Capital of Capital: Money, Banking+Power in New York City 1784

Donnelly’s was not a lone voice. In the years after the Civil War, an array of reformers and activists tailored old Jacksonian fears about the power of banks to new financial and social realities. Although the movement ultimately gained its greatest momentum among farmers and townspeople in the West and South, even New Yorkers took part. In 1876, for example, Peter Cooper, a New York City inventor, manufacturer, and philanthropist, ran as the presidential candidate of the small Independent Greenback Party against the Republican Rutherford Hayes and the Democrat Samuel Tilden. Although the 85-year-old Cooper attracted a mere 81,000 votes nationwide, less than 1 percent of the ballots cast for president, he continued to sound warnings that echoed Donnelly’s. In an open letter to President Hayes in 1877, Cooper beseeched him to “lead the people from a threatened bondage that now hangs over the liberties and the happiness of the American people”—a bondage to the “money-power” of the 2,000-odd banks scattered across the country. Cooper’s and Donnelly’s assertions were persuasive to many in New York City’s burgeoning labor movement who viewed the nation’s industrial economy as a battleground between “producers” (those who created real value by making handicrafts and industrial goods or harvesting crops) and “nonproducers” (greedy employers, lawyers, speculators, and bankers who manipulated prices, workers’ wages, and credit without creating real commodities themselves). Into the mid-1880s, New York members of the Knights of Labor and the Central Labor Union proclaimed their opposition to the “money power” and banker control of the currency; in the nation’s first Labor Day parade in Union Square in 1882, workers carried placards demanding “NO MONEY MONOPOLY.”2

The power of Wall Street was undeniably real, and the city’s very rise to national primacy owed much to the ability of its bankers to attract and redirect the nation’s wealth and generate new wealth. Many Americans feared the unsettling changes that accompanied this financial growth. For them, “big business” meant a new economy in which a small number of large corporations dominated markets; violent strikes pitted labor unions against bank-financed railroads and mining companies; prosperity periodically gave way to devastating “crashes”; and the luxuries of 60-room mansions contrasted starkly with the miseries of overcrowded tenements, or for that matter, with the modest virtues of middle-class homes. More broadly, many ordinary Americans were troubled by an economy that seemed increasingly beyond their control. In this new post-Civil War America, complex, incomprehensible, and hidden forces appeared to be interfering with the free operation of the laws of supply and demand that had governed an older, arguably simpler national economy. For many Americans bewildered or frustrated by economic change, the accumulation of economic power in the hands of railroad “tycoons,” large industrialists, and financiers was both the source and the symbol of these unsettling developments. Consequently, many took alarm at the concentrated and seemingly inscrutable power that bankers and their associates now possessed, viewed as a threat to the nation’s very survival as a democratic republic. While Boston, Philadelphia, Chicago, and other major cities also concentrated this power, they appeared as mere spokes to the hub of New York City.

Over the next 35 years, Cooper’s argument that New York bankers were wringing economic and political power out of “the toiling masses of the American people” resonated in the thinking and activism of numerous American radicals, insurgents, writers, politicians, and voters. Several generations of reformers—Greenbackers between the late 1860s and the 1880s, Populists in the 1890s, and “progressives” in the 1900s and 1910s—viewed Manhattan as a financial octopus whose tentacles threatened to entangle ordinary Americans from coast to coast. Some critics denounced Wall Street in order to contain what they saw as new urban threats to older American values, including the alleged greed and influence of foreigners and Jews or the threat of a monopolistic “Money Trust.” Some offered relatively sophisticated plans to remake or regulate Wall Street “for the people” by expanding the currency supply in order to lower interest rates for ordinary borrowers, raise the prices paid to farmers and small business owners, and prevent financial panics and depressions.3

Yet the sheer centrality and reach of New York’s banks in the nation’s economy meant that most efforts at reform—whether through elections, legislation, official inquests, or new regulatory bodies—achieved minimal success. Wall Street banks continued to play an unrivaled role in accumulating wealth and shaping the country’s financial, commercial, and industrial growth, despite the most strenuous efforts of critics who saw them as dangerously omnipotent. Ironically, it was New York bankers themselves—buoyed by their growing influence and power, and troubled by the inefficiency and economic damage triggered by dramatic swings in the availability of credit and currency—who became the most successful reformers of their own institutions. The longest-lasting financial innovation to emerge from this era of ferment—the creation of the Federal Reserve System in 1913—would largely be the work of New York financiers. Thus, as Americans grappled with unprecedented economic change, New York’s banks and bankers would be critical actors as well as symbols and targets.

Consequently, most New York bankers wanted the federal government to resume the gold standard that had been abandoned in December 1861, when New York banks, the U.S. Treasury, and then the rest of the nation’s banks stopped paying out gold in exchange for paper currency as an emergency measure during the Civil War. Resumption of gold payments by the Treasury—the return to the gold standard—meant that the federal government would limit the amount of paper money in circulation so that the gold dollar coin and the paper dollar bill would be equivalent and exchangeable in value, buying the same amount of merchandise in the marketplace and guaranteeing the “honest” repayment of what debtors owed their creditors. Although bankers and other advocates of “sound money” embraced a wide variety of opinions about the timing and details of gold resumption, many believed that the government’s legal tender greenbacks would have to be reduced drastically, leaving National Bank Notes (a separate form of paper currency controlled by the National Banks established during the war) to circulate alongside gold (and some silver) coins. The most adamant “sound money” advocates embraced the “cremation theory of resumption,” under which the Treasury would burn the greenbacks it received in payments and exchanges to ensure that they would never reenter circulation.8

Greenbackers had a diametrically opposed understanding of how things should work. For them, a limited gold supply meant that powerful bankers and creditors in New York and other large cities could control the entire economy to serve their own self-interest rather than the welfare of the American people. A contracting currency—a money supply that grew smaller as greenbacks were phased out and gold and National Bank Notes remained static—meant that ordinary farmers and small businesspeople would be squeezed to pay back loans in money that was more valuable than when they borrowed it, giving banks an extra and undeserved profit. As the amount of circulating currency decreased, debtors would also face deflated prices for the crops or goods they sold. Instead of appeasing gold plutocrats, Greenbackers argued, the U.S. government should protect the people by maintaining and if necessary expanding the issue of greenbacks to keep the money supply apace with population and economic growth.

New York’s banks played a vivid and sinister part in Greenback ideology. Greenbackers (and the Populists who followed them in the 1890s) did not always fully understand the mechanics of New York’s domination of the nation’s banking system, but they did grasp that the city’s banks played an outsized role in controlling the flow of available capital in ways that could hurt farmers and small businesspeople. Some currency reformers knew that Wall Street’s accumulation of deposit reserves from “country” banks—sanctioned by the National Banking Act of 1864—thwarted borrowers in the West and South. By requiring National Banks across the country to keep capital reserves in New York City banks, the 1864 law in effect siphoned money from banks in rural western and southern states and put it in the hands of Wall Street bankers.

The New Yorkers, in turn, profited by lending the reserves to brokers and speculators on the New York Stock Exchange and other exchanges. In the 1870s, these “call loans” were about one-third of all loans made by National Banks in New York City, and that proportion would increase to about half before the end of the century. While the call loans helped make the NYSE the nation’s securities marketplace and greatly fueled railroad and industrial expansion, they also shifted capital out of agriculture, thereby contributing to tighter credit and higher interest rates in many parts of the West and South. Meanwhile, when those western and southern banks called back surplus deposits from New York in the fall to finance the annual harvesting and shipment of crops, the resulting shortage of call loan money on Wall Street repeatedly helped trigger financial panics, runs on banks, market slumps, and economic depressions that spread from Manhattan to the rest of the nation—as they did in 1873 (and would do again in 1884, 1893, and 1907). For financial insurgents, the concentration of these rural bank deposits in New York—and the way they fed speculative fever in the stock market and disastrous cycles of boom and bust for everyone else—proved that a financial monopoly based in New York jeopardized the country’s well-being and survival.

The Populists believed that New York City, controlled by a small handful of despotic bankers, had displaced Washington, D.C., as the nation’s capital. “The Government itself lies prone in the dust with the iron heel of Wall Street upon its neck,” declared Tom Watson of Georgia, the Populist candidate for vice president in 1896. Comparing the gold-obsessed bankers to their Tory predecessors during the American Revolution, William “Coin” Harvey, a leading Populist writer, charged in 1894 that “the business men of New York passed strong resolutions against the Declaration of Independence in 1776, and they are passing strong resolutions against an American policy now.” Mary E. Lease, the Kansas Populist orator, further claimed that this financial aristocracy controlled the fate of the country. “A few men in New York may meet at a wine supper and decree a reduction of wages for a million men, thus inviting a strike that might paralyze the industries of the whole nation, precipitating riots that might give a pretext for calling out national troops” to crush the desperate strikers. At the ballot box, as in their publications, Populists called on the people to reduce the power of Wall Street, expand the currency, and restore the republic.9

While a radical egalitarian impulse ran through Populism, prompting its spokesmen to call for low-interest government loans to farmers, a federal takeover of railroads and telegraph lines for public benefit, the creation of savings banks in post offices, and the abolition of commodity and stock exchanges, the movement’s obsession with conspiracy theories led many Populists to embrace less liberal ideas. According to Populist pamphleteers, behind Wall Street lay the power of London banks, especially the Bank of England, which dictated a gold-based currency in order to enslave Americans to British greed. Greenbacks and/or silver would bring a truly patriotic currency, free of the control and taint of foreigners. Just as sinister, Populists saw the influence of Jews in every financial measure they hated. August Belmont, the German-born Jew who had been chairman of the Democratic National Committee in New York and funded a number of “sound money” publications and political candidates, became a special target of Populist wrath due to his role as American agent for the Rothschild bank of London. The fact that the Rothschilds and other European investment bankers bought large blocks of U.S. government bonds, usually through Wall Street banking houses, allegedly gave them an ominous influence over federal policies. Populist writers and speakers repeatedly warned of the devious power of “Wall Street, and the Jews of Europe,” or “Jewish bankers and British gold.” The aim of “Shylock,” pamphleteer Sarah Emery contended, was “to rob the people through exorbitant rates of interest.”¹⁰

Despite their bigotry, Morgan and other gentile bankers also worked with Jews in campaigns against the common “soft money” enemy. New York financiers responded to the crusades of Greenbackers and silver advocates with energetic counterattacks. In 1877, a delegation including J. P. Morgan, Joseph Seligman, and the First National Bank’s Francis O. French traveled to Washington to lobby the Senate against enacting “dangerous” inflationary laws; George Coe of the American Exchange Bank, private banker Levi P. Morton, and August Belmont also helped mobilize pro-gold businessmen to petition Congress. In the 1890s, bankers James Stillman and James Speyer were active in the New York Reform Club, an organization dedicated to sponsoring pamphlets, speakers, and mass meetings nationwide in support of “honest money” (gold) against the silver activists.

The 1896 Republican presidential campaign against William Jennings Bryan similarly required widespread support from New York’s banking community. When the Democratic and Populist parties both chose Nebraska’s pro-silver Bryan as their candidate, Republicans and alienated “Gold Democrats” across the country looked to Manhattan for aid in electing William McKinley, “the Advance Agent of Prosperity.” Bankers played a major role in raising money from the business community to defeat Bryan, a man many saw as a wild-eyed radical who would bring “Populistic communism … and anarchism” to the White House. Pressed into service by Mark Hanna, McKinley’s campaign manager, numerous New York bankers and industrialists, including railroad magnate James J. Hill and the National City Bank’s William Rockefeller, raised $3 million of the then-staggering total of $3.5 million that flowed into the Republican campaign chest. Hill and Hanna literally spent five days on Wall Street going from office to office, soliciting funds. Hanna’s systematic canvassing of bankers and corporate leaders helped to inaugurate modern campaign finance in America. It also proved highly effective in promoting McKinley’s candidacy.¹²

Along with business opposition, Bryan’s inability to secure widespread labor or urban support for his campaign pitting “The People” against “Wall Street” doomed the Populist crusade to failure; the movement’s antiurban and antiforeign biases held little appeal in the nation’s burgeoning immigrant cities. Economic changes undercut a revival of rural insurgency thereafter. In the late 1890s, an expanding demand for food in American cities and European markets—two traditional sources of corruption in Populist thinking—raised crop prices and launched two decades of prosperity for farmers. An upsurge in the number of state-chartered banks and revised rules that made it easier to open National Banks in smaller cities and towns increased the availability of bank credit and equalized interest rates across the country. Gold rushes in Australia, Canada, and Alaska increased the world supply of the metal, amplifying the nation’s circulating currency without dramatic greenback or silver expansion. Yet although Populism died as a movement, much of its moral outrage remained, carried forward by socialists, labor unionists, and reformers who had joined Populists in calls for the regulation or even overthrow of concentrated finance capitalism. In the 20th century, conflict would resume over the threats to opportunity, equality, and democracy that many Americans still saw when they looked in the direction of Lower Manhattan. The locus of dissent, however, shifted from farmers’ halls to urban magazine offices, middle-class living rooms, and legislative hearings.

As the nation’s media capital, New York was now the incubator as well as the target of banking controversy. The publishers and editors of mass-circulation magazines like McClure’s, Collier’s, and Everybody’s dispatched reporters to expose corruption and abuses of power wherever they found them—in monopolistic corporations like the Standard Oil Company, in Tammany Hall and other urban political machines, even in the U.S. Senate. Headquartered in Manhattan, these “muckraking” magazines often had offices only a few blocks from the subjects of their investigations.

Wall Street’s turn came in 1904–05, when Everybody’s Magazine—a periodical of general interest for middle-class readers—ran a series of articles in 1899 entitled “Frenzied Finance” by Thomas Lawson, a Boston stockbroker with inside information on the creation of the large Amalgamated Copper Mining Company—the “Copper Trust.” Lawson detailed how the merger of copper companies had been orchestrated by the National City Bank, managed by James Stillman and his brother-in-law William Rockefeller (brother of Standard Oil magnate John D. Rockefeller). Lawson also asserted that this “‘Standard Oil’ bank,” as he called it, played a dominant and hidden role in the city’s booming insurance industry. He painted a picture of wealthy New York-based life insurance firms—New York Life, Equitable, and Mutual Life—linked to financial houses and industrial corporations by bankers who sat on the boards of all the intertwined companies, unbeknownst to policy holders, many shareholders, and the general public. Lawson charged that large banks like National City had the power to invest the money of insurance policy holders and investors as they chose; the results were personal windfalls for bankers and insurance executives, financial disaster for unknowing shareholders, and a concentration of power in the hands of a small number of banking tycoons who pulled the strings of the nation’s largest companies. Lawson intended his revelations to restore accountability and fairness to big business. “Every scoundrel with a mask, dark-lantern, and suspicious-looking bag will stand out so clearly that he cannot escape the consequences of his past deeds,” he proclaimed.14

Lawson’s sensational articles alarmed middle-class readers, who believed hidden speculation jeopardized the security of vulnerable policy holders, despite the avowals of company heads that bank-directed investments actually guaranteed payments on policies. “Frenzied Finance” prompted calls for governmental investigation. By mid-1905, New York State’s Superintendent of Insurance was advocating “the elimination of Wall Street control” over the industry. The ensuing Armstrong Committee inquiry in the New York State legislature in 1905-06 followed up on Lawson’s charges. The committee’s counsel, Manhattan lawyer Charles Evans Hughes, examined an array of witnesses from New York’s business community in an effort to determine what role commercial and investment bankers played in controlling insurance company investments, and to what extent they were colluding—creating a conflict of interest—by selling corporate stocks and bonds to themselves in their role as directors of insurance companies.15

The inquiry revealed the extent to which American big business and big banks now conducted their business with each other in the same set of Wall Street and Midtown boardrooms. George W. Perkins, vice president of New York Life and a Morgan partner, meant to reassure the Armstrong Committee when he described his multiple roles: “Mr. Chairman … I know when a transaction comes to me, whether it is in J. P. Morgan & Company, or the New York Life or the Steel Corporation, or whatever it may be, I take up that question and dispose of it as I see my duty.” Such comments, which revealed the concentrated power hidden from the public, alarmed many New Yorkers who followed the investigation in newspapers and magazines. The Armstrong Committee concluded that life insurance companies were investing millions of dollars of their funds in corporate securities sold by the investment bankers sitting on their boards. To end the speculative risk to policy holders and the conflict of interest such investments represented, the New York State legislature passed laws in 1906 prohibiting life insurance companies from buying corporate stocks, barring them from taking part in syndicates organized by bankers to underwrite new corporate securities, and preventing insurance executives from personally investing in and profiting from company transactions. By 1908, 19 other states had also enacted “Armstrong” laws.¹⁶

Other aspects of Wall Street banking also struck Pujo investigators as troubling signs of the concentration of financial power. For example, as private partnerships, investment houses were legally immune from routine government inspection, unlike state-chartered commercial and savings banks or federally incorporated National Banks. The resulting secrecy of investment banks like Morgan and Kuhn, Loeb, and the unwillingness or inability of their partners to divulge the details of specific relationships and transactions, disturbed congressmen seeking what we would today call transparency. Another worrisome aspect of Wall Street practice was the fact that much of the capital used by investment banks consisted of “other people’s money” in the form of multimillion-dollar sums deposited in the banks by the corporations whose bonds and stocks the banks issued. Corporation shareholders thus had neither control over nor knowledge of how their investments were being used by bankers. The committee majority’s final report affirmed that there was, indeed, a “Money Trust” that “resulted in great and rapidly growing concentration of the control of money and credit in the hands of these few men.”¹⁸

The Pujo Committee devised and recommended some creative proposals for diluting the power of the Money Trust, albeit through indirect means. Samuel Untermyer, the committee’s legal counsel, believed that this could be done by imposing state and federal supervision on the New York Stock Exchange, through which the banks marketed securities; prohibiting National Banks from underwriting and selling stocks and bonds; and requiring interstate corporations to use multiple banks to market their securities, thus avoiding exclusive reliance on one powerful banking house and the syndicate of compliant banks it assembled to raise capital. Such measures would not only prevent monopoly but also restore the transparency that Americans needed to understand what was happening to finance and industry. “Publicity is justly commended as a remedy for social and industrial diseases,” asserted the lawyer Louis D. Brandeis, a key advisor to the new Democratic president, Woodrow Wilson, and author of “Other People’s Money and How the Bankers Use It,” a series of scathing articles in Harper’s Weekly in 1913–14. “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” A disgruntled J. P. Morgan echoed his adversary: “The time is coming when all business will have to be done with glass pockets.” Shortly after Morgan’s death in 1913, his son and successor, Jack (J. P. Morgan, Jr.), along with four of his senior partners, voluntarily resigned from the boards of dozens of corporations, in his words, to appease “public feeling” aroused against J. P. Morgan and Company by the Pujo Committee “and the press generally.”19

Measures enacted in response to the Pujo report, most notably the Clayton Antitrust Act passed by Congress in 1914 with Wilson’s support, left much to be desired in the eyes of reformers. As originally conceived, the Clayton Act was supposed to ban interlocking corporate directorates and shareholdings and permit the federal government to launch aggressive prosecutions of individuals and corporations for breaking the law, with fines and prison sentences as penalties. These regulations, Brandeis and others concluded, would break up the hidden concentrations of power devised by bankers and their corporate clients and help restore a marketplace where smaller, newer economic units—both banks and industrial concerns—could compete and distribute opportunity and wealth in a far fairer and democratic way. But after being watered down by the Senate Judiciary Committee, the final draft actually made prosecutions difficult by requiring the government to prove that bankers had substantially lessened competition when they sat on the boards of multiple corporations or controlled securities in an array of interlocking banks and companies. As one disappointed senator put it, the Clayton Act originally “was a raging lion with a mouth full of teeth. It has degenerated into a tabby cat with soft gums, a plaintive mew, and an anaemic appearance.” Moreover, President Wilson himself, forced to balance the conflicting desires of progressives and financial conservatives in Congress and in his own Democratic Party, appointed conservatives to the new Federal Trade Commission established in 1914, men largely uninterested in limiting big banks and corporations. Uneasy about censuring or alienating businessmen who could help the national economy recover from an ongoing recession, Wilson ultimately drew back from the radical implications of his own Jeffersonian rhetoric about the dangers posed by concentrated bigness. Additionally, no securities market regulation—a lynchpin in Untermyer’s plan—passed Congress. Nor would Republican Presidents Harding, Coolidge, or Hoover, enthusiastic champions of the efficiency and prosperity ostensibly promoted by unfettered business, make regulation of big banks or corporations a federal priority during the 1920s.20

Financiers fought back actively against the reformers. A new trade association, the Investment Bankers Association of America (IBA, 1912), representing 373 investment firms in New York, Chicago, and 40 other cities, publicly denounced both the Pujo majority report and Brandeis’s Harper’s articles. The IBA also lobbied state legislatures to modify “Blue Sky laws,” a series of statutes first enacted by several states between 1911 and 1916 to regulate the advertising and sale of securities. The laws, meant to protect ordinary consumers from being sold fraudulent, worthless, or misrepresented stocks and bonds by brokers and bankers, were so named because of the notion that security salesmen would try to sell ignorant buyers the “blue sky” itself if they could get away with it. In response, the New York-based Banker’s Magazine contested the idea of protecting consumers in 1912 by arguing that “there is little ground for government intervention to save the fool and the knave [i.e., the stock or bond buyer] from the consequences of his own folly and knavery.” Nevertheless, Blue Sky laws were ruled constitutional by the U.S. Supreme Court in 1917 and by 1933, had been enacted in all the 48 states except Nevada. New York’s Martin Act, passed in 1921, came to be considered one of the most sweeping and aggressive of these anti-financial fraud laws. Yet, while the state laws protected consumers against unscrupulous sales practices, they reduced banking consolidation no more effectively than did the Clayton Act. One lasting effect, however, was to teach bankers in New York and elsewhere that in a new world of mass journalism, insurgent politics, advertising, and public relations, financiers had to embrace tactics (associations, speeches, circulars, periodicals, op-ed articles, lobbying campaigns) to challenge the arguments of reformers and convince consumers, voters, readers, and officeholders of the integrity, safety, and necessity of the nation’s large banks.26

Historians, most notably Vincent P. Carosso, have largely agreed with the bankers concerning the nonexistence of an effective “Money Trust.” Rather than colluding to keep corporations from seeking lower fees or better services, Wall Street banks competed for clients, even though Jacob Schiff and other Pujo witnesses admitted that they valued stability and long-term relationships with their corporate clients. The formation of bond- or stock-issuing syndicates by Morgan or Kuhn, Loeb was a constantly shifting process involving hundreds of banks and brokerages across the country, even if the most important players were in New York. The fact that bankers sat on numerous corporation boards, moreover, did not mean that they held an iron grip on the policies and decisions of those companies; managers and shareholders often welcomed their expertise, advice, and reputations as corporate assets.

And yet, if progressives exaggerated the monopolistic grip that Wall Street banks held on the American economy, the grievances they aired—the power and secrecy of large corporations; the ability of those corporations to determine labor conditions, wages, and consumer prices; bank and business influence in politics and government—struck a deep chord among millions of Americans. New York bankers had created a new economy, daunting in the sheer scale and consolidation of its resources and influence. “There is a close and well-defined ‘community of interest’ and understanding among the men who dominate the financial destinies of our country and who wield fabulous power over the fortunes of others,” Samuel Untermyer had claimed in a 1911 speech at Manhattan’s West Side YMCA. His charge continued to resonate among ordinary Americans in New York and across the country.²⁷

In November 1910, Republican Senator Nelson Aldrich of Rhode Island, chairman of the National Monetary Commission established after the 1907 panic, convened a meeting of the nation’s leading bankers at an exclusive resort on Jekyll Island, Georgia. Aldrich invited Assistant Treasury Secretary A. Piatt Andrew; Paul Warburg of Kuhn, Loeb; Frank Vanderlip of National City Bank; Morgan representatives Henry Davison and Benjamin Strong, Jr.; and Charles Norton of the First National Bank of New York to hammer out a plan to remedy the shortcomings of the National Banking System. According to one estimate, the assembled New Yorkers represented about one-quarter of the world’s wealth at the time. Aldrich insisted on the utmost secrecy for the meeting, and the bankers left New York via a Jersey City train station, posing as duck hunters, a ruse that did not fool snooping reporters. “Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness,” a journalist later recalled, “… sneaking onto an island deserted by all but a few servants” in order to shield from public view “this strangest, most secret expedition in the history of American finance.” Aldrich meant the privacy to allow the bankers to debate different approaches to the politically controversial issue of a central bank. Its lasting impact was to prompt speculations by generations of conspiracy theorists that the Federal Reserve was a Wall Street plot to manipulate the economy.28

The result of the Jekyll Island conference and Aldrich’s National Monetary Commission studies was a series of recommendations that shaped the Federal Reserve Act. After much debate and disagreement both inside and outside Congress, planners and legislators sought to steer a middle course between the criticisms of ex-Populists, westerners, and southerners who feared a system empowering the big banks of the Northeast, and the reservations of urban bankers alarmed by potential government control of American finance. When passed by Congress with Wilson’s support in 1913, the act established 12 districts across the country, each with a Federal Reserve Bank. All National Banks were legally required to become members by buying stock and depositing reserves in their district’s “Fed” bank. State-chartered banks were invited to join under similar conditions. A Federal Reserve Board of Governors in Washington—consisting of the Treasury Secretary, the Comptroller of the Currency, and five presidential appointees—controlled the system. But the act sought to defuse fears of concentrated power by giving considerable decision-making autonomy to the 12 Federal Reserve Banks, each of whose nine-person boards balanced Washington appointees with directors elected by local member banks, only three of whom could be bankers. Three of the board members in each of the 12 districts would be chosen from among local businessmen and civic-minded citizens who, presumably, would provide a popular and democratic counterbalance keeping bankers from monopolizing Fed policy. This initial diffusion of power was partly a political concession to fears of Wall Street control, a lasting if indirect legacy of Greenbackism, Populism, and progressive reform.

New Yorkers played a seminal role in the early years of the Federal Reserve System. Wilson asked the German-born Paul Warburg of Kuhn, Loeb, one of the system’s most important intellectual architects, to join the Federal Reserve Board of Governors in Washington. A surprised Warburg commented, “I did not think the President would be at all likely to submit the name of a man associated with one of the leading Wall Street firms.” Indeed, Warburg’s nomination prompted a resurgence of Populist anger; Congressman Joe Eagle of Texas declared that he would oppose the appointment because Warburg was “a Jew, a German, a banker and an alien.” Yet the nomination helped to reassure many bankers who were as suspicious of government intervention as old Populists were of Wall Street machinations. The Senate confirmed Warburg, and he served on the board until 1918.29

When it was fully implemented in 1914, the Federal Reserve System created a flexible national money reserve that seemed to remove the threat of depleted bank vaults—especially New York City’s—triggering nationwide panics and depressions. During World War I, the Fed’s interest-rate policies helped to expand the nation’s money supply to meet wartime needs; however, the Fed later inadvertently helped to exacerbate postwar inflation and recession. Not until the 1920s did Fed authorities, most notably the confident Benjamin Strong, Jr.—Jekyll Island conferee, former vice president of the Morgan-controlled Banker’s Trust of New York, and now Governor of the Federal Reserve Bank of New York—realize that there was another efficient way to regulate the nation’s money flow. By buying and selling securities—especially U.S. government notes—on a mass scale, the Fed could swell or shrink the commercial bank accounts of investors, thus regulating the amount of money in bank reserves across the country so as to ensure stability and liquidity. If the Fed believed that available money was growing too scarce, it could buy large amounts of bonds on the open market, leading the sellers to deposit Fed payments in their banks and thus expanding available capital for loans, payments, and cash. If the Fed feared that too much money in circulation was producing inflation, it could sell bonds, absorbing money from the buyers and removing it from their commercial bank accounts and the economy.

Calls for reform and regulation would be muffled in the postwar era. Following the 1917 Bolshevik Revolution in Russia, wartime campaigns against domestic radicals helped feed a “Red Scare” in 1919-20 targeting communists, anarchists, and labor unions, making any criticism of American business—or banking—potentially dangerous. True, some voices continued to assail Wall Street, including Senator Robert La Follette of Wisconsin, who ran unsuccessfully as the Progressive Party candidate for the presidency in 1924. His ally in the House of Representatives, a young resident of working-class Italian East Harlem named Fiorello La Guardia, nominated La Follette by declaring, “I speak for Avenue A and 116th Street, instead of Broad and Wall.”³¹

Wall Street also suffered a violent attack on September 16, 1920 when an explosion ripped through the intersection of Wall, Broad, and Nassau Streets, killing 38 people and wounding 143 others. The bomb had been planted at the symbolic crossroads of American capitalism, between J.P. Morgan & Company at 23 Wall Street, the New York Stock Exchange across Broad Street, and 26 Wall Street, recently vacated by the U.S. Subtreasury. Although nobody ever claimed responsibility for the bombing and authorities failed to identify the culprit, the perpetrator was probably Mario Buda, an Italian-born anarchist who left the country shortly after the explosion. Its lasting consequence was to further discredit the entire American left, already facing a backlash for its opposition to World War I, militant postwar strikes, other anarchist bombings in 1919, and enthusiasm for the new Soviet Union.

Indeed, political criticism of New York’s banks had become unfashionable as well as risky. After a postwar recession ended in 1922, a booming industrial economy brought prosperity to millions across the country. As never before, credit became central to the nation’s consumer economy. Banks and their affiliates, such as the National City Company organized by the National City Bank, advertised aggressively to sell securities to middle-class salaried men and wage earners who had purchased Liberty bonds, stamps, and certificates during the war. Consumers relied on loans from banks, finance companies, and retailers to purchase everything from refrigerators and automobiles to homes. By the late 1920s, credit provided by banks and their affiliated securities companies to investors and speculators (a category that now included millions of Americans, not just the shifty gamblers of popular lore) was driving a roaring “bull market” on the New York Stock Exchange. By 1929, some 8 to 10 million American households possessed stocks.