Federal Reserve Act ; Federal Reserve System - History

Verle B. Johnston

English

Research Papers in Economics

January 6,1984
The Aldrich Plan
Prior to 1908, the United States' financial
system had been subject to a series offinan-
cial panics that led the Congress to establish
a National MonetaryCommission to recom-
mend specific reforms. The Commission
ascribed the panics to an "inelastic
currency"-the inabilityofbanks to issue
enough currency to meet depositors' addi-
tional demands for cash during periods of
financial stress-and to the prevailing
system of"pyramiding" reserves which
allowed a dollarofreserves to be counted
as reserves more than once.
Under the National Banking System estab-
lished in 1863, the nation's supply of
currency consisted ofa fixed amountof
governmentcurrency (greenbacks) and
notes issued by national banks. In principle,
theamountofnational banknotes in circula-
tion could increase when the public's
demandforcurrency rose, but itwas feltthat
in practice the response was inadequate-
that the supply ofcurrency was too inelastic
to respond to the demand for currency. In
the eyes ofmany critics at the time, the
problem ofan inelastic currency was com-
pounded by the practice of"pyramiding,"
in which country banks would place their
reserves with city banks, who in turn would
loan them out in the market. A shortage of
currency at the country banks, sometimes
just because ofhigher seasonal needs,
would lead to calls for their funds from city
banks, which ifthe extra demand was great
enough, would find themselves with insuffi-
cient cash to meet these calls. In such
situations, country banks might have to
close theirdoors, precipitating depositor
panics that spread to other banks.
The Commission submitted its report early
in 1911 and the followingyear its Chairman,
Senator Nelson Aldrich (R-RI), framed his
recommendations in a bill toestablish a
"National Reserve Association ofthe United
States."
1
Over the years, certain critics ofthe Federal
Reserve System have charged that the Fed-
eral Reserve Act, passed by the Congress in
December 1913, was almost identical with
the Aldrich Plan. The have claimed the Act
was conceived and drafted by private
bankers with foreign ("Rothschild and
Warburg") and "Wall Street" connections
who first used the Republican and then the
Democratic party as their sponsor. In fact,
there were some significant differences
between the Aldrich proposal and the Fed-
eral Reserve Act: in the people who
supported them, ofthe type ofcentral bank
which they proposed, in the organizational
structures, and in their arrangements for
holding and mobilizingbank reserves, dis-
counting, and issuing currency. This Letter
will discuss the Aldrich Plan for bankingand
currency reform and why it was rejected by
the incomingadministration ofPresident-
electWoodrow Wilson.
The Aldrich Plan
Although the Aldrich Plan had the virtually
unanimous endorsement ofthe American
Bankers Association and that ofa consider-
ablemajorityofCongressional Republicans,
itwas specifically repudiated (along with
any unitary, European-type central bank) by
Presidential candidate Woodrow Wilson
and the Democrats in their 1912 party plat-
form. "Progressive Party" candidate, Teddy
Roosevelt, also denounced the plan as a
scheme "to place the currency and credit
system ofthe United States in private hands
notsubjecttoeffectivepubliccontrol." After
his election, Wilson stated that the funda-
mental issue surrounding afinancial reform
biII was whether it wouId be written by the
administration and embrace a regionally
structured central bank (the term "central
bank" was not used at this time because of
its connotations ofcentralized control) with
a proper mix ofprivate and public interests,
or be written by "a controlling group of
bankers" determined to achieve a highlyrp'(~;(dl~fr'
lBjiD\lI\\lk (C))i1
("'" ,"' \F"I~" j'J 0)(Q\L.',}', ''''~ J
()plnion~; (~XrHl\::;'~:(:"d ill ihi\ fll'VVs!(,\l~:r do nOi
nece:;c;driiv refle(:li'!l(" VI('\.'\/:'; {it the j"nanag;;'fl'lvnt
of th(\ federal [{C';;(TVC Eank of ~:,an rr{·:ncl·~.CO,
or err Ihp Board of C;OVCf'no(", of the Federal
Reserve Sv~,tcrn.
centralized structure underprivate control.
This position was reflected in a House cur-
rency committee investigation early in 1913
that found a "vast and growingcontrol over
money and credit" in the hands ofa private
Wall St. "moneytrust."
Private, centralized control
Criticisms ofthe Aldrich Plan centered on
the highly centralized and privately con-
trolled structure ofthe National Reserve
Association, includingthe procedures by
which its directors (and those ofits proposed
15 branches and local associations) would
be elected. Those procedures tended to
place voting control in the hands ofthe
larger banks because votes were based, in
part, on the numberofshares ofstocks that
banks held in the Association.
Moreover, among the National Associa-
tion's proposed 46-member Board of
Directors, only four would represent the
public as ex officio members (the Secretaries
ofthe Treasury, Agriculture, Commerce and
Labor, and theComptrollerofthe Currency),
while a fifth ex officio member, the
"Governor," would be selected by the
President from a list submitted by the other
directors, who also would selecttwodeputy
governors and could remove all three. Simi-
larly, only two ofthe Board's nine-member
governing Executive Committee (the Gov-
ernor and the Comptroller) could be said
to represent the government.
A "Breederof Panics"
Several other aspects ofthe proposed
National Reserve Association also were
considered by the incoming Democratic
Administration to be fatally flawed. These
included its key provisions regarding how
bankscould hold theirreserves, the terms on
which they could borrow from the Associa-
tion, and how currency would be issued.
In the view of its critics the Aldrich Plan
was flawed byallowing membership in the
Reserve Association to be voluntary. Also,
the plan was criticized forallowingbanks to
2
continueto pyramid reserves iftheywished,
thus perpetuating the fundamental weak-
ness ofthe existing National Banking
System...a "breederofpanics" in thewords
of House Banking Committee Chairman
Carter Glass.
Another criticism ofthe Aldrich Plan
centered on the provision that required the
approval ofthe Governorofthe National
Reserve Association and the concurrence of
the Treasury Secretary when a bank used its
own promissorynoteas collateral toacquire
currency and borrow reserves from the
Association. Critics argued that the geo-
graphical enormityofthe U.S. and the
highlydiversified structure of its regional
economies rendered such highly central-
ized control and decisionmaking inappro-
priate. Similar objections were made to the
proposal for a uniform nationwide discount
rate.
Finally, underthe influence ofthe populists
in the Democratic Party (including William
Jennings Bryan, whobecame President
Wilson's Secretary ofState), the incoming
administration strongly opposed the Aldrich
Plan's proposal that the privately owned
National Reserve Association "at its dis-
cretion,'1 issue new banknotes as its own
obligation rather than as thatofthe govern-
ment, even though such notes would be
redeemed in gold orother "lawful money"
upon demand. The proposal reflected the
prevailing banking orthodoxy that, as the
National MonetaryCommission put it, the
directexercise bythe governmentofauthor-
ity to issue money "ofany kind...has,
as shown by the experience ofthe world,
inevitably led tp disastrous results."
The Federal Reserve Act
HR7873, the banking and currency reform
billdeveloped byCongressman Glass under
the guidinghand ofPresident Wilson, was
designed to rectify the perceived defects
ofthe Aldrich Plan's proposed National
Reserve Association. President Wilson
made clear his desire for a decentralizedcentral bank(again, theterm "central bank"
was notused) composed ofa system of
regional Reserve Banks in which national
banks and voluntarily participating state
banks would be required to hold stock and
maintain their reserves (other than vault
cash). He was equally adamanton themat-
ter ofthe dispersion ofpower and control,
stipulatingthat while six ofa regional
reserve bank's proposed nine directors
would be chosen bybanks, only three of
these could themselves be bankers, while
three, includingthe chairman, would be
chosen by aseparate Federal Reserve Board
located in Washington and designed to be
the capstone ofthe System.
Wilson also stipulated that the members of
the proposed Board otherthan its ex officio
members (the Secretary ofthe Treasury and
the Comptrollerofthe Currency) shouId be
chosen bythe President and cdnfirmed by
the Senate and should not include any
members chosen by banks. This view,
strongly urged bySenate BankingCom-
mittee Chairman Robert Owen (D-Okla.)
and William Jennings Bryan, initiallywas
opposed by Congressman Glass and was
strongly criticized by Aldrich Plan sup-
porters whoargued thatsuch a Board wouId
be "hopelessly political." To these banker
criticisms, Wilson replied, "which ofyou
gentlemen think the railroads should select
members ofthe ICO"
The specificelements oftheFederal Reserve
Act, which were presented to the House
Banking Committee for its consideration in
June of 1913, did noliall easily in place.
Atonejuncture,Treasury SecretaryMcAdoo
("oneofthefewmen in the world whocould
swear interestingly," accordingtoCongress-
man Glass) proposed to solve the currency
and banking problem bysimplyestablishing
in the Treasury, a bureau "with all the
elementsofacentral bank." Also, priortoits
submission for consideration by the House
BankingCommittee, thebill had tosurvive a
stormy party caucus ("no such scenes were
ever witnessed before") in which die-hard
3
populists and agrarian soft-money advo-
cates of"corn tassle currency" demanded
that a bona fide member ofa labor union, a
farmer, and former U.S. Presidents be made
members ofthe poposed Federal Reserve
Board. Theyalso demandedthattheReserve
Banks be required to lend $200 million
directly to farmers with guaranteed prices
fortheir corn, cotton and wheat crops, and
that additional hundreds ofmillionsof
dollars be loaned to finance public works in
the various states. However, even William
Jennings Bryan balked at the "soft money"
proposals andfinallyendorsed theAdminis-
tration's hard money proposal to issue
Federal Reserve notes that were backed by
gold and whichwere legal obligationsofthe
Reserve Banks and the U.5. government.
Thenewcentral bankcreated bytheFederal
Reserve Actof 1913 was very different in
several key respects than that proposed in
the Aldrich Plan, whose supporters, includ-
ing significantelements ofthe banking
community, bitterly opposed the bill in
Congress. Despite this, revisionist critics of
theFed tothisday paintitasacreature ofthe
banking industrythat embodies the highly
centralized, private control features ofthe
Aldrich Plan. A future Weekly Letter will
discuss the key prOVisions ofthe Federal
Reserve bill, and the hostility which they
encountered from many bankers and sup-
porters ofthe Aldrich Plan.
Verle 8. JohnstonUOlfiU!4SE'M. 4E'ln • uoficuO • E'peAaN • 0YE'pl
!!E'ME'H • "E'!UJoJHP) • E'UOZPV • P>jSE'IV
(\));;:))~~;;:)) \ill~J(~ \ill~~
~(\)) 1\I\ill~cm
@LffiJ(@~@CQI IT~J(@jp)@~
~\ill <0>'lIm ~dJ WI<W<1>l@ \\II;))dJ WI <0>\'\1 <1>l(Qf
BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and liabilities
Large Commercial Banks
Amount
Outstanding
12/21/83
Change
from
12/14/83
Change from
year ago
Dollar Percent
Loans (gross, adjusted) and investments* 165,335 474 1,726 1.1
Loans (gross, adjusted) - total# 145,161 468 2,594 1.8
Commercial and industrial 43,967 17 - 1,486 - 3.3
Real estate 57,743 114 644 1.1
Loans to individuals 25,716 148 1,878 7.9
Securities loans 3,355 - 82 616 225
U.S. Treasury securities* 7,847 - 15 849 12.1
Other securities* 12,326 21 - 1,717 - 12.2
Demand deposits - total# 43,419 - 218 1,355 3.2
Demand deposits - adjusted 30,054 - 462 1,217 4.2
Savings deposits - totalt 66,028 - 338 24,409 58.6
Time deposits - total# 70,481 298 - 20,1.?-0 - 22.2
Individuals, part. & corp_ 64,440 184 - 16,254 - 20.1
(Large negotiableCD's) 17,489 204 - 13,832 - 44.2
Weekly Averages
of Daily Figures
Member Bank Reserve Position
Excess Reserves (+)/Deficiency (-)
Borrowings
Net free reserves (+)/Net borrowed(-)
Weekended
12/21/83
129
35
94
Weekended
12/14/83
55
5
49
Comparable
year-ago period
134
25
109
* Excludes tradmg account secuntles.
# Includes items not shown separately.
t Includes MoneyMarket Deposit Accounts, Super-NOW accounts, and NOWaccounts.
Editorial commentsmay beaddressedto theeditor(Gregory Tong)orto the author ....Freecopiesof
this and other Federal Reserve publications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 974·2246.

The Aldrich plan

http://www.frbsf.org/publications/economics/letter/1984/el84-01.pdf

The Aldrich plan

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics