------------ EH.NET BOOK REVIEW --------------  
Published by EH.NET (August 2006)  
  
Elmus Wicker, _The Great Debate on Banking Reform: Nelson Aldrich and   
the Origins of the Fed_. Columbus, OH: Ohio State University Press,   
2005. xii + 120 pp. $35 (cloth), ISBN: 0-8142-1000-7.  
  
Reviewed for EH.NET by Ellis W. Tallman, Federal Reserve Bank of Atlanta.  
  
  
Elmus Wicker has written another important book for understanding a   
crucial portion of the complex economic history of the United   
States's banking system. The book describes the evolution of the   
banking reform debate that took place between 1894 and 1913 in   
newspapers, magazines, and political discourse, documenting the sharp   
turns it took along with changes in the key reform proposals from the   
most influential reformers. The book ends with Wicker suggesting that   
the creation of the Fed may have been accidental. Although the   
conclusion is debatable, the book will likely motivate further   
research on the banking reform movement and should appeal   
particularly to the specialist in the monetary history of the United   
States.  
  
The core of the book centers on how the banking reform debate evolved   
from the initial asset-based currency proposals arising from the   
interior banks toward the central bank-like plans (mainly from the   
New York City banking interests) that culminated in the passage of   
the Federal Reserve Act. Wicker presents essential details on various   
banking reform proposals, the key participants, and the main tenets   
of the reforms and he makes it clear that the path toward the   
establishment of a central banking entity was circuitous.  
  
For the context of banking reform, it helps to provide a brief   
synopsis of the cornerstone events spurring the debate. During the   
Banking Crisis of 1893, the New York City national banks left   
interior banks to fend for themselves by restricting convertibility   
of deposits into currency. Under existing banking legislation, banks   
outside New York City could not increase their currency supply when   
demand required it, but instead relied on their reserves on deposit   
at New York City national banks. In reform proposals, the banks   
outside New York City wanted to reduce their dependence on New York   
City national banks when emergency cash needs arose. Asset-based   
currency provisions would reduce that dependence. New York City   
bankers opposed asset-based currency proposals, instead supporting   
(though half-heartedly) central bank proposals. These positions held   
generally prior to the Panic of 1907.  
  
In a brief book, each chapter takes on a mission and Chapter 3,   
entitled "The Quest for an Asset-Based Currency, 1894-1908" argues   
that initial banking reform proposals aimed to repair the flaws of   
the National Banking System: seasonal money market stringency and   
banking panics. The initial reform proposals wrangled with   
"inelasticity of the currency," that is, the failure of currency   
(note issuance from banks especially) to respond to changes in   
demand, most notably, the seasonal demands from the agricultural   
cycle. The book provides a complete analysis of proposals and reform   
movements, and the descriptions retain a thematic continuity to the   
title. The Baltimore Plan in 1894 was conceived by bankers in the   
Baltimore Clearing House who then presented a proposal for currency   
reform at the American Bankers' Association annual convention. Wicker   
presents the detailed asset-based currency proposal of the Baltimore   
Plan, emphasizing that the plan was not uniformly supported by   
reformers with similar views. For example, J. Laurence Laughlin,   
chairman of the Department of Economics at the University of Chicago,   
perceived that the key constraint in a banking panic was access to   
credit, which was not going to be fixed by additional currency.   
Laughlin's subsequent participation in the Indianapolis Monetary   
Commission in 1897 links together the discussion of the two reform   
movements, making clear that the latter reform gained from the work   
of the Baltimore Plan. The Indianapolis Monetary Commission had as   
its goal the appointment of a National Monetary Commission, much like   
the one commissioned in the Aldrich-Vreeland Act of 1908.  
  
Wicker describes several other less well known reform proposals that   
deserve notice. Among the other banking reform proposals, the Pratt   
Bill of 1903 would have authorized each clearinghouse with the right   
to issue currency on the collateral of its general assets, thereby   
offering asset-based currency only through the clearinghouses rather   
than individual banks. This innovative element was similar to the   
portion of the Aldrich-Vreeland Act that allowed clearinghouses the   
authority to issue "emergency currency."  
  
The New York Chamber of Commerce Report in 1906 proposed a banking   
reform that promoted the establishment of a European-style central   
bank. Arising from New York City business leaders, the proposal   
provides a key contrast to the proposals from outside New York City.   
Frank Vanderlip, an executive at National City Bank in New York City,   
participated in the effort, although he apparently was unconvinced by   
the final draft of the proposal. It was a notable outlier among the   
reform proposals prior to the Panic of 1907.  
  
The book leaves two key questions relatively unanswered. First,   
Wicker asks how it was that the Midwestern, interior banking forces   
that initiated the serious effort toward reform lost the leadership   
of the banking reform movement to Wall Street bankers. Without that   
leadership, the interior banking interests had limited influence on   
the shape and content to the banking reform legislation. I think that   
the book understates the effect that the Panic of 1907 had on the   
banking reform debate. Wicker describes the Columbia University   
Lectures, a set of prepared lectures held in New York City on banking   
and financial market reform presented by a list of distinguished   
bankers, scholars, and public servants. The motivation for the   
lecture series arose from the aftermath of the Panic of 1907, which   
had affected New York City banks and financial markets most   
intensely. As a result, New York City banking interests had a   
heightened interest in the banking reform debate. The influence of   
the Wall Street bankers on the reform proposals in 1908 and afterward   
changed the contents of the banking reform debate. Separately, Wicker   
argues that bank reform shifted toward the creation of a central bank   
and lost its focus on panic prevention. This loss of focus in the   
banking reform movement on its initial motivation is not fully   
developed in the book, and offers some opportunities for additional   
inquiries.  
  
The second question that the book raises but then does not fully   
answer refers to the change in the perspective on banking reform of   
the central political character of the book, Nelson Aldrich, Senator   
from Rhode Island and Chairman of the Senate Banking Committee. The   
text describes how Aldrich left the United States to visit European   
central banks; at the time of his departure, Aldrich believed in the   
efficacy of currency reform, perhaps some form of asset-based   
currency legislation. Upon his return, though, Aldrich was an   
advocate of establishing a central bank in the United States. The   
discussion leaves the reader asking "why did he change his mind?" It   
is left for further research to uncover whether there was an event or   
particular observation that led Aldrich to change his mind. The   
address by Aldrich in the National Monetary Commission (Volume XX)   
emphasizes the absence of large-scale credit disruptions in Europe   
over the period in which the United States faced several serious   
crises, but there is no revelation of what caused his notable change   
of view.  
  
The description of the infamous Jekyll Island cabal and its role in   
the conception and creation of the Aldrich Bill offers perhaps the   
most accessible content for the general interest reader. Wicker   
describes the key personalities, their views, and their role in the   
creative process. The participants of Jekyll Island meeting were   
Nelson Aldrich, Henry P. Davison (a partner of J.P. Morgan and Co.),   
A. Piatt Andrew (a Harvard economics professor on leave as Assistant   
Treasury Secretary), Frank Vanderlip (second in command to James   
Stillman at National City Bank), and Paul Warburg (an investment   
banker from Kuhn-Loeb). Wicker emphasizes the absence of Benjamin   
Strong from the list of participants, and provides ample source   
material to underline that fact. Otherwise, the discussion of the   
Aldrich Bill is concise and accurate to set up a comparison with the   
Owen-Glass Bill that was eventually passed as legislation for the   
creation of the Federal Reserve System.  
  
The discussion of the Glass Bill examines an overlooked antecedent in   
the Muhleman Plan. Apparently, it is one of three proposals that H.   
Parker Willis, assistant to Carter Glass and often referred to as a   
central figure in the drafting of the Glass Bill, summarized for the   
Glass subcommittee. Wicker also describes Victor Morawetz's plan for   
regional reserve banks, in which the each district has considerable   
autonomy, a notable difference from the Aldrich Bill. Regional   
district autonomy was adapted to the Glass Bill.  
  
The book spends substantial text highlighting the differences and   
similarities of the Aldrich and Glass-Owen Bills. The differences   
were huge, despite the obvious benefit that the Owen-Glass Bill   
received from the Aldrich Bill as blueprint. The Aldrich Bill left   
the National Reserve Association as an entity run by bankers with   
some political oversight, whereas the Owen-Glass Bill reversed the   
roles. In terms of currency, the Aldrich Bill maintained currency as   
bank issue, whereas the Owen-Glass Bill made currency an obligation   
of the U.S. Treasury. With respect to the regional structure and   
districts, the Aldrich Bill was somewhat more centralized than the   
Owen-Glass Bill. The autonomy of the district banks in the Owen-Glass   
Bill contrasted with the Aldrich Bill proposal, and in retrospect,   
such autonomy likely hindered coordination within the Federal Reserve   
System during the Great Depression. The similarities of the two bills   
provide backdrop for another central theme of the book.  
  
The subtitle of the book is _Nelson Aldrich and the Origins of the   
Fed_ and the author makes no secret of his intention to acknowledge   
the debt owed to Nelson Aldrich for the successful passage of the   
Federal Reserve Act. The point is well-argued, well-worth making, and   
it is simple. Nelson Aldrich participated in the investigation of   
other central banks, he was crucial in guiding the momentum for   
banking reform toward the establishment of a central bank, and he   
coordinated the writing of the Aldrich Bill, which was an important   
blueprint for the Owen-Glass Bill. Aldrich was able to push the   
debate far enough to allow discussion of an institution that could be   
referred to as a central bank. For seven preceding decades in the   
United States, there was innate aversion to any proposal for a   
central bank. The contribution of Aldrich to the success of the   
Owen-Glass Bill, both in its content and in its passage, seems   
unmistakable.  
  
The contribution of this book is more than a summary of central   
points on bank reform proposals and their shortcomings. Instead, it   
offers a comprehensive yet concise analysis of the great American   
debate on banking reform. The book should become required reading for   
those interested in U.S. monetary and financial history, as a   
synopsis of the banking reform proposals as well as the development   
and passage of the Federal Reserve Act.  
  
  
Ellis W. Tallman is Vice President in the Macro Policy Group of the   
Research Department at the Federal Reserve Bank of Atlanta. His   
research interests in economic history focus on financial crises and   
specifically on the Panic of 1907 in the United States. He and his   
frequent co-author Jon Moen are completing a manuscript of a book   
examining the economic arguments that supported the movement to   
establish a central bank in the United States in the early twentieth   
century.  
  
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