William G. McAdoo should have had no trouble establishing the new currency system. The Organizing Committee created by the Federal Reserve Act consisted of the secretary of the Treasury, the secretary of agriculture, and the comptroller of the currency. Since two of the three members of the Organizing Committee satis ed a quorum and since the comptroller of the currency served under the treasury secretary, McAdoo could easily have had his way. Moreover, the Federal Reserve Act authorized the treasury secretary himself to determine when to open the Reserve Banks. Why didn’t McAdoo just pick a date?
The Federal Reserve System came in thirteen separate pieces—a board located in Washington, D.C, and twelve individual Federal Reserve Banks spread throughout the United States. The individual Reserve Banks were real banks with assets and liabilities, just like commercial banks, except their only customers were the banks who were members of the system. In fact, the member commercial banks technically owned the Federal Reserve Banks and actually elected their directors. The Federal Reserve Banks needed o ce space, vaults, and sta , among other things, before opening for business.
McAdoo had to negotiate the opening date for the Reserve Banks with the officers of those institutions—a conflict that would last months.
The Federal Reserve Board, the government’s watchdog within the system, needed only people to begin operation. The legislation speci ed that the Federal Reserve Board should consist of seven individuals appointed by the president, including the secretary of the Treasury and the comptroller of the currency as ex o cio members.* The Federal Reserve Act designated the secretary of the Treasury as chairman of the Federal Reserve Board. McAdoo would occupy the same position as Paul Volcker and Alan Greenspan did during the last quarter of the twentieth century.†
To establish the board, President Wilson had submitted ve nominees for con rmation in the Senate on June 15, 1914.70 The Senate Banking Committee quickly con rmed Adolph Miller, an economics professor at the University of California; W.P.G. Harding, a banker from Birmingham, Alabama; and Charles Hamlin, a Boston lawyer serving as an assistant treasury secretary. The two remaining nominations, Edward Jones, a close friend of the president’s from Chicago and a director of the International Harvester Company, and Paul M. Warburg, a partner in Kuhn, Loeb, the
powerful New York banking house, met considerable resistance in the Senate Banking Committee. They remained uncon rmed a week before the outbreak of the Great War.71
McAdoo had mostly himself to blame for the administration’s predicament. He had lost Wilson’s ear on potential candidates for the board to Colonel Edward M. House, the president’s close friend and adviser.
McAdoo had tried to dominate the new currency system even before it had been signed into law. He had met with Wilson on December 20, 1913, three days before the bill was passed, and wrote him a note afterward: “The immediate success of the new system depends almost wholly upon this Board.
It must be composed not only of able men, but men who are in sympathy with purposes of the bill and the aims of the administration, and it is essential that they shall be acceptable to your Secretary of the Treasury.”72
Wilson met with House two days later and said that he did not sympathize with McAdoo’s desire for a board that would work in harmony with him.73 The president wanted to remove the Federal Reserve Board from McAdoo’s control.
Wilson did not think poorly of McAdoo; quite the opposite. In March 1914, McAdoo, seven years younger than the president and a widower with grown children, became engaged to the president’s daughter Eleanor, twenty- ve years younger than McAdoo. Wilson wrote to his intimate friend and con dante, Mary Allen Hulbert, in Paris: “Dearest Friend, Has the cable brought you news of Nellie’s engagement to Mr. McAdoo, the Secretary of the Treasury? Of course it has. That is what the Paris edition of the Herald is for.
The dear girl is the apple of my eye: no man is good enough for her. But McAdoo comes as near being so as any man could. I am therefore content, not that she is to leave us for him, but that she should have such prospects for happiness.”74
McAdoo tendered his resignation to Wilson upon the engagement: “Mr.
President, I think in the circumstances that I ought to resign after my marriage, and I should like you to think that my resignation is at your disposal, to take effect at your convenience.”75
McAdoo hoped that Wilson would reject his o er to resign, but he had fallen under Eleanor’s spell and would have accepted his fate. He had written to Ambassador Walter Page in London: “You can imagine what a happy man I am. As I tell all my friends, the days of miracles are not yet over, or I certainly could not have succeeded in winning the love of this wonderful girl, because she certainly is an unusually ne and lovable character. There aren’t enough appropriate superlatives in the English language for me to give you a just description of her.”76
Wilson did not disappoint McAdoo when he responded to his resignation o er: “You were appointed Secretary of the Treasury solely on your merit. No one imagined at the time that the present situation would arise. … You are
now organizing the Federal Reserve Banks and engaged in other matters of vital public interest. Your resignation would be a serious blow.”77
Wilson refused McAdoo’s resignation but also refused to follow his recommendations to the Federal Reserve Board. Wilson knew how persuasive McAdoo could be and felt that the new currency system needed an independent voice to succeed. In June 1913, while the legislation to establish the Federal Reserve System still languished in the House Banking and Currency Committee, McAdoo tried to substitute a bill that would have made the central bank a bureau within the Treasury. Carter Glass, chairman of the House Banking and Currency Committee, complained to Wilson and convinced the president that to do so would make the bank a political tool.78
During the 1930s Congress would further insulate the central bank from politics by passing legislation to remove the treasury secretary and the comptroller of the currency from the Federal Reserve Board. An independent central bank helps to neutralize the tendency of politicians to spend rst and pay later, a process that would depreciate the value of the currency without a vigilant central bank. The evolution of an independent Federal Reserve System in the United States con rms the wisdom of Wilson’s original decision.
McAdoo’s desire to dominate the Federal Reserve damaged his in uence with the president. But McAdoo could not help trying to be a hero. He craved public approval even for his business ventures. As a young entrepreneur, McAdoo risked his life savings trying to bring electricity to the Knoxville Street Railroad. He felt proud that the citizens of Knoxville applauded his e orts, even though the failed venture left him penniless.79 After moving to New York, McAdoo successfully tunneled under the Hudson River to provide passenger rail service connecting New York City with New Jersey. As president of the Hudson & Manhattan Railway Company, he created the corny slogan, “Let the Public Be Pleased,” and demonstrated its sincerity by printing and publicly distributing 100,000 complaint forms.80
McAdoo had practiced socially responsible entrepreneurship long before it became fashionable. According to syndicated columnist Walter Lippmann, McAdoo is “the kind of man who likes enterprises more than profit.”81 When he became treasury secretary, McAdoo jumped at the opportunity to lead America to nancial prominence. After he lost the battle to handpick members of the Federal Reserve Board, McAdoo buried his pride to help salvage Wilson’s appointments.
Edward Jones of Chicago and Paul M. Warburg of New York remained uncon rmed in mid-July 1914, a month after the president had submitted their names. On July 11, the Senate Banking Committee voted 7–4 to reject Jones, a director of the International Harvester Company and former trustee of Princeton when Wilson headed the university. Farmers had sent letters to their senators protesting Jones’s appointment because his company, then
under indictment for antitrust violations, allegedly charged exorbitant prices for farm equipment. Warburg, a partner at the New York banking rm Kuhn, Loeb and an expert on central banking practice, had asked Wilson on July 6 to withdraw his name from consideration. Warburg resented the Senate Banking Committee’s request for his (and Jones’s) testimony, while the committee bowed to the reputation of Wilson’s three other nominees.
Wilson refused to accept the setbacks. The New York Times headlined a battle: “For Open Fight on Warburg and Jones.”82 Senator Gilbert Hitchcock, Democratic senator from Nebraska and acting chairman of the Senate Banking Committee, voted against Jones, despite pressure from Wilson. The confrontation escalated. When the president questioned a statement released by the Senate committee, he provoked Hitchcock into saying: “If the President is correctly quoted, and if he doubts the accuracy of that statement, the con dential print of the testimony of Mr. Jones is at his disposal as are all confidential papers.”83
Hitchcock’s problem with Warburg was procedural: “The reason the Committee declines to take action on Mr. Warburg [is that] we can’t get any definite information about him. All the Committee knows is that Mr. Warburg came to this country from Germany where his father was a leading banker and that his connection with Kuhn Loeb & Co. has enabled that rm to be eminently successful in European a airs. Mr. Warburg is said to be making between $300,000 and $500,000 a year from his connection with this rm.
There are a number of questions the Committee would like to ask him. Unless we have this opportunity of questioning Mr. Warburg we will take no action whatever on his case.”84 “Radical” congressman Joe Eagle expressed his concern in less polite terms. He said that the problem with Warburg was that
“he is a Jew, a German, a banker and an alien.”85
On July 23, the day of the Austrian Ultimatum to Serbia, sustained opposition in the Senate forced Wilson to withdraw Jones’s name from consideration.86 The defeat in the Senate was a personal rebuke to Wilson, who had stuck by his good friend Edward Jones to the end. Warburg’s continued refusal to meet with the Senate Banking Committee dimmed his prospects as well. Warburg’s loss would damage Wilson, but spelled even more trouble for the Federal Reserve Board.
Warburg had been preparing for the job of central banker ever since he settled in the United States in 1905. On January 6, 1907, he published an article in the New York Times Annual Financial Review entitled “Defects and Needs of our Banking System.”87 Later, he helped Senator Nelson Aldrich, chairman of the U.S. National Monetary Commission, formulate the “Aldrich Plan” for a central bank.88 Warburg favored a strong and independent central bank. When McAdoo launched his plan in mid-1913 to make the central bank a division of the Treasury, Warburg undermined the e ort. He denounced the scheme in the “Mauretania Memorandum,” and showed it to Wilson’s adviser, Colonel Edward House, who happened to be sailing to Europe with Warburg
on the Mauretania.89
The New York Times o ered the following headline when trouble over the Warburg nomination rst surfaced: “Call for Warburg as Balance Wheel.”90 The Times article explained: “The fear seems to be that unless men of high nancial standing and great personal experience [such as Warburg] are included in the Board’s membership, Mr. McAdoo and Mr. Williams [comptroller of the currency] will dominate its policy.” The Times call for Warburg as a “balance wheel” was an understatement, as Warburg would soon become McAdoo’s antagonist.91
Paul Warburg’s pride prevented him from submitting to an inquisition by the Senate Banking Committee, but his desire to be a central banker sparked a plan. On July 23, the same day that President Wilson withdrew the name of Edward Jones from consideration by the Senate, Warburg penned the following letter to McAdoo: “Dear Mr. Secretary: May I hand you herewith copy of a paper which I wrote for the Senator. It contains: (1) A statement to the e ect that my attitude does not involve any denying on my part the prerogative of the U.S. Senate; (2) The suggested basis of an agreement. The latter is in the form of a statement to be made by Senator Hitchcock preliminary to my appearing before the committee. … I hope that the Senator will be able to establish without much delay whether an agreement substantially on these lines will be feasible or whether any further attempt of reconciling the two sides must be de nitely abandoned.” Warburg added a postscript to McAdoo’s letter: “I have not informed the Senator that I am communicating with you.”92
What gave Warburg the confidence to conspire with McAdoo?
McAdoo had already demonstrated that he was a team player. After Wilson sided with Carter Glass’s version of the currency bill in mid-1913 (perhaps with an assist from Warburg), McAdoo lobbied enthusiastically for Glass’s legislation. Glass complimented him when recounting the ght to establish the Federal Reserve: “[McAdoo] was adept at persuading men [and did] e ective missionary work to overcome obstructionists within Congress threatening to undermine the currency bill.”93
McAdoo had also demonstrated his intolerance for prejudice of any kind.
In 1909, as president of the Hudson & Manhattan Railroad, he followed a policy of equal opportunity employment well before it became the law of the land. He had said to his general superintendent, E. T. Munger: “Of course I want to run the road as economically as possible, but I am opposed to doing it at the expense of justice. Let’s employ women as ticket sellers on the downtown lines and give them the same wages as men.”94 In 1911 McAdoo accepted the chairmanship of the National Citizens Committee. The committee’s objective was to terminate an 1832 treaty with the Russian government because of Russia’s discriminatory practices towards Catholics and Jews.95 On December 6, 1911, the committee held a mass meeting in
Carnegie Hall and adopted a resolution asking Congress to abrogate the treaty with Russia. McAdoo went to Washington with a subcommittee to present the resolution to Congress and to President Taft. McAdoo’s subcommittee included Jacob Schi , the senior partner of Kuhn, Loeb and Paul Warburg’s brother-in-law.
On July 29, ve days after Warburg had sent his note to Senator Hitchcock, with the Machiavellian copy to McAdoo, Hitchcock stopped in New York on his way back to Washington from his vacation in Southampton, Long Island and, while there, met with Warburg. Afterward, when Hitchcock was asked whether Warburg had agreed to appear before the committee, he said: “No, but he seemed to understand after our talk just how the Committee felt toward him, and that there had been no discrimination against him, and he indicated in every way that he would be willing to appear. I believe Mr.
Warburg’s attitude has been changed by the explanation I have been able to make to him.”96