4. The Personnel of the Federal Reserve

The people in positions of power in America’s new central bank were at least as important as its structure. The bankers, warmly hailing the enactment of the Federal Reserve, waited eagerly to see who would be running the powerful new institution.[35]

Of the seven members of the Federal Reserve Board, two were (by statute at the time) ex officio, the secretary of the treasury and the comptroller of the currency. Before assuming their posts in the Wilson administration, these two men had been close business and financial associates. Secretary of the Treasury William Gibbs McAdoo had been a failing businessman in New York City when he was befriended and bailed out by J.P. Morgan and his associates. The Morgans set McAdoo up as president of New York’s Hudson & Manhattan Railroad until his appointment in the Wilson administration. McAdoo spent the rest of his financial and political life securely in the Morgan ambit. When he was president of the Hudson & Manhattan for a decade, McAdoo’s fellow officers and board members were virtually all Morgan men. His vice-presidents were Edmund C. Converse, president of the Morgan-run Bankers Trust Company, and Walter G. Oakman, president of Morgan’s flagship commercial bank, Guaranty Trust. His fellow directors included Judge Elbert H. Gary, chairman of the board of Morgan’s attempted steel monopoly, U.S. Steel, and a director of another failed Morgan monopoly attempt, International Harvester, Frederic B. Jennings, partner in the “Morgan” law firm of Stetson, Jennings & Russell (whose senior partner, Francis Lynde Stetson, was J.P.’s personal attorney), and John G. McCullough, a director of the Morgan-controlled Atchison, Topeka & Santa Fe Railroad. Directors of Hudson & Manhattan’s parent company, the Hudson Companies, included William C. Lane, a vice-president of Guaranty Trust, and Grant B. Schley, a brother-in-law of one of the country’s top Morgan lieutenants, George F. Baker, head of the First National Bank of New York. Shortly after his appointment as secretary of the treasury, William McAdoo cemented his political stature by marrying President Wilson’s daughter.[36]

The comptroller of the currency was a long-time associate of McAdoo’s. A Virginia banker and president of the Richmond Trust & Safe Deposit Company, John Skelton Williams had been a director of McAdoo’s Hudson & Manhattan Railroad and president of the Morgan-oriented Seaboard Airline Railway. When McAdoo became secretary of the treasury, he appointed Williams as one of his two assistant secretaries.

One of President Wilson’s five appointees to the Federal Reserve Board was another close associate of McAdoo’s, Charles S. Hamlin, whom McAdoo had appointed as his other assistant secretary. Hamlin was a Boston attorney who had married into the wealthy Pruyn family of Albany, a family long connected with the Morgan-dominated New York Central Railroad.

Of the other Wilson appointees to the board, one was none other than Paul M. Warburg. Others were Frederic A. Delano, uncle of Franklin D. Roosevelt and president of the Rockefeller-controlled Wabash Railway, William P.G. Harding, president of the First National Bank of Birmingham, Alabama, and son-in-law of Joseph H. Woodward, head of the Woodward Iron Company, which had several prominent Morgan and Rockefeller men on its board, and finally, Professor Adolph C. Miller, economist at the University of California, Berkeley. Miller had married into the wealthy, Morgan-connected Sprague family of Chicago. His father-in-law, Otho S.A. Sprague, had been a prominent businessman and had served as a director of the Morgan-dominated Pullman Company. Miller’s wife’s uncle, Albert A. Sprague, was a director of numerous large firms, including the Chicago Telephone Company, a subsidiary of the mighty Morgan-controlled monopoly American Telephone & Telegraph Company.[37]

The Federal Reserve Board thus began its existence with three Morgan men, one person in the Rockefeller ambit, a leader of Kuhn, Loeb & Co. (allied with the Rockefellers), a prominent Alabama banker, and an economist with vague family connections to Morgan interests. No board could have better symbolized the alliance of banking and financial interests, aided by a few economists, that had conceived and successfully driven through a radical transformation of the American banking system.

But more important from the inception of the Fed through the 1920s was the man appointed as governor of the Federal Reserve Bank of New York, who swiftly took control of the policies of the system. Benjamin Strong had spent virtually his entire business and personal life in the circle of top aides of J.P. Morgan. Secretary of several trust companies in New York City, Strong lived in the then wealthy suburb of Englewood, New Jersey, where he became close friends of three top Morgan partners: Henry P. Davison, Thomas W. Lamont, and Dwight Morrow. Davison in particular became Strong’s mentor and in 1904 offered him the post of secretary of the new Morgan-created Bankers Trust Company. Strong soon married the daughter of the wealthy Edmund C. Converse, then president of Bankers Trust, and succeeded Thomas W. Lamont as vice-president. Not long after, Strong was acting as virtual president of Bankers Trust under the aging Converse, and in January 1914, he officially became president of the company.

Strong had favored central banking reform at least since 1907, and in August 1911 he participated with Nelson Aldrich in a lengthy meeting on the Aldrich plan with Davison, Vanderlip, and a few other leading bankers on Aldrich’s yacht. He also spoke before the American Bankers Association on its behalf. When, at the suggestion of his close friend Warburg, Strong was offered the post of governor of the New York Fed, he at first refused, since he wanted a “real central bank ... run from New York by a board of directors on the ground”—in short, a frankly and openly Wall Street-run cartelized banking system. After a weekend in the country, Davison and Warburg persuaded Strong to change his mind and accept; presumably, he now realized that he could achieve a Wall Street-run cartel on a little less candid basis from his powerful new post at the heart of the nation’s money market. Strong became governor of the New York Fed in October 1914.[38]

Strong moved for seizure of commanding power shortly after the organization of the Federal Reserve System. At the organizing convention of the system in October 1914, an extra-legal council of governors was formed. At the first meeting of the council in December, Benjamin Strong became chairman not only of the council but also of its operating executive committee. From then on, Strong acted as chairman of the governors and assumed the dominant powers that the statute had envisioned for the Federal Reserve Board. William P.G. Harding, who became governor (now chairman) of the Federal Reserve Board in Washington in 1916, cracked down on the meetings of the council, but Strong continued as the dominant force in the system, a position ensured by his being named the sole agent for the open-market operations of all the Federal Reserve Banks.[39]

Two years after the establishment of the Federal Reserve and a year before the American entry into World War I, Representative Carter Class, a Democrat from Virginia who had drawn up the final Federal Reserve bill in the House, looked back on his cartelizing handiwork and found it good. He pointed out that his objective was very far from injuring Wall Street financial dominance:

The proponents of the Federal reserve had no idea of impairing the rightful prestige of New York as the financial metropolis of this hemisphere. They rather expected to confirm its distinction, and even hoped to assist powerfully in wresting this scepter from London and eventually making New York the financial center of the world. ... Indeed, momentarily this has come to pass. And we may point to the amazing contrast between New York under the old system in 1907, shaken to its very foundations because of two bank failures, and New York at the present time, under the new system, serenely secure in its domestic banking operations and confidently financing the great enterprises of European nations at war.[40]

However, there was still a problem: the failure of the state-chartered banks to join the Federal Reserve System. All national banks were compelled by law to join the system and to keep their reserves with the Fed, but the eagerness with which they joined is revealed by the fact that virtually no national banks abandoned their national status to seek state charters. State banks were free to join or not, and a bane of the Fed’s existence is that virtually none of them did so, preferring the lesser regulation of state law.

In a letter of October 1916, Benjamin Strong lamented the situation, writing: “Frankly, our bankers are more or less an unorganized mob. Until they are educated by experience to the advantages of cooperation through the Reserve System, I believe it is unsafe to rely upon reserves contributed by their voluntary action.”[41] In such a vein has every cartelist reacted to the ambitions of individual firms or entrepreneurs to kick over the collective discipline of the cartel. All Fed officials felt the same way, and only political considerations have thus far prevented compulsory membership.