
The first serious test of the Federal Reserve system in its role as arbiter of the nation’s money occurred during the decade after the war. The Fed lowered interest rates, in part to encourage Europeans to invest at home, in order to reconstruct the plant and infrastructure ravaged by the war. But the cheap money triggered speculation, and a large bubble developed in the American stock market. The Fed thereupon raised interest rates, yet not enough to halt the speculation, which grew ever more frenzied till the bubble burst in October 1929. As in previous panics, money disappeared amid the crumbling of banks and the flight of investors.
At this point the Fed should have loosened the strings, but it didn’t. The democratically appointed governors as yet knew too little about money and banking to realize what was required, and the capitalists in the Reserve banks continued to think too much like bankers to take the risk. The only person who might have stepped Morgan-like into the breach had lately died. Benjamin Strong had been president of Bankers Trust in Morgan’s day and had learned from the master the art of managing the nation’s money. After Morgan’s passing he accepted appointment to head the New York Federal Reserve Bank, where he wielded an influence that reflected both his own self-confidence and the first-among-equals status of the New York bank. Strong was the one who shaped the easy-money policy of the early 1920s and the shift to greater stringency as the stock market soared. Strong understood the potential of the Fed for dealing with financial crises. “The very existence of the Federal Reserve System is a safeguard against anything like a calamity growing out of money rates,” he wrote. “We have the power to deal with such an emergency instantly by flooding the Street with money.” But Strong died in 1928, and when the emergency he foresaw developed, no one had the nerve to open the sluice gates. The Fed kept interest rates high, with the result that the American money supply contracted by a strangling one-third.
The Fed wasn’t alone in fumbling policy as the Great Crash became the Great Depression. Congress and Herbert Hoover collaborated to raise taxes and reduce spending, on the reasoning that government should tighten its belt along with everyone else, when lower taxes and higher spending would have helped pull the economy out of its downward spiral. Congress raised tariff rates, and Hoover approved them, in the hope of preserving the home market for domestic producers. But the tariff increase encouraged foreign countries to retaliate, sparking a trade war that beggared the entire Atlantic neighborhood.
The international aspect of the depression was what drove Franklin Roosevelt to implement the dream of William Jennings Bryan. The depression forced Britain off the gold standard in 1931; the consequent devaluation of the British pound gave Britain a competitive advantage in trade with other countries. Roosevelt refused to cede the market without a fight and in 1933 suspended redemption of dollars by gold, effectively taking the United States off the gold standard. Congress ratified his decision several months later, consigning gold to the dustbin of American monetary history. Gold would make an international comeback at the end of World War II, but for America’s domestic purposes it ceased to exist as money at the beginning of 1934. The call of Bryan for silver had never been so much about silver as about gold; by nixing gold Roosevelt and the New Deal Congress finally gave the aurophobes what they wanted.
In doing so they left the country more reliant on the Fed than ever. The central bank learned from the depression and never repeated its deflationary mistake. During the following decades it occasionally erred in the opposite direction, doing too little in the 1960s and 1970s to counteract the inflationary triple whammy of Great Society social spending, Vietnam War military spending, and OPEC-extorted energy spending. (It was during the early 1970s that Richard Nixon took the United States off the international gold standard, thereby completing Roosevelt’s Bryanic work.) But behind the leadership of Paul Volcker, the Fed in the 1980s eased the economy to a soft landing. And under Volcker’s successor, Alan Greenspan, the Fed acted with dispatch and verve after a stock market crash in October 1987, flooding the markets with the cash Benjamin Strong had prescribed for such an event in the 1920s and preventing the stock swoon from becoming a general swan dive.
The economic boom of the 1990s made Greenspan a capitalist hero and then a political icon. Presidents of both parties basked in his celebrity. The bursting of the tech bubble at the beginning of the twenty-first century dimmed the Greenspan glow somewhat, but again the Fed kept the woes of the stock market from depressing the larger economy. The millennium recession was, by long-term historical standards, shallow and brief.
By those same historical standards, such debates as the recession evoked were polite and subdued, which underscored how completely the money question had vanished from American politics. The passion that had fueled the fight over Alexander Hamilton’s Bank of the United States, that had driven Andrew Jackson and Nicholas Biddle to mortal combat over the second Bank, that had caused the Treasury Department to stiff Jay Cooke even as the Union depended on the bonds he sold, that had surrounded Jay Gould’s raid on the nation’s gold supply, that had made J. P. Morgan the most feared, hated, and indispensable man in America, had gone into other issues. The capitalists and the democrats still fought, but no longer over money per se. The ceasefire they achieved with the creation of the Federal Reserve held firm, nine decades after their heavy artillery and sniping rifles fell silent.
Money men still prowled the political economy, seeking their own interest and sometimes the nation’s. A few, like Greenspan, became household names. But with the money question long since answered—as fully, at any rate, as it was likely to be answered in America—they lacked the notoriety and in nearly all cases the influence of the giants of the past. Money policy was far more successful than when those giants had battled, but it was also far less entertaining.