The Meeting at Jekyll Island
November 20, 1910–November 30, 1910
A
secret gathering at a secluded island off the coast of Georgia in
1910 laid the foundations for the Federal Reserve System.
The old clubhouse, Jekyll Island, Georgia. (Courtesy of Tyler E. Bagwell)
Sections
The Need for Reform
At
the time, the men who met on Jekyll Island believed the banking
system suffered from serious problems. The Jekyll Island
participants’ views on this issue are well known, since before and
after their conclave several spoke publicly and others published
extensively on the topic. Collectively, they encapsulated their
concerns in the plan they wrote on Jekyll Island and in the reports
of the National Monetary Commission.
Like
many Americans, these men were concerned with financial panics, which
had disrupted economic activity in the United States periodically
during the nineteenth century. Nationwide panics occurred on average
every fifteen years. These panics forced financial institutions to
suspend operations, triggering long and deep recessions. American
banks held large required reserves of cash, but these reserves were
scattered throughout the nation, held in the vaults of thousands of
banks or as deposits in financial institutions in designated reserve
and central reserve cities. During crises, they became frozen in
place, preventing them from being used to alleviate the situation.
During booms, banks’ excess reserves tended to flow toward big
cities, especially New York, where bankers invested them in call
loans, which were loans repayable on demand to brokers. The brokers
in turn loaned the funds to investors speculating in equity markets,
whose stock purchases served as collateral for the transactions. This
American system made bank reserves immobile and equity markets
volatile, a recipe for financial instability.
In
Europe, in contrast, bankers invested much of their portfolio in
short-term loans to merchants and manufacturers. This commercial
paper directly financed commerce and industry while providing banks
with assets that they could quickly convert to cash during a crisis.
These loans remained liquid for several reasons. First, borrowers
paid financial institutions – typically banks with which they had
long-standing relationships – to guarantee repayment in case the
borrowers could not meet their financial obligations. Second, the
loans funded merchandise in the process of production and sale and
that merchandise served as collateral should borrowers default. The
Jekyll Island participants also worried about the inelastic supply of
currency in the United States. The value of the dollar was linked to
gold, and the quantity of currency available was linked to the supply
of a special series of federal government bonds. The supply of
currency neither expanded nor contracted with seasonal changes in
demands for cash, such as the fall harvest or the holiday shopping
season, causing interest rates to vary substantially from one month
to the next. The inelastic supply of currency and limited supplies of
gold also contributed to long and painful deflations.
Furthermore,
Jekyll Island participants believed that an array of antiquated
arrangements impeded America’s financial and economic progress. For
example, American banks could not operate overseas. Thus, American
merchants had to finance imports and exports through financial houses
in Europe, principally London. American banks also struggled to
collectively clear checks outside the boundaries of a single city.
This increased costs of inter-city and interstate commerce and
required risky and expensive remittances of cash over long distances.
In
an article published in the New
York Times
in 1907, Paul Warburg, a successful, German-born financier who was a
partner at the investment bank Kuhn, Loeb, and Co. and widely
regarded as an expert on the banking systems in the United States and
Europe, wrote that the United States’ financial system was “at
about the same point that had been reached by Europe at the time of
the Medicis, and by Asia, in all likelihood, at the time of
Hammurabi” (Warburg 1907).
Just
months after Warburg wrote those words, the country was struck by the
Panic of 1907. The panic galvanized the US Congress, particularly
Republican senator Nelson Aldrich, the chair of the Senate Finance
Committee. In 1908, Aldrich sponsored a bill with Republican
representative Edward Vreeland that, among other things, created the
National Monetary Commission to study reforms to the financial
system. Aldrich quickly hired several advisers to the commission,
including Henry Davison, a partner at J.P. Morgan, and A. Piatt
Andrew, an economics professor at Harvard University. Over the next
two years, they studied banking and financial systems extensively and
visited Europe to meet with bankers and central bankers.
The Duck Hunt
By
the fall of 1910, Aldrich was persuaded of the necessity of a central
bank for the United States. With Congress ready to begin meeting in
just a few weeks, Aldrich -- most likely at Davison’s suggestion --
decided to convene a small group to help him synthesize all he had
learned and write down a proposal to establish a central bank.
The
group included Aldrich; his private secretary Arthur Shelton;
Davison; Andrew (who by 1910 had been appointed assistant Treasury
secretary); Frank Vanderlip, president of National City Bank and a
former Treasury official; and Warburg.
A
member of the exclusive Jekyll Island Club, most likely J.P. Morgan,
arranged for the group to use the club’s facilities. Founded in
1886, the club’s membership boasted elites such as Morgan, Marshall
Field, and William Kissam Vanderbilt I, whose mansion-sized
“cottages” dotted the island. Munsey’s
Magazine
described it in 1904 as “the richest, the most exclusive, the most
inaccessible” club in the world.
Train
station in Brunswick, Georgia, near Jekyll Island. (Courtesy Tyler E.
Bagwell)
Aldrich
and Davison chose the attendees for their expertise, but Aldrich knew
their ties to Wall Street could arouse suspicion about their motives
and threaten the bill’s political passage. So he went to great
lengths to keep the meeting secret, adopting the ruse of a duck
hunting trip and instructing the men to come one at a time to a train
terminal in New Jersey, where they could board his private train car.
Once aboard, the men used only first names – Nelson, Harry, Frank,
Paul, Piatt, and Arthur – to prevent the staff from learning their
identities. For decades after, the group referred to themselves as
the “First Name Club.”
An
additional member of the First Name Club was Benjamin
Strong,
vice president of the Bankers Trust Company and the future founding
chief executive officer (then called governor, now called president)
of the Federal Reserve Bank of New York. But it is unlikely Strong
attended the meeting on Jekyll Island. In his autobiography,
Vanderlip recalls him attending, but no other account indicates
Strong’s presence. Most scholars and journalists who have written
about the issue, including Bertie Charles (B.C.) Forbes -- the
founder of Forbes
magazine and the journalist who first revealed the meetings in an
article in 1916 -- have concluded Strong did not attend (Forbes
1916). Strong had worked closely with the Jekyll Island attendees in
other venues, however, and his ideas were certainly present at the
meeting even if he was not there in person. After the meeting, as the
First Name Club revised the plan and prepared it for publication,
Strong was frequently consulted and according to Forbes, “joined
the ‘First-Name Club’ as ‘Ben’” (Forbes 1922).
The Plan Takes Shape
Aldrich
and his colleagues quickly realized that while they agreed on some
broad principles -- establishing an elastic currency supplied by a
bank that held the reserves of all banks -- they disagreed on
details. Figuring out those details was a “desperately trying
undertaking,” in Warburg’s words. Completely secluded, the men
woke up early and worked late into the night for more than a week.
“We had disappeared from the world onto a deserted island,”
Vanderlip recalled in his autobiography. “We put in the most
intense period of work that I have ever had.”
By
the end of their time on Jekyll Island, Aldrich and his colleagues
had developed a plan for a Reserve Association of America, a single
central bank with fifteen branches across the country. Each branch
would be governed by boards of directors elected by the member banks
in each district, with larger banks getting more votes. The branches
would be responsible for holding the reserves of their member banks;
issuing currency; discounting commercial paper; transferring balances
between branches; and check clearing and collection. The national
body would set discount rates for the system as a whole and buy and
sell securities.
Shortly
after returning home, Aldrich became ill and was unable to write the
group’s final report. So Vanderlip and Strong traveled to
Washington to get the plan ready for Congress. Aldrich presented it
to the National Monetary Commission in January 1911 without telling
the commission members how the plan had been developed. A final
report, along with legislative text, went to Congress a year later
with a few minor changes, including naming the new institution the
National Reserve Association.
In
a letter accompanying the report, the Commission said it had created
an institution “scientific in its method, and democratic in its
control.” But many people, especially Democrats, objected to the
version of democracy it presented, which could have allowed the
largest banks to exert outsized influence on the central bank’s
leadership. With a presidential election coming up, the Democrats
made repudiating the Aldrich plan a part of their platform. When
Woodrow Wilson won the presidency and the Democrats took control of
both houses, Aldrich’s National Reserve Association appeared to be
shelved.
Leaders
of the Democratic Party, however, also were interested in reform,
including President Wilson and the chairs of the House and Senate
Committees on Banking and Currency, Carter Glass and Robert Owen,
respectively. Glass and Owen both introduced proposals to form a
central banking system based on draft legislation supported by
Wilson. Glass, Owen, and their staffs directly consulted with
Warburg, whose technical expertise was respected by Democratic and
Republican politicians alike. Wilson’s chief political adviser,
Col. E. M. House, met and corresponded with Warburg to discuss
banking reform in general and the Glass and Owen plans in particular.
So did William McAdoo and Henry Morgenthau, senior political and
policy advisers to Wilson who served in his administration.
Morgenthau assured Warburg “that he sent his copy of the [January
10, 1913] memorandum to President Wilson” (Warburg 1930, p. 90).
Together, these ideas formed the basis of the final Federal Reserve
Act, which Congress passed and the president signed in December 1913.
The technical details of the final bill closely resembled those of
the Aldrich Plan. The major differences were the political and
decision-making structures, which was a compromise acceptable to both
the progressive and populist wings of the Democratic Party.
Postscript
B.C.
Forbes somehow learned about the Jekyll Island trip and wrote about
it in 1916 in an article published in Leslie’s
Weekly
(October 19, 1916 p. 423), which was recapitulated a few months later
in an article in the magazine Current
Opinion.
In 1917, Forbes again described the meeting in Men
Who Are Making America,
a collection of short biographies of prominent entrepreneurs,
including Davison, Vanderlip, and Warburg. Not many people noticed
the revelation, and those who did dismissed it as “a mere yarn,”
according to Aldrich’s biographer.
The
participants themselves denied the meeting had occurred for twenty
years, until the publication of Aldrich’s biography in 1930. The
impetus for coming clean was probably the publication in 1927 of
Carter Glass’s memoir, An
Adventure in Constructive Finance.
In it, Glass, by now a senator, claimed credit for the key ideas in
the Federal Reserve Act, which prompted the Jekyll Island
participants to reveal their roles in creating the Federal Reserve.
Warburg
was especially critical of Glass’s description of events. In 1930,
he published a two-volume book describing the origins of the Fed,
including a line-by-line comparison of the Aldrich bill and the
Glass-Owen bill to prove their similarity. In the introduction, he
wrote, “I had gone to California for a three months’ rest when
the appearance of a series of articles written by Senator
Glass…impelled me to lay down in black and white my recollections
of certain events in the history of banking reform.” Warburg’s
book does not mention Jekyll Island specifically, although he states
that
“In November, 1910, I was invited to join a small group of men who, at Senator Aldrich’s request, were to take part in a several days’ conference with him, to discuss the form that the new banking bill should take. … when the conference closed … the rough draft of what later became the Aldrich Bill had been agreed upon ... The results of the conference were entirely confidential. Even the fact that there had been a meeting was not permitted to become public. … Though eighteen years have gone by, I do not feel free to give a description of this most interesting conference concerning which Senator Aldrich pledged all participants to secrecy. I understand, however, a history of Senator Aldrich’s life … will contain an authorized account to of this episode” (Warburg 1930, pp. 58-60).
Disagreements
over authorship of the Federal Reserve Act received widespread
publicity in the late 1920s. Glass defended his claim for the lion’s
share of the credit in speeches, in his book, and in submissions to
prominent publications including the New
York Evening Post
and the New
York Times.
Critics responded in similar venues and academic journals. For
example, Samuel Untermyer, former counsel to the House Committee on
Banking and Currency, published a pamphlet titled “Who is Entitled
to the Credit for the Federal Reserve Act? An Answer to Senator
Carter Glass,” in which he asserted that Glass’s claims of
primary authorship were “fiction,” “fable,” and a “work of
imagination” (Untermyer 1927). In 1914, Edwin Seligman, a prominent
professor at Columbia University, wrote that “in its fundamental
features the Federal Reserve Act is the work of Mr. Warburg more than
of any other man.” In 1927, Seligman and Glass debated this point
in a series of letters published in the New
York Times.
The
Jekyll Island Club never bounced back from the Great Depression, when
many of its members resigned, and it closed in 1942. Today, its
former clubhouse and cottages are National Historic Landmarks. But
the debates at and about the conference on Jekyll Island remain
relevant today.
Bibliography
Forbes,
B.C.
Men
Who Are Making America.
New York: B.C. Forbes Publishing Co., Inc., 1917.
Forbes,
B.C. “How the Federal Reserve Bank Was Evolved by Five Men on Jekyl
Island.” Current
Opinion
vol. 61, no. 6 (December 1916): pp. 382-383.
Glass,
Carter. An
Adventure in Constructive Finance.
New York: Doubleday, 1927.
Glass,
Carter, “Mr. Warburg and the Bank: A Reply to Prof. Seligman on the
Paternity of the Federal Reserve,” New
York Times,
February 15, 1927, p. 24.
Lamont,
Thomas. Henry
P. Davison: The Record of a Useful Life.
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Roger. America’s
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of Federal Reserve Fiction and Its Author Credulous. Claims Glory for
Owen. Wilson, McAdoo and Bryan also Entitled to Credit … "
June 20, 1927, p. 4.
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Available at
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Frank, and Boyden Sparks. From
Farm Boy to Financier.
New York and London: D. Appleton-Century Company, 1935.
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Paul M., “The Defects and Needs of Our Banking System,” New
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Paul M. The
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