I don’t know anything about banking, but I guess I can learn.
—CARTER GLASS
© Corbis
It was a snowy December 26, 1912, when Carter Glass traveled from Virginia to Princeton, New Jersey, to meet with President-elect Woodrow Wilson. Glass was an energetic young Democratic congressman from Lynchburg, Virginia, and during his four-year tenure on the House Banking and Currency Committee he had been an outspoken opponent of establishing a central bank in the United States. His maiden speech in Congress, in fact, was a denunciation of the Aldrich-Vreeland Act that provided for the National Monetary Commission—the congressional task force set up to simply study the question of central banking for the United States.
Yet the purpose of his visit was to present Wilson with a central bank alternative to the Republican-proposed Aldrich Bill, which called for a national reserve along the lines of that formulated by Paul Warburg. Glass and his fellow Democrats were muted in their opposition to the Aldrich Bill throughout 1912, probably anticipating that they would regain control of Congress and the White House later that year. And though opposition to the Aldrich Bill—and for that matter opposition to central banking in any form at all—had been a universally approved plank in the Democrats’ platform, the issue of a central bank rarely rose to any meaningful level of debate during the just-completed presidential election. But Glass, now chairman of the House Banking and Currency Committee, recognized that the country’s banking system was in need of urgent reform. On November 7, just two days after the election, Glass sent Wilson a letter requesting a meeting on “the entire subject of a reorganization of the banking and currency system” that stated, “While we did not think it would be prudent to complicate the Presidential contest by taking any definitive action at the last session of Congress, the committee has not been idle and we have gone into much work of detail and have, indeed, formulated, tentatively, a substitute for what is known as the Aldrich bill.”1
In their admiring 1939 biography of Glass, authors Rixey Smith and Norman Beasley grandly describe the brief December meeting between Wilson and Glass as “an historic day in America, and the world. Within two hours a great federal reserve system, under which the entire economic life of a nation will soon be permanently organized, will here be born.”2 So according to this telling, the framework of what would soon become the Federal Reserve System was not conceived on Georgia’s Jekyll Island in 1910, but two years later at Woodrow Wilson’s home in Princeton, and accordingly the “father” of the Federal Reserve was Carter Glass rather than Paul Warburg.
The Unreconstructed Rebel
In 1902, the year Paul Warburg moved to New York from Germany to become a partner of Kuhn, Loeb & Company, Carter Glass moved to Washington to begin his first term as a congressman. Warburg was a well-educated but self-effacing gentleman from a prominent European banking family; Glass, the fifth of twelve children, was from a family of scrappers and duelers. He came of age during the South’s hardscrabble years of Reconstruction, and was just old enough to recall the turmoil of the Civil War and how the “blue-coated devils” overran and occupied his native Virginia. A lifelong bantam weight—he stood five feet, four inches tall and weighed just over one hundred pounds throughout adulthood—he was always spoiling for a fight and reveled in an underdog status.
Yet Glass was no country rube. His formal education ended at age thirteen, but he developed impressive intellectual abilities under the tutelage of his father, who owned and managed the Lynchburg Daily Republican. As a young man, Glass worked for the paper as a printer’s apprentice, then later became a reporter and eventually the paper’s publisher. He undertook his own version of a great books self-study program, with a personal reading list that included the works of Plato, Edmund Burke, and Shakespeare. His interest in the last somehow developed into an obsession with the notion, which had currency at the time, that the plays attributed to Shakespeare had actually been written by Sir Francis Bacon. That opinion (which seemed to grow more rigid as Glass aged) was peppered through his own writing, and he referenced it, perhaps unwisely, in conjunction with his barely concealed claim to the fatherhood of the Federal Reserve.
Through the editorials of the Lynchburg Daily Republican and other newspapers he later published, Glass championed Democratic Party causes. He entered politics at a young age, becoming clerk of the Lynchburg City Council at twenty-three, and shortly thereafter the representative of his Lynchburg region in the Virginia state legislature. As a product of the Old South, Glass was an unrepentant states’ rights advocate, and while in the Virginia congress sponsored bills, repugnant by today’s more enlightened standards, that blatantly disenfranchised African Americans. Much later, Franklin Roosevelt nicknamed him “the Unreconstructed Rebel” for clinging to Confederate mores and socially conservative politics.
Up Against the Money Devils
A pivotal point in the development of his political outlook, including his antipathy toward the Eastern banking establishment, occurred at the 1896 Democratic National Convention in Chicago where, as a Virginia delegate, he was enthralled by William Jennings Bryan and his immortal “Cross of Gold” speech. Glass was elected to Congress in 1902, and he thrived in his role as a Bryan-inspired financial populist—especially after being appointed to the chairmanship of a House banking subcommittee and then, in 1912, becoming chairman of the committee itself. He openly referred to Eastern bankers as “money devils” and relished playing a self-proclaimed David up against the banking Goliaths. He was prone to speaking and writing of himself in deprecating, third-person descriptions—“The banking subcommittee, with a mere country editor for its chairman was not taken seriously” and “He had no special qualifications for the committee’s work beyond the information absorbed in these years of discussion and a reasonable amount of common sense acquired as a practical printer.”3
Despite his later outspokenness on matters of finance, Glass initially had little interest in the committee. As a junior congressman he coveted a chair on the Foreign Affairs Committee, but the House leadership denied him that role, offering membership on the Banking and Currency Committee as a consolation. Glass was not enthusiastic about the alternative but, resigned to that or no assignment at all, replied, “I don’t know anything about banking, but I guess I can learn.”4
The serendipitous appointment of Glass to the House banking committee was a fortunate quirk of history. He is best remembered as one of the two sponsors of the Glass-Steagall Act of 1933, a major and long-enduring part of Franklin Roosevelt’s New Deal initiatives that separated investment banking from commercial banking. He is less known today for his indispensable and unlikely role in establishing the nation’s central bank though passage of the Federal Reserve Act of 1913.
As with his position on the banking committee, he took on the Federal Reserve task much by accident. In 1912, Louisiana Congressman Arsène Pujo had convened a congressional committee to look into the concentration of financial power in the United States. It was a time of widespread distrust of big business and Wall Street, and Pujo was intent on investigating the so-called money trusts of the day. He subpoenaed J. P. Morgan and other leading bankers and industrialists to testify in open hearings as to the workings and financing of their business. Glass, as part of the inquiry and by now a recognized speaker on banking topics, was appointed to head a subcommittee to look into the “scheme” for a central bank as set forth by the Republicans in the Aldrich Plan.
Although the Pujo deliberations did not unveil the sinister plotting and underhanded financial dealing many had anticipated, they did reveal an extraordinary level of control of American industry by banks and stoked the public’s growing unease with capitalism and its financiers. For example, the calculations of the committee’s staff revealed that Morgan and his partners held seventy-two directorships at forty-seven industrial companies. Similarly, officers of Wall Street’s largest bank, First National Bank, held seats on the boards of eighty-nine companies, in many cases sitting alongside Morgan partners. All in all, the eighteen largest financial institutions in the country controlled capital resources that totaled an amount equivalent to two-thirds of its gross national product.5 And the revelations of concentrated wealth played into the hand of the Democratic Party’s powerful populist wing, already vocal in its dislike and distrust of J. P. Morgan and East Coast bankers in general. At the party’s 1912 convention, the ever-fiery William Jennings Bryan introduced a sweeping resolution that would have barred the selection of any presidential candidate “who is the representative or under any obligation to J. Pierpont Morgan, Thomas F. Ryan, August Belmont, or any other member of the privilege-hunting and favor-seeking class.”6
In 1912, it was not common knowledge that Nelson Aldrich had, just two years earlier, convened a meeting on Jekyll Island among the vilified leaders of Wall Street—several of whom were brought to testify before the largely hostile Pujo committee—to formulate a U.S. central bank. That revelation could have provided the Democrats with powerful ammunition during the hearings, but in the end it probably would not have mattered. Aldrich’s connections to Morgan, Rockefeller, and the other titans of the day were well known, and the central bank initiatives taken during President William Howard Taft’s one-term administration were already doomed when Woodrow Wilson trounced him in his 1912 bid for re-election. The Democrats captured control of both the White House and Congress, and that party could not have been any clearer in its opposition to central banking.
Wilson’s nomination at the Democrats’ stormy summer convention had been cemented only after William Jennings Bryan released his delegates to Wilson. As a result, the party platform that emerged from that convention contained a plank brokered by the Bryan forces—whom Warburg would characterize as “a powerful wing wedded to the wildest monetary and banking doctrines”7—with an unambiguous statement that the Democratic Party was opposed to central banking in general and in particular to the Aldrich Plan or a U.S. central bank.
An Unlikely Ally
The Aldrich Bill, which looked so promising when it had been introduced in the Senate in January 1912, had become a dead issue upon Wilson’s victory. At the beginning of the year, Republican Warburg was convinced that the idea of a central bank had already “triumphed.” But by the end of 1912, he viewed the prospect of pushing legislation through Congress to be an impossible task due to the “ignorance, prejudice, vagaries, and conceit within the ranks of the Democratic party.”8 Yet it was precisely at that point that Glass—who in Warburg’s mind embodied all of these negative attributes of his party—began to exhibit both his newfound expertise in central banking and his long-standing political acumen.
The “mere country editor” with populist bona fides became the chairman of the House banking subcommittee at a crucial time in the nation’s financial history. In his work for the Pujo commission, the self-educated Glass had taken the opportunity to learn about central banking on his own, and he soon realized that the issue needed immediate attention. The panic of 1907 and its near toppling of the country’s primitive financial structure were not yet a distant memory, and Glass understood the continuing peril the country faced in operating without a central bank. What he called the “Siamese twins of disorder,” an inelastic currency and a fractionated reserve system, were still powerful destabilizers of the U.S. economy, and he knew that it was just a matter of time before the next financial panic surfaced. Glass understood that without a well-designed currency-management system that could adjust to normal seasonal cycles and recurring business cycles, liquidity would once again become a problem for banks and their customers. And if the lack of liquidity led to bank failures, there was still no lender of last resort to prevent new financial panics, no institution that could stave off the next chain reaction of ever-larger failures that would cripple the economy. Glass realized the country needed a central bank to avert the next financial crisis—he just could not call it that.
Determined to avert a financial panic during the new Democratic administration, Glass acted with an unrelenting urgency. He brought the monumental and complex Federal Reserve Act of 1913 to completion in exactly one year’s time, from his initial meeting with Wilson the day after Christmas in 1912 until its final passage by the House and Senate on December 23, 1913. Glass received assistance from able committee members and staff, but any tracing of the bill’s progress shows Glass pulling the laboring oar. The Senate version of the House bill was sponsored by Robert L. Owen of Oklahoma, the first chairman of the newly established Senate Committee on Banking and Currency, but after winding through debate and conferences, it wound up differing little from the House version Glass had authored. The resulting Federal Reserve Act (initially the Owen-Glass Bank and Currency Act) was essentially a Glass production with only minimal reconciliation.
Winning Over the Populists
The speed with which the act was passed was certainly due in part to the strong Democratic mandate after the 1912 election, in which Wilson captured forty of the then forty-eight states, and the Democrats secured large pluralities in both the House and Senate. The challenges Glass faced, however, were driven less by the Republicans than by opposition from within his own party.
Not surprisingly, the most formidable opposition came from Bryan with his Andrew Jackson–like opposition to any form of central banking. Now elevated from senator to secretary of state in Wilson’s administration, Bryan focused much of his vehemence about Glass’s bill to a proposal to remove the U.S. government bond backing from the currency in favor of Federal Reserve notes backed by the banks. For Bryan, this went directly against a conviction he had held for some twenty years based on his fear of control by bankers with their reverence for hard money and the gold standard. Backing down on that issue for him and his followers was tantamount to a metaphorical crucifixion on a cross of gold.
At the same time, the continuance of government bond backing was totally unpalatable to Glass, since that ill-advised policy, initiated some fifty years earlier through the 1864 National Banking Act, was at the very heart of the currency problem. In a1927 memoir he wrote:
The national currency was inelastic because it was based on the bonded indebtedness of the United States. For half a century we banked on the absurd theory that the country always needed a volume of currency equal to the nation’s bonded indebtedness and at no time ever required less, whereas we frequently did not need as much as was outstanding and quite often required more than it was possible to obtain. So, when more was needed than could be gotten, stringencies resulting in panics would be precipitated. When currency was redundant, it was sent by interior banks to the great money centers to be loaned on call for stock and commodity gambling.9
Glass and Bryan remained at loggerheads over the issue, and when Owen, heading the Senate’s legislative efforts, sided with Bryan, the matter of the U.S. backing of the currency wound up on President Wilson’s desk. For Glass, the issue showed a profound lack of understanding about the security of the proposed Federal Reserve note, and he pled earnestly with the president to withhold his support of formal government backing. Glass recalls the argument he presented to Wilson:
The liability of the individual member bank, with the double liability of its stockholders; the considerable gold cover with the 100 percent commercial secondary reserve; the liability of the regional banks, individually and jointly, as well as the double liability of the member banks; the banking instinct behind every discount and every rediscount transaction; the right of the regional bank to reject business and, finally, the power of the Federal Reserve Board to withhold notes. The suggested government obligation is so remote it could never be discerned.10
Wilson listened attentively to Glass’s argument and concurred with his reasoning but, in a nod to Bryan’s intransigence on the issue, suggested that the congressman “surrender the shadow but save the substance” by preserving the full faith and credit government guaranty without tying the level of currency to outstanding bonded indebtedness.11 Glass was not happy but agreed to go along with the “innocuous camouflage.” The inclusion of the U.S. government’s backing to the bill assuaged Bryan sufficiently to gain his support of the act.
On the crucially important matter of the Federal Reserve’s governance, however, the populists held sway and Wilson remained firmly in their camp. Those who conceived the original framework of the Aldrich Plan on Jekyll Island would probably have preferred a central bank based on a European model, one with a single bank located in New York City and governed by an independent board representing the private sector. But bowing to political realities, the Aldrich Bill they presented to Congress in 1911 envisioned a system of fifteen national reserve banks across the country, with a central board that included a mix of government appointees and bank and business representatives. The Glass-originated bill was similar to the Aldrich Bill, in that it called for regionally headquartered federal reserve banks, but the composition of the controlling board would tilt toward government appointees, with bankers given only minority representation. Glass felt strongly that a board composed entirely of government officials and appointees would subject the Federal Reserve to undue political influence and convinced Wilson’s new secretary of the Treasury, William McAdoo, as to the wisdom of a balance between business and government appointees.
But even a minority representation from business was too much for Secretary of State Bryan, and Wilson was eventually brought in again as a tiebreaker to make the final decision on the composition of the Federal Reserve’s board. In a meeting convened to win over Wilson’s support on the issue, Glass summoned prominent members from the American Bankers Association to visit with Wilson in the White House for the purpose of reinforcing Glass’s arguments. Each had his say, with an approving Glass looking on. But at the end of their presentations, Wilson, after a thoughtful delay, asked: “Will one of you gentlemen tell me in what civilized country on the earth there are important government boards of control on which private interests are represented?”12 There being no effective rejoinder from the bankers, the progressive arm of the Democratic Party carried the day, and the Federal Reserve wound up with a board composed entirely of presidential appointees—and with its headquarters in Washington, D.C.
Governor Warburg’s Brief Tenure
Among Wilson’s nominees for the founding seven-member board was none other than Paul Warburg. In a letter dated April 30, 1914, Wilson—no doubt mindful of the financial consequences of Warburg’s altruism in giving up a lucrative Kuhn, Loeb partnership for the low-paying governorship of the Fed—stated in closing, “I feel that your counsel would be invaluable to the board and I sincerely hope that you may see your way to making the sacrifices necessary to accept.” Warburg accepted the appointment the next day, writing, “Whether any personal sacrifices are involved or not, it is a rare privilege.” The financial sacrifice was substantial: during the four years of his service as a governor he would be earning only $12,000 annually, a competitive salary for the position, but a pittance in comparison to the half-million yearly income he was walking away from as a private banker.13
What Warburg may not have realized at the time, however, was that his sacrifices would not be just monetary but would include giving up the treasured privacy of his personal and professional life. While the other six nominees sailed through the Senate confirmation hearings, Warburg was subjected to cross-examination in a manner reminiscent of the Pujo hearings a few years earlier. The senators seemed more eager to reopen the subject of Kuhn, Loeb’s control of the money trusts than to examine Warburg’s central banking credentials or his views on economic and monetary policy. Faced with this pointed hostility, and no doubt harboring second thoughts about his extraordinary financial sacrifice, he asked the president to withdraw his nomination. But in a commendable show of Wilson’s commitment to establishing a competent and politically independent board, the president convinced the Republican banker to continue through the confirmation process. In August 1914, Warburg was named as a founding board member.
Wilson’s confidence in Warburg was well placed. Just as Warburg had emerged as the intellectual force that fashioned the framework for the central bank four years earlier, he now became the obvious board member to prepare the Federal Reserve for its newfound responsibilities. To do so, he wrote and pushed through Congress a multitude of amendments to the Federal Reserve Act—most of which were opposed by Carter Glass, territorial about the bill and loath to see it modified—that better positioned the bank to deal with the convertibility and mobility of gold. Though the amendments were mind-numbingly technical, they would make it possible for the Federal Reserve to become the de facto central bank for the Allied countries in the looming Great War. For his accomplishments, Wilson further recognized Warburg in August of 1916 by naming him as the Federal Reserve’s first vice chairman. Indeed, he likely would have named Warburg chairman, had the Federal Reserve Act not required at the time that the current secretary of the Treasury serve in that role.
Warburg’s prominence, though, was short-lived. In one of the ironies of history, Warburg—who had capably structured the Federal Reserve for effective wartime finance—became for many a popular villain. Outlandish rumors swirled about his being in the service of Kaiser Wilhelm and acting as a double agent to enfeeble the nation’s financial ability to wage war. His still-pronounced German accent, coupled with the fact that his brother Max was assisting in financing the Central Powers’ war efforts through the Hamburg-based M. M. Warburg, fueled the rumors and gave them credence. That the Federal Reserve had become the fiscal agent for the sale of Liberty Bonds to finance America’s war efforts only made these accusations more pernicious.
The whispering campaign grew with such persistence that Warburg offered to withdraw his name from Wilson’s list of nominees when his term expired in August 1918. In a long and sad letter, Warburg wrote to Wilson: “Certain persons have started an agitation to the effect that a naturalized citizen of German birth, having a near relative prominent in German public life, should not be permitted to hold a position of great trust in the service of the United States.” Warburg clearly hoped Wilson would stand on principle and nominate him for another four-year term, writing, “If for reasons of your own, you should decide not to re-nominate me it is likely to be construed by many as an acceptance by you of a point of view which I am certain you would not wish to sanction.”14
Much to Warburg’s dismay, however, it was not until the last possible minute that he finally got a letter in response from the president. In it, Wilson praised the vice chairman for his “indispensable counsel in these first formative years of the new system,” but went on to say, “I read between the lines of your generous offer that you will yourself feel more at ease if you are free to serve in other ways.”15 To Warburg the praise was too faint and the letter much too late in coming and, moreover, totally disingenuous.
A Question of Paternity
Warburg left Washington in a despondent frame of mind and returned to New York. He did not return to Kuhn, Loeb, but assumed—or reassumed—directorships of a score of prominent businesses of the day, including the First National Bank of Boston, the Union Pacific Railroad, the B&O Railroad, and the Western Union Telegraph Company. In 1921, he founded the International Acceptance Bank in New York, merging it later with the Bank of Manhattan, and in a renewed commitment to the public weal, founded the Council on Foreign Relations and other philanthropies.
The gentlemanly Warburg would have likely lived out the rest of his life comfortable in the knowledge that he had made significant, if not widely appreciated, contributions to his adopted country through his early work in the creation of the Federal Reserve System. But for Carter Glass, it had long been of utmost political importance that the Glass Bill remained differentiated from the Aldrich Bill, and Glass took great pains to stress that his bill was more than just a repackaged version of the Aldrich Bill. In order to make that differentiation clear, it was necessary—at least in Glass’s mind—to clarify who the legitimate “father” of the Federal Reserve was. The only two contenders for that title, of course, were Warburg and Glass.
With his 1927 memoir, An Adventure in Constructive Finance, Glass laid out a highly charged argument for himself—or, alternatively, in a polite demurral for Woodrow Wilson, who signed the Federal Reserve Act into law—as the rightful father of the Federal Reserve. He begins the book by stating, “It’s not especially important to have it precisely determined who was the author of what is known as the Federal Reserve Act.”16 But then throughout the first three chapters he offers arguments refuting any ascription of the credit to the drafters of the Aldrich Bill.
Warburg could give a grudging recognition to Carter Glass’s need to distance himself from Nelson Aldrich and other Republicans in order to gain the vote of William Jennings Bryan and key Democrats. But Adventure went far beyond what was politically necessary for Glass, and its publication seemed to shake any complacency Warburg may have felt about the allocation of credit for the founding and early successes of the Federal Reserve. Particularly galling to Warburg was Glass’s rhapsodic and self-aggrandizing critique of the value of the Federal Reserve in connection with the financing of World War I:
I agree with the considered judgment of those eminent bankers of this and other lands who have said that the World War could not have been financed but for the Federal Reserve Act. The real value of this one achievement of Wilson’s administration might be fairly appraised by simply leaving to the human contemplation what further slaughter and destruction would have ensued or what would be our situation today had we lost the war with the Central European Powers!17
Warburg’s rebuttal to Glass’s slapdash and hyperbolic Adventure followed three years later in the form of a massive and scholarly retort: The Federal Reserve System: Its Origin and Growth. The two-volume tome, with each volume exceeding eight hundred pages, was written between 1927 and 1930, much of it during extended breaks in Pasadena, California, while Warburg was serving in New York as chairman of the Bank of Manhattan. And there is little doubt what motivated his writing it: “Miss Clio, the Muse of History,” Warburg wrote, “is a stubborn lady, entirely devoid of a sense of humor, and once she has made up her mind, it is exasperatingly difficult to alter her verdict. It is inadvisable, therefore, to delay too long the correction of inaccuracies, particularly in cases where silence might fairly be construed as assent.”18
Warburg’s Federal Reserve System seeks to set the record straight on developments before and after passage of the Federal Reserve Act. Taking straight-on Glass’s assertion that the act was a one-year, Democratic creation, Warburg begins his book by making a more expansionary case, stating at the outset: “In order to be accorded its proper place, the reserve system must be looked upon as a national monument, like the old cathedrals of Europe, which were the work of many generations and of many masters, and are treasured as symbols of national achievement.” He then traces the origins of the Federal Reserve to the seminal November 1910 Jekyll Island meeting at which the Aldrich Plan was hatched, but calls it “merely a several days’ conference among a small group of men.” (Despite the passage of twenty years, Warburg apparently felt bound to a blood brothers’ oath not to reveal the colorful and clandestine circumstances surrounding the meeting or the names and stature of the men in attendance.) He then, in a methodical style much like an extended lawyer’s brief, takes the reader through the Aldrich Bill, then its successors—the Glass Bill and the Owen-Glass Bill—and finally the resultant Federal Reserve Act of 1913. Through two chapters and 228 annotated pages, Warburg provides a side-by-side comparison of the Aldrich Bill with the Federal Reserve Act.
It’s doubtful that many readers, then or since, have taken the time to study Warburg’s section-by-section analysis, but even a cursory review shows that—Glass’s protestations notwithstanding—the bills are remarkably similar. The National Reserve Association of the Aldrich Bill becomes the Federal Reserve System; the number and location of cities with reserve banks changes slightly; and many other nonsubstantive differences are identified. But one comes away from the review convinced that Congressman Glass was able to create distinctions without differences for the simple expedient of convincing his like-minded colleagues that they would not be voting for a repackaged version of the Republican-drafted Aldrich Plan.
Glass’s reticence in attributing any contribution from Warburg’s and Aldrich’s efforts shows up amusingly in his use of terminology. While Glass was wont to equate the Aldrich Plan with central banking, he refused to utter the dreaded term “central bank” in connection with the Federal Reserve System created in his legislation. In a footnote to his Adventure memoir, he painstakingly explains that “wherever the term ‘central bank’ occurs in this narrative it means a ‘central bank of banks’ dealing only with the member bank of a system and not a central bank in the European sense, transacting business with the public.”19 But in his book, Warburg recounts a telling conversation with Glass during which Glass expresses frustration that the Federal Reserve Board is not able to exert more power over the regional banks.
“But Mr. Glass,” Warburg said, “the Board has no power in the premises to force the banks and, moreover, would not that make it a central bank?”
“Oh, hell,” Glass answered, “it is a central bank.”20
Warburg passed away in 1932 at age 63, shortly after the publication of his book. Glass long outlived Warburg and devoted his considerable energy and combative personality to public service, much of it in the cause of reforming the financial establishment. In 1919, Wilson named him secretary of Treasury, just in time to oversee the National Prohibition (“Volstead”) Act that Congress had passed over Wilson’s veto that year. During his brief tenure at Treasury, Glass also advocated for financial assistance for the recently defeated Central Powers and, with his proprietary interest in the Federal Reserve, was a tireless critic of speculative lending and pushed for tighter lending regulation.
But Glass’s preferred venue was Congress—he would decline an offer many years later from Franklin Roosevelt to serve again as Treasury secretary—where he could more effectively engage his reformist impulses. So upon the death in 1919 of Virginia’s senior senator, Thomas S. Martin, Glass left his Treasury position after less than a year’s service to fill the vacated Senate seat, a seat he would occupy until his own death in 1948.
Glass reappears prominently in the next chapter as a seasoned, if still scrappy, senator. He was often at swords’ points with Franklin Roosevelt, but played a prominent role in the shaping of key financial reforms and regulation put in place by the New Deal’s president. He remains best known today for the Glass-Steagall Act of 1933 that stayed on the books until its controversial repeal in 1999. But his pushing through Congress the long-needed legislation for a central banking system for the United States—albeit in a testy, unacknowledged, and odd-couple fashion with Paul Warburg—remains his most meaningful contribution to American finance.
The Fed’s First Hundred Years
The Federal Reserve System—“the Fed,” as it came to be called—was born in controversy and has remained there ever since. On the eve of the passage of the 1913 act, Charles Lindbergh Sr., a Minnesota congressman and father of the famed aviator, proclaimed that giving monetary powers to the government perpetrated “the worst legislative crime of the ages.” As late as 1998, a harshly critical book about the Federal Reserve titled The Creature from Jekyll Island dredged up nearly a century of allegedly nefarious actions orchestrated by a cabal of financiers. And in 2010, a book called simply End the Fed was published by the well-known Libertarian presidential candidate Ron Paul.
The more temperate and reasoned criticism of the Fed over its first century, however, relates to its “mission creep.” As conceived by both Glass and Warburg, the institution’s purposes were important but narrow in scope: to provide for currency elasticity and to forestall financial panics. Though there is a close connection between price levels and the amount of currency circulating in the economy, in its early days the Fed’s mission did not include controlling the level of inflation. The gold standard under which the country operated was assumed to control prices, at least over the long run. Likewise, even though the original Federal Reserve Act provided the mechanism for open-market operations—the Fed’s main instrument for effecting monetary policy in modern times—the central bank in its early years had largely confined its business to the passive buying and selling of “real bills”—the IOUs that commercial banks created in their business lending.
The reviews of its early years of operations are mixed. During the first years of the Fed’s existence, as both Warburg and Glass were proud to point out, it played a crucial role in financing the war efforts of the Allies. In the succeeding decades, however, it made colossal blunders. In the years leading up to the 1929 stock market crash, its policies were far too accommodating and stoked the fires of financial speculation. And then, during the ensuing Great Depression, it made the opposite error by restricting the availability of money just when the economy needed it most. The Fed’s tight-money policy during the Great Depression may have simply been a consequence of an underappreciation of the power of monetary policy. Or it could have been a reflection of the well-known views of Andrew Mellon, Herbert Hoover’s secretary of the Treasury—and, under the law at the time, chairman of the Fed’s board of governors—that the economy would best be served by a hands-off approach that would eventually clear out the “rot” he believed had infested the country’s economy. But Mellon’s dictate to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate” resulted in a commensurate contraction of the money supply that Nobel Prize winner Milton Friedman would term the “Great Contraction of 1929–1933.” That action served to prolong the economic pain of the Depression.
Over most of the mid-twentieth century the management of the economy was a bifurcated effort, with monetary policy the primary responsibility of the Federal Reserve and price stability the main indicator of its success. Fiscal policy, by contrast, was handled by the elected officials of the U.S. Congress and the president, using the instruments of government spending and taxation to promote full employment. In the landmark Employment Act of 1946, fiscal policy was viewed as the primary driver of the economy, and the president, through a newly formed Council of Economic Advisers, was required to prepare a yearly economic report from the president that spelled out employment goals and policies, along with the fiscal measures that would be undertaken to implement the policies and achieve the goals. The Federal Reserve and monetary policy were in decidedly supporting roles.
As “monetarists”—in particular Friedman and others at the University of Chicago—gained influence in their demonstration of the potency of monetary policy on the economy, the importance of the Fed’s activities grew commensurately. In 1978, Congress passed the Humphrey-Hawkins Full Employment Act, in which the Fed’s mission was vastly expanded beyond controlling inflation and, despite the protests of monetarists and Keynesian economists alike, it was charged with promoting full employment—and, for good measure, growth in gross domestic product and balanced trade and government budgets. As part of the Humphrey-Hawkins Act, the Fed’s governors were required to deliver a semiannual monetary policy report outlining its success in achieving these laudable, but most often contradictory, goals. In time, the chairs of the Federal Reserve, with their vastly expanded mandate, became, alongside the president, the most important spokespersons on the economy. Paul Volcker, Alan Greenspan, Ben Bernanke, and Janet Yellen became household names.
And during the twenty-first century, the Fed’s mission grew to encompass goals and responsibilities far beyond the imaginations of Warburg and Glass. Until the 2008 financial catastrophes, the Fed had limited its open-market buying and selling almost entirely to Treasury securities—the rock-solid bills, notes, and bonds of the U.S. government—and conducted monetary policy largely through the country’s commercial banks. But in the midst of the crisis, the Fed, relying on a once-obscure section of the Federal Reserve Act of 1932 that allowed expanded lending to entities other than commercial banks in “unusual and exigent circumstances,” made emergency loans to investment banks, including Goldman Sachs, Morgan Stanley, and Merrill Lynch. And it turned out that those loans were just for starters, with the Fed’s lending eventually extended to American subsidiaries of foreign banks, including Britain’s Barclays Bank, Switzerland’s UBS, Japan’s Mizuho Securities, and France’s BNP Paribas. Industrial concerns as far-ranging as General Electric, General Motors, and Harley-Davidson received bailout funding.
During the so-called Great Recession, the Fed’s unconventional central banking activities were expanded to include “quantitative easing,” a program of asset purchases to stimulate the economy in a time of low interest rates. The assets the Fed bought continued to migrate far beyond U.S. Treasuries and grew to unprecedented amounts. Glass and Warburg would no doubt have been stunned by the thought that the modest collection of twelve federal banks they created a century ago would today be the repositories for a multi-trillion-dollar portfolio of government, corporate, and mortgage-backed securities.
The Fed’s expansion also extended to its regulatory role. The Federal Reserve Act of 1913 gave the Fed a bank examination function, but mainly in coordination with other government agencies. At the time, virtually all of the country’s tens of thousands of banks were one-office, one-business “unit bank” institutions. If they were national banks, they were supervised by the U.S. comptroller of the currency; if state banks, by state agencies. But that changed as the banking industry consolidated and diversified through holding companies. Through legislative action during the latter half of the twentieth century, the Federal Reserve was given the primary role in approving and regulating holding companies. As holding companies became the dominant structure for banking, the Fed became the superregulator of banks.
The development of the other superregulator of the financial system, the Securities and Exchange Commission, is the subject of the next chapter. Glass had an important role in shaping the SEC and other New Deal securities legislation, but the driving force was a former prosecutor named Ferdinand Pecora. In many ways, Pecora and Glass were alike: lifelong Democrats, combative players, born reformers, and self-promoters—and those shared characteristics may explain why, as the following pages detail, they rarely saw eye to eye.
