Nelson Aldrich versus Carter Glass—Part 1

(Part 2)

The 1907 Crisis finally provoked the Aldrich-Vreeland Act, which was intended to decide upon some form of central bank for the United States. Up to this time, the United States did not have a central bank and was unusually prone to financial crises.¹ Some professional bankers, such as Warburg (1930, p.17), drew a connection between the two. Others, such as Senator Carter Glass (D-VA) or Charles A. Conant (1896) felt the connection was overdrawn or nonexistent.

Over the long run, the main impact of Aldrich-Vreeland was the creation of the National Monetary Commission, which drew up a plan (later revised by Glass) for a central bank. Another impact, possibly less important, was provision for an emergency currency to be issued in the event of another financial crisis.² In the meantime, the architecture of the Federal Reserve System continued to evolve.

The question I seek to resolve here is, What were the key differences between Nelson Aldrich's plan (influenced by Paul Warburg) and Carter Glass's plan? Why did the two men favor their respective plans and what was the ultimate outcome?

A shorter version of the story seems to be that Aldrich/Warburg represented a 19th century conservative vision involving centralization under a (soft) gold standard; Glass represented a 19th century populist vision of decentralization under a (hard) gold standard; and the ultimate winner, Mariner Eccles, represented a 20th century progressive vision of centralization under a fiduciary currency. Glass was in effect a neo-Jacksonian in monetary outlook; Aldrich was a neo-Clavian; and Eccles was a New Dealer.³

COMPARISON OF THE BILLS

In January 1912, Senator Aldrich introduced a bill for the creation of a "National Reserve Association," or NRA.  To avoid confusion, I will just call this the Aldrich Central Bank (ACB) instead, which represented the summation of Republican Party efforts to design a central bank since the 1909 Monetary Commission.  The Bill was drafted after a secret meeting on Jekyll Island in Georgia, which has naturally attracted a lot of negative attention. Those curious about the goals of drafters might want to consider some of the features of the abandoned ACB plan and the partly-realized Glass Central Bank (GCB) which evolved through multiple stages into the post-Greenspan Federal Reserve System.

Paul Warburg (1930, pp.178-368) has a juxtaposition of the two bills, with relevant passages on facing pages and explanatory notes.  My notes are from this part of the book.

1. Warburg's comments tend to emphasize the similarities between the ACB and GCB.  He describes Sen. Glass  mostly as an antagonist who was outwitted by objective conditions; Glass, for example, is quoted (I.p.177) in private conversation with Warburg himself as being forced to admit the Federal Reserve Board would be a central bank after all (as opposed to a mere mutual association of private banks), because it would need to compel district banks to do stuff.  In other words, the GCB evolved a priori into central bank, because of the force of evidence available to Senator Glass during the process of drafting and reconciling the bills.


2. Both the ACB and GCB had sunset provisions; the ACB would have expired around 1963-ish, whereas the GCB's charter expired 1934.  The 20-year charter was a self-conscious reference to the charter of the two Bank of the United States, which were not renewed.  The McFadden Act of 1927 extended the FRS's charter indefinitely (Meltzer 2004, pp.215-216).


3. (Warburg, I.182) Member banks of the ACB were required to "subscribe" (or acquire a stake) to the amount of 20% their capital (and the bills both had specific capital adequacy requirements).  The Federal Reserve Act specified a much lower share, but Warburg thinks the difference is immaterial.  The Fed has lots of capital.


4. Warburg, I.188) Both bills made membership in the CB optional for state banks, banking associations (mutuals), and trust companies. The ACB  bill said that national banks may join, whereas the Federal Reserve Act says all nationally chartered institutions must join.⁴


5. (I.pp.198-204) Both bills specified the creation of districts with reserve banks.  The ACB would have had more reserve banks—in the end, the FRS settled on 12 districts, to the ACB's 15.  


6. (I.pp.210-223) The Federal Reserve Act includes instructions for selecting reserve bank directors.  This includes the restriction of bank directors/bank representatives to no more than a third of the total (out of nine directors ).  The ACB plan would have included a scheme to balance representation of large and small member banks in each district among 12 members (for a total of 180 directors nationally; C.f., the 108 directors in the FRS) 


7. (I.pp.224-233) Each version specifies the appointment of a central board.  Following the Aldrich plan's pattern of more directors, the ACB would have had a central board of 30 directors (two per district bank). Nine more would represent the banks by share holding in the CB. Seven would be ex officio members representing the executive branch (for a total of 46). The ACB also had an executive committee of nine of the 46 directors. In comparison, the GCB had seven members, of whom one was the Secretary of the Treasury, another was the Comptroller of the Currency, and five others were presidential appointees. 


8. (I.pp.234-241) The ACB didn't really specify the powers of the board; the Federal Reserve Act §11 lists 127 specific competencies, including inspection of the fifteen district banks.  The district banks, in both bills, were responsible for discounting and re-discounting bills of exchange.  The ACB allows the central board to carry out open market operations; in the FRA, district banks may (but with some oversight by the FRB).


9. (I.p.254) The ACB (but not the GCB) required the results of annual inspections of banks to be published. A logical implication is that the Federal Reserve Board does not divulge the results of inspections.


10. (I.p.263) The ACB would have required the Treasury to use the National Reserve Association for all its free funds; OTOH, the ACB would have paid a slightly larger share of profits back to the government (p.258). In practice, the Treasury holds some of its free funds in other institutions.⁵


11. (I.p.274) Important! The ACB required uniform discount rates in all districts.  The GCB does not.  In practice, the discount rates have been the same for all districts since WW2. 


12. (I.p.310) Important! Under the ACB, banknotes (currency) are obligations of the National Reserve Association; they are issued against [other bank's] notes, bills of exchange, and gold.
    
    Under the Federal Reserve Act (GCB), banknotes are obligations of the USA.  They are issued against [other bank's] notes and bills accepted for rediscount, and reserves of at least 40% gold.


13.  (I.p.318) Under ACB, banknotes issued (and demand liabilities, e.g., checking accounts) require 50% reserves; under the GCB, 40% reserves for notes 🙵; 35% against demand deposits.

Other differences between the two bills exist; one (I.p.280) concerns the terms for acceptances, which would have been of significance except it was subsequently modified (When? How?).  Another (I.pp.286-293) is ambiguous; Warburg argues that the actual Federal Reserve System functions in effect as the ACB was supposed to have in regard to open market operations, despite inferior language to that of the ACB.

(Part 2)

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NOTES

1. See Meltzer (2004), Chapter 3. For an account of the crises, see Sprague (1910). Sprague offers up analysis of the failures of the National Banking Act (1863) in several places, but perhaps the most pertinent for this post is on p.20 (PDF 34/514) and following. It is worth noting that the central reserve banks had some attributes of a central bank, except there were many of them and they had no role in setting monetary policy.
2. An account of this 2nd feature of Aldrich-Vreeland is provided by Silber (2007). I am not going to address this part in this post. The Federal Reserve Act was passed in December 1913 and reflected a change in party control of the White House and both houses of Congress. However, over a year was required to set up the Federal Reserve System, and it was during the opening months of World War I that the emergency currency was used for the first and only time.
   
   For an account of Aldrich-Vreeland, see Foster (1919), p.274ff.


3. "Neo-Jacksonian" refers to Andrew Jackson, nemesis of the 2nd Bank of the United States; "neo-Clavian" refers to Henry Clay, who favored industrial policy and monetary coordination. A hard gold standard would be something like a gold coin standard, in which either gold coin, token money (e.g., silver coins under a gold standard), or gold certificates are the accepted legal tender. A soft gold standard would involve convertibility to gold for all currencies, but the supply of money would be guided by the probability of demand for gold (i.e., a customary ratio of gold reserves to bank notes)
   
   "Fiduciary money" refers to a system of bank notes managed by central authorities; gold convertibility, if it exists, serves as a liquidity standard. Under a fiduciary system, the supply of money is chosen for policy objectives by monetary authorities.


4. Banks (or quasi-banks, such as trust companies and thrifts) must have a charter to perform banking operations.  In the USA, a banking charter may be issued by the state in which the bank operates, or it may have a national charter (since 1863).  The rules for getting charters and running a bank vary with each jurisdiction, with national banks generally having rather more demanding rules for capitalization, reserve requirements, and so on.  In addition, most banks are corporations and require a charter to incorporate; this is issued only by state governments.    Some banks/quasi banks are limited partnerships, or other forms of corporate organization.


5. John Carlson 🙵 John Lindner, "Treasury Deposits and Excess Bank Reserves," Federal Reserve Bank of Cleveland (13 Jan 2010), accessed 22 Jan 2013

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SOURCES 🙵 ADDITIONAL READING

Charles Arthur Conant A history of modern banks of issue (complete text online), G.P. Putnam 🙵 Sons (1896)

Charles Arthur Conant The Principles of Money and Banking, Vol I 🙵 II (complete text online), Harper (1904)

Major B. Foster, Banking (Vol. XVI of Modern Business series), Alexander Hamilton Institute (1919)

Carter Glass, An Adventure in Constructive Finance, Doubleday, Page 🙵 Co. (1927)

Allan H. Meltzer, A History of the Federal Reserve, Vol I: 1913-1951, University of Chicago Press (2004)

Milton Friedman 🙵 Anna J. Schwartz, A Monetary History of the United States, 1867-1960, Princeton University Press (1971)

William L. Silber, When Washington Shut Down Wall Street, Princeton University Press (2007)

O.M.W. Sprague, History of crises under the national banking system (complete text online), National Banking Commission (1910)

Paul M. Warburg, Federal Reserve System: Its Origin and Growth (complete text online) Volume I, MacMillan (1930)————