The meeting on Jekyll Island (2024)

In November 1910, six men - Nelson Aldrich, A. Piatt Andrew, Henry Davison, Arthur Shelton, Frank Vanderlip andPaul Warburg- met at the Jekyll Island Club, off the coast of Georgia, to write a plan to reform the country's banking system. The meeting and its purpose were closely guarded secrets, with participants only admitting that the meeting took place in the 1930s. But the plan written on Jekyll Island laid the foundation for what would eventually become the Federal Reserve System.

The need for reforms

At the time, the men who met on Jekyll Island believed that the banking system was in serious trouble. The positions of the Jekyll Island participants on this issue are well known, as several spoke publicly before and after their conclave and others published widely on the subject. Together they summarized 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 about the financial panic that had periodically disrupted economic activity in the United States throughout the nineteenth century. National panics occurred on average every fifteen years. This panic forced financial institutions to halt operations, leading to long and deep recessions. American banks had large required reserves of cash, but these reserves were spread across the country, kept in the vaults of thousands of banks or as deposits at financial institutions in designated reserve and central reserve cities. During crises they were frozen in place, preventing them from being used to remedy the situation. During boom times, banks' excess reserves tended to flow to big cities, especially New York, where bankers invested them in call loans, loans that had to be repaid to brokers. The brokers in turn lent the money to investors who speculated on the stock markets, whose stock purchases served as collateral for the transactions. This American system made bank reserves immobile and stock markets volatile, a recipe for financial instability.

In Europe, by contrast, bankers invested a large part of their portfolio in short-term loans to traders and manufacturers. This commercial paper directly financed trade and industry and provided the banks with assets that they could quickly convert into cash during a crisis. These loans remained liquid for various reasons. First, borrowers paid financial institutions – usually banks with which they had long-term relationships – to guarantee repayment if borrowers could not meet their financial obligations. Second, the loans financed goods in production and sale, and these goods served as collateral if borrowers defaulted. Jekyll Island participants were also concerned about the inelastic supply of currency in the United States. The value of the dollar was tied to gold, and the amount of currency available was tied to the supply of a special series of federal government bonds. The supply of currency neither increased nor decreased due to seasonal changes in cash demand, such as the fall harvest or the Christmas shopping season, causing interest rates to vary significantly from month to month. The inelastic supply of currency and limited supply of gold also contributed to long and painful deflations.

Furthermore, Jekyll Island participants believed that a number of outdated regulations were hindering America's financial and economic progress. For example, American banks could not operate abroad. For example, American merchants had to finance imports and exports through financial institutions in Europe, mainly London. U.S. banks also struggled to collectively clear checks beyond the boundaries of one city. This increased the cost of trade between cities and highways and required risky and expensive money transfers over long distances.

In an article published inNew York Timesin 1907 Paul Warburg, a successful German-born financier who was a partner in the investment bank Kuhn, Loeb and Co. and widely regarded as an expert on the banking systems of the United States and Europe, that the financial system of the United States was "about the same as that achieved by Medici-era Europe, and by Asia, in all probability, in the time of Hammurabi" (Warburg 1907).

Just months after Warburg wrote these words, the country was struck by the Panic of 1907. The panic roiled the United States Congress, especially Republican Senator Nelson Aldrich, the chairman of the Senate Finance Committee. In 1908, Aldrich, along with Republican Representative Edward Vreeland, sponsored a bill that, among other things, created the National Monetary Commission to study reforms to the financial system. Aldrich quickly hired several advisors to the committee, including Henry Davison, a partner at J.P. Morgan, and A. Piatt Andrew, professor of economics at Harvard University. Over the next two years they studied the banking and financial systems in depth and visited Europe to meet with bankers and central bankers.

The duck hunt

In the fall of 1910, Aldrich became convinced of the need for a central bank for the United States. With Congress set to begin meeting in just a few weeks, Aldrich decided—most likely at Davison's suggestion—to convene a small group to help him summarize everything he had learned and write up a proposal to establish a central bank.

The group included Aldrich; his private secretary Arthur Shelton; Davison; Andrew (who had been appointed Assistant Secretary of the Treasury in 1910); Frank Vanderlip, president of National City Bank and former Secretary of the Treasury; and Warburg.

A member of the exclusive Jekyll Island Club, probably J.P. Morgan ensured that the group could use the club's facilities. Founded in 1886, the club featured such elites as Morgan, Marshall Field, and William Kissam Vanderbilt I, whose mansion-like “cottages” dotted the island.Munsey's Magazinedescribed it in 1904 as "the richest, most exclusive, most inaccessible" club in the world.

Aldrich and Davison chose the participants for their expertise, but Aldrich knew their ties to Wall Street could raise suspicions about their motives and jeopardize the bill's political passage. So he went to great lengths to keep the meeting secret, using the ruse of a duck hunt and ordering the men to come one by one to a train terminal in New Jersey where they could board his private train car. Once on board, the men used only first names - Nelson, Harry, Frank, Paul, Piatt and Arthur - to prevent staff from discovering their identities. Decades later, the group called itself the "First Name Club."

An additional member of the First Name Club wasBenjamin Strong, vice president of the Bankers Trust Company and future founder and CEO (then called governor, now called president) of the Federal Reserve Bank of New York. But it is unlikely that Strong attended the Jekyll Island meeting. In his autobiography, Vanderlip recalls him being present, but no other accounts indicate Strong's presence. Most scientists and journalists who have written on this topic, including Bertie Charles (B.C.) Forbes – the founder ofForbesthe magazine and the journalist who first made the meetings public in a 1916 article – have concluded that Strong did not attend (Forbes 1916). However, Strong had worked closely with the Jekyll Island participants elsewhere, 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 regularly consulted and, according to Forbes, "registered in the 'First-Name Club' as 'Ben'" (Forbes 1922).

The plan is taking shape

Aldrich and his colleagues soon realized that while they agreed on some general principles—the introduction of an elastic currency, provided by a bank that held the reserves of all the banks—they disagreed on the details. Sorting out these details was a “desperately difficult undertaking,” in Warburg's words. Completely withdrawn, the men got up early and worked late into the night for over a week. “We had disappeared from the world to a desert island,” Vanderlip recalled in his autobiography. “We did the most intense period of work I've 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 will be governed by boards elected by the member banks in each district, with larger banks getting more votes. The branches would be responsible for maintaining the reserves of their member banks; issuance of currency; discount on commercial paper; transfer of balances between branches; and control of approval 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 prepare the plan for Congress. Aldrich presented it to the National Monetary Commission in January 1911 without telling committee members how the plan was developed. A final report, along with the legislative text, went to Congress a year later with a few minor changes, including the name of the new institution, the National Reserve Association.

In a letter accompanying the report, the Commission says it has created an institution that is "scientific in method and democratic in control." But many people, especially Democrats, objected to the version of democracy she presented, which could have allowed the largest banks to exercise overall influence over central bank management. With a presidential election looming, Democrats have made rejection of the Aldrich plan part of their platform. When Woodrow Wilson won the presidency and Democrats took control of both houses, it seemed Aldrich's National Reserve Association was shelved.

However, Democratic Party leaders were also interested in reform, including President Wilson and the chairmen of the House and Senate Banking and Currency Committees,Carter Glasand Robert Owen respectively. Glass and Owen both presented proposals to form a central banking system based on bills supported by Wilson. Glass, Owen and their staff consulted directly with Warburg, whose technical expertise was respected by both Democratic and Republican politicians. Wilson's chief political advisor, Colonel E. M. House, met and corresponded with Warburg to discuss banking reform in general and Glass and Owen's plans in particular. It didWilliam McAdooInHendrik Morgenthau, senior political and policy advisors to Wilson who served in his administration. Morgenthau assured Warburg "that he had sent his copy of the memorandum of [January 10, 1913] 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 were similar to those of the Aldrich Plan. The main 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

BC Forbes somehow heard about the Jekyll Island trip and wrote about it in 1916 in an article published inLeslie's Weekly(October 19, 1916 p. 423), which was summarized a few months later in an article in the magazineCurrent opinion. In 1917, Forbes described the meeting againMen who make 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 “just a thread,” according to Aldrich's biographer.

The participants themselves denied that the meeting had taken place 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 memoirs,An adventure in constructive economics. In it, Glass, now a senator, took credit for the key ideas of the Federal Reserve Act, which led the Jekyll Island participants to reveal their role in the creation of the Federal Reserve.

Warburg was particularly critical of Glass's description of events. In 1930, he published a two-part 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 three months' rest, when the appearance of a series of articles written by Senator Glass... induced me to write down in black and white my recollections of certain events in history. of banking reform." Warburg's book does not specifically mention Jekyll Island, although he does

“In November, 1910, I was invited to join a small group of men who, at the request of Senator Aldrich, were to attend a conference of several days with him to discuss what form the new banking bill should take... ended... agreement was reached on a rough draft of what would become the Aldrich bill... The results of the conference were completely confidential. Even the fact that a meeting had taken place was not allowed to become public... Although Eighteen years have passed, I am not at liberty to give a description of this most interesting conference, of which Senator Aldrich has promised secrecy to all participants. However, I understand that a history of Senator Aldrich's life... will contain an authorized record. of this episode" (Warburg 1930, pp. 58-60).

The controversies over the authorship of the Federal Reserve Act were widely publicized in the late 1920s. Glass defended his claim to the lion's share of the credit in speeches, in his book and in contributions to leading publications, includingEvening mail from New YorkInNew York Times. Critics responded in similar venues and academic journals. For example, Samuel Untermyer, former counsel to the House Committee on Banking and Monetary, published a pamphlet entitled “Who is Entitled to the Credit for the Federal Reserve Act?” An Answer to Senator Carter Glass', in which he argued that Glass's claims The main authorship was "fiction", "fable" and a "work of fantasy" (Untermyer 1927). In 1914, Edwin Seligman, a leading professor at Columbia University, wrote that "the Federal Reserve Act in its basic features is more the work of Mr. Warburg than of any other man." In 1927, Seligman and Glass discussed this point in a series of letters published inNew York Times.

The Jekyll Island Club never recovered from the Great Depression, as many of its members resigned, and closed in 1942. Today, the former clubhouse and cabins are National Historic Landmarks. But the debates at and about the conference on Jekyll Island are still relevant.