The turn of the 20th century, particularly the years leading up to 1913, marks a fascinating and critical juncture in American history, characterized by a significant transformation in the nation’s economic and political landscape. This era, often dubbed the Progressive Movement, saw an intentional shift from a more laissez-faire approach to a centralized statism, a change notably driven by powerful business interests themselves, rather than as a popular uprising against them.
Indeed, what we understand about the Progressive Movement, which began around 1900, often contrasts sharply with popular historical narratives. While it’s commonly thought of as a grassroots movement by workers and farmers, fiercely opposing big business and seeking to curb monopolies, historical research reveals a different truth. In reality, the late 19th century witnessed increasing competition among businesses, and major financial houses, such as J.P. Morgan and Company, actively sought to establish cartels to ensure their continued economic dominance and profits. When their attempts at voluntary cartelization failed due to market competition, it became clear that the only way to achieve their goals was to leverage governmental power.
This strategic maneuver involved a redefinition of “monopoly.” Traditionally understood as exclusive privileges granted by the government, the term was cleverly reframed to mean “big business” or “competitive practices” like price cutting. This allowed for the establishment of regulatory commissions, such as the Interstate Commerce Commission and later the Federal Trade Commission, which were then lobbied for and staffed by big businessmen from the very industries they were supposedly “curbing.” This was all done under the guise of “opposing monopoly” and promoting the general welfare. Intellectuals, academics, and technocrats, often trained in German universities that promoted statism, readily joined this alliance, serving as apologists and planners for this new, centrally planned society, which promised a “cooperative commonwealth”. This period also saw the federal government expand its policymaking functions significantly, venturing into areas like antitrust, agriculture, and transportation.
Amidst this broader push for systemic change, the early 1900s also brought a focus on corruption. From 1901 to 1903, journalist Lincoln Steffens famously exposed municipal corruption in his work, The Shame of the Cities. Steffens’s writings contributed to the “muckraking” atmosphere of dissent by simply revealing what he observed. His work placed municipal corruption scandals within a wider societal context, arguing that corruption was a pervasive phenomenon that threatened to transform American democracies into oligarchies controlled by special interests. However, it’s important to understand that by the 1890s, while venal corruption remained, the fear that corruption posed an “inframarginal threat”—that it would inevitably lead to tyranny and slavery—had largely faded. Progressive Era reforms, in general, aimed to remove “special, minority, and corrupt influence” from government, reflecting a growing confidence in the inherent balance and resilience of the American system.
The desire for a more controlled economic system extended deeply into the banking sector. The existing National Banking System, established after the Civil War, provided only a “halfway house” to central banking and was increasingly seen as insufficient by Wall Street banks. They yearned for a governmental central bank that could coordinate inflation and act as a “lender of last resort” to bail out banks in distress, thereby preventing the recurrent boom-bust cycles and ensuring stability. The system was criticized for its “inelasticity,” meaning banks couldn’t expand money and credit as much as desired, particularly during recessions. This period saw significant competition among banks, including the rapid growth of state banks outside New York, which presented a challenge to the established Wall Street financial centers.
An early attempt at banking reform, the Fowler bill, introduced in 1902, aimed to allow for broader asset currency and branch banking. This bill sought to expand national banknotes based on a wider range of assets beyond government bonds and, crucially, would permit national banks to establish branches domestically and internationally, a practice previously illegal due to opposition from smaller country bankers. It also proposed a three-member board within the Treasury Department to supervise the creation of new banknotes and establish clearinghouse associations, signaling a step toward a full-fledged central bank. However, this bill was met with fierce resistance from the multitude of country bankers who feared competition from the larger banks, and it was ultimately defeated in the House. Following this setback, the big bankers decided to focus on achieving their goals through the executive branch and administrative means. Senator Nelson W. Aldrich’s subsequent bill the following year, which would have allowed large New York national banks to issue “emergency currency” based on municipal and railroad bonds, also failed.
From 1903 to 1905, Treasury Secretary Leslie Shaw, appointed by President Roosevelt (marking a shift from Rockefeller to Morgan dominance in the administration, though both financial camps largely aligned on central banking matters), attempted to make the Treasury function as a de facto central bank. Shaw tried to expand the money supply by purchasing government bonds on the open market during recessions and depositing substantial funds with favored big national banks. However, these proto-central bank manipulations were ultimately deemed a failure by reformers, who criticized them for artificially suppressing interest rates and leading to an “artificial expansion of credit”.
The formal campaign for a central bank gained significant momentum in January 1906, when Jacob H. Schiff, head of the powerful Wall Street investment bank Kuhn, Loeb & Company, delivered a pivotal speech to the New York Chamber of Commerce. Schiff lamented that the Treasury had, in the autumn of 1905, actually contracted the money supply by reducing government deposits, leading to a financial crisis and soaring interest rates—a “disgrace” in his words. He argued for the imperative of an “elastic currency” for the nation and urged the Chamber’s Committee on Finance to devise a comprehensive plan for a modern banking system to achieve this. Schiff’s partner, Paul Moritz Warburg, who had been advocating for a central bank since at least 1903, was instrumental in this push, aiming to bring the benefits of European central banking to the United States.
Following Schiff’s call, the New York Chamber quickly produced a report. James Stillman, chairman of the Rockefeller-backed National City Bank of New York, then suggested a new five-man special commission to develop a currency reform plan. This agitation extended to influential groups like the American Bankers Association (ABA). The ABA’s Currency Commission, featuring prominent figures such as A. Barton Hepburn of Morgan’s Chase National Bank and James B. Forgan of Rockefeller’s First National Bank of Chicago, sought a “broader asset currency” and emergency banknote issuance by national banks. A key concern for these reformers was to ensure that any credit inflation remained controlled and confined to large national banks, explicitly to prevent “uncontrolled state bank inflation” that might benefit smaller entrepreneurs and “speculative marginal producers”. Warburg consistently articulated this sentiment, emphasizing that “small banks constitute a danger” and advocating for a tightly controlled central bank system to replace the existing competition and decentralization.
The severe financial Panic of 1907 proved to be a critical turning point, unifying banker and business opinion in favor of a central bank that could regulate the economy and serve as a crucial “lender of last resort”. The strategy to achieve this involved a sophisticated “educational campaign” aimed at first bankers, then commercial organizations, and finally the general public. This included winning the support of academics and experts through organizations like the American Academy of Political and Social Science and the Academy of Political Science of Columbia University. The Aldrich-Vreeland Act of 1908, while a compromise on currency, established the significant National Monetary Commission, chaired by Senator Nelson W. Aldrich (John D. Rockefeller Jr.’s father-in-law), to investigate currency issues and propose comprehensive banking reform.
Charles A. Conant, a leading historian of banking and a key propagandist for the National Monetary Commission (NMC), played a crucial role. He wrote an influential 14-part series in the Wall Street Journal beginning in September 1909, advocating for a central bank and assuring readers that such an institution would primarily deal with larger national banks. This campaign involved manipulating the press, with the NMC preparing abstracts and articles for newspaper editors and recruiting the Associated Press to highlight “newsy paragraphs”. Academic organizations lent their “cloak of disinterested expertise,” publishing volumes that advanced the common agenda of a central bank, seemingly scientific yet designed to influence opinion. Paul Warburg, for his part, passionately articulated his vision of a “United Reserve Bank for the United States,” modeled on the German Reichsbank, emphasizing central bank control over the money market and the need to replace “free and self-regulating market” action with “the best judgment of the best experts”.
By 1911, the campaign escalated, with the formation of the National Citizens League for the Creation of a Sound Banking System in Chicago. While presented as a “grassroots heartland operation” to counter fears of Wall Street control, its true direction came from Chicago businessmen associated with major financial interests like Morgan and Rockefeller. The League’s purpose, as later conceded, was a “propaganda organ of the nation’s bankers”.
Despite political shifts and Republican-Democrat wrangling, particularly after Woodrow Wilson’s victory in the 1912 presidential election, the core objectives of the bank reformers remained consistent. The Aldrich Plan, initially associated with Republicans, was strategically rebranded as a Democratic measure (the Glass Bill), facilitated by figures like H. Parker Willis, who became a key assistant to Democrat Carter Glass. Though bankers preferred to appoint the Federal Reserve Board members themselves, they recognized the political necessity of having the President and Congress make these appointments, while ensuring their influence through the election of regional Federal Reserve bank officials and an advisory council.
Finally, on December 23, 1913, the Federal Reserve Act was passed, enjoying overwhelming support from the banking community. As A. Barton Hepburn of Chase National Bank remarked, the act “recognizes and adopts the principles of a central bank. Indeed, it will make all incorporated banks together joint owners of a central dominating power”. While President Wilson had insisted on political control over the Federal Reserve Board, not banker control, power was swiftly concentrated in the hands of “Morgan Men,” most notably Benjamin Strong, the influential head of the Federal Reserve Bank of New York. The passage of this act, a cornerstone of Wilson’s remarkable domestic agenda, solidified a shift towards compulsory cartelization in the name of “progressivism” and ultimately helped to preserve and even enhance Wall Street’s dominant position within a newly regulated system. Initially structured as a system of semi-autonomous regional banks to balance populist and banking concerns, control would eventually centralize further in Washington.