Introduction
When the Federal Reserve Bill was enacted in 1913, it created an arcane system of multilevel governance that combined decentralized monetary policy, centralized government oversight and coordination, and private banker input over policy at the regional level.Footnote 1 By decentralizing monetary policy decision making and creating a monetary authority that allows for geographically differentiated monetary policy within the dollar currency area, the Federal Reserve System as it was originally envisaged presents a striking contrast with the contemporary landscape of central banks typically providing uniform monetary policy through a centralized decision-making process. Yet the plan was controversial. In response to the Federal Reserve Bill, Benjamin Strong, later governor of the New York Federal Reserve, exclaimed that the proposed institution was a “multiheaded hydra” that was “rent within itself by regional competitive conditions” and that constituted a poor approximation of a central bank.Footnote 2 Many scholars have since dismissed the early Federal Reserve as a failed institutional experiment,Footnote 3 and its design has been reduced to a political compromise that nobody truly wanted.Footnote 4 However, this oversimplifies the origins of the Federal Reserve and misses an opportunity to better understand the reasoning and political choices behind decentralized monetary government. Therefore, this article seeks to make sense of this purported mirage of a central bank by tracing the construction of the early Federal Reserve to a particular reading of the American constitutional tradition, articulated in Woodrow Wilson’s New Freedom political program, which provided the basis for a particular conception of federal monetary government.
The literature on monetary policy and central banking provides limited guidance for making sense of decentralized “central” banking. Although scholarship on macroeconomic policy often frames federalism as a possible solution to problems of regional heterogeneity,Footnote 5 the literature on federal monetary government has instead focused on how federal veto points affect the credibility of monetary-policy targets and commitments to central bank independence.Footnote 6 This says little about what a federal monetary order could actually look like beyond the norms of uniformity and centrality.Footnote 7 The early Federal Reserve System did not conform to these norms. The Federal Reserve Act of 1913 provided for an institution with a unique design compared with central banking norms. The split-level governance structure of the early Federal Reserve had two main features: a decentralized system of 12 autonomous reserve banks and a government-appointed Federal Reserve Board. The reserve banks played central roles in the formulation and implementation of monetary policy through the collection of banking reserves, by discounting commercial paper presented to them by member banks, and through open-market operations. The reserve banks were linked through their facilities for transfers and clearing between districts and facilities for rediscounting between reserve banks.Footnote 8 The Federal Reserve Board in Washington DC was created to “exercise general supervision over said federal reserve banks,” and it was authorized to “examine at its discretion the accounts, books and affairs of each federal reserve bank and of each member bank.” The discount rates chosen by the reserve banks were “subject to review and determination of the Federal Reserve Board,” and the Board could require reserve banks to rediscount for one another. The Board also appointed three of the nine directors of each reserve bank, including the chairman.Footnote 9
Existing scholarship seeking to explain the design of the early Fed emphasizes sectoral and interest-group politicsFootnote 10 and the important role played by political compromises to get political factions on board with this sweeping overhaul of the US monetary and financial system.Footnote 11 These fall short of providing an adequate understanding of the institutional logic of the decentralized system and the substantive design choices made throughout this prolonged and contentious policy process. To fill this gap, this article focuses on ideas articulated in policy debates within and outside of Congress leading up to the Federal Reserve Act. Through this analysis, the article makes two key contributions. First of all, it provides a better understanding of the politics of currency and banking reform in the period by reconstructing two distinct conceptions of monetary federalism that vied for influence during reform debates. Second, the article highlights how Wilson and his New Freedom political program facilitated a merger between two main strands of Democratic political-economic thought and thereby provided the basis for the conception of federal central banking that ultimately informed the Federal Reserve Act.
The structure of a new central bank in the United States was the most controversial issue leading up to the creation of the Federal Reserve,Footnote 12 and the design of the Federal Reserve System must be understood in terms of the dilemmas of federal money that U.S. elites wrestled with. Monetary government in compound systems faces three main interrelated dilemmas.Footnote 13
The first concerns the level of monetary authority. Federal systems differ from arrangements for administrative delegation in that different levels of government in federations have “independent bases of authority,”Footnote 14 and the balance between centralized and decentralized government is at the core of federal constitutionalism.Footnote 15 Although this is rarely addressed in the literature on monetary government, such constitutional issues rose to the foreground in progressive era political debates,Footnote 16 also affecting monetary debates. It was widely agreed that monetary sovereignty resided with the federal government,Footnote 17 but controversy arose over the appropriate level of control and implementation of monetary policy.Footnote 18
The second dilemma is over mechanisms for control and accountability. The public–private boundary is constitutive of central banking, as these institutions are informed by both regulatory and market logics.Footnote 19 In early twentieth-century United States, the balance between centralization and decentralization intersected with the question of the appropriate boundary between public and private spheres of influence and whether a new organization would be most judiciously governed under public or private control. The dominant concern was with the (alleged) power of the so-called money trust and the fear that a central bank would be captured by powerful private economic interests—a concern that crossed party lines.Footnote 20
The third dilemma relates to the spatial structure of monetary policy in heterogeneous currency areas. Whereas late twentieth-century central banking norms focused on central bank unity and independence and monetary policy uniformity (“one size fits all”)Footnote 21 and central banks ground their legitimacy in claims to technocratic exceptionalism and neutrality,Footnote 22 recent research on the political economy of central banking has emphasized the distributive implications of monetary policy.Footnote 23 Such issues are amplified in compound currency areas where economic and regulatory differences and structural asymmetries create particular challenges for monetary policy,Footnote 24 and the debate is ongoing regarding the degree to which institutional arrangements can mitigate structural tensions within currency areas.Footnote 25 During the early twentieth-century in the United States, this constituted a key issue in debates on currency and banking reform. The existing dual system of state and national banks with different state and federal regulatory regimes created an entrenched territorial financial system.Footnote 26 Many observers argued that the country’s size and social and economic heterogeneity made a central bank and a uniform monetary policy unsuitable for the United States.Footnote 27 A key question in these debates was whether monetary policy should be nationally uniform or sensitive to regional and local differences and needs.
The two major reform proposals in the United States that emerged and vied for influence in early twentieth-century—the Aldrich plan and the Glass-Wilson plan—responded to these dilemmas in distinct ways and provided distinct blueprints for a new federal organization of monetary government. This article traces these reform plans to two distinct readings of the American federal-constitutional tradition that culminated in the articulation of two irreconcilable conceptions of just, efficient, and legitimate federal monetary government. In developing this argument, this article draws on scholarship on the role of ideas in politics and policy making that highlights how communicative action and discursive interactions enable actors to reflect on their institutional context and experiment with new ideas, sometimes culminating in policy innovation and institutional change.Footnote 28 This provides a lens through which to understand how US policy makers translated the central bank idea into American political discourses and traditions culminating in the unique design of the Federal Reserve System.
The dilemmas of federal money are relevant far beyond the case of the Federal Reserve. There are many historical examples of decentralized arrangements for monetary policy that do not conform to the norms of uniformity and centrality, such as the autonomy of Norges Bank branches in the nineteenth centuryFootnote 29 and the coordination of central banks in the European Monetary System.Footnote 30 Many central banks have also explored unconventional monetary policy tools with important spatial dimensions, including the Municipal Liquidity Facility and the Mainstream Loan Facilities in the United StatesFootnote 31 and the Outright Monetary Transactions and the Public Sector Purchase Programs in Europe.Footnote 32 In a sense, monetary federalism is the paradigm that never was—a practice that has never been fully articulated. In line with the increasing scholarly interest in the political-theoretical foundations of money,Footnote 33 this article contributes to our understanding of federal monetary politics by exploring a historical case where the dilemmas and principles of federal government were explicitly connected to issues of central banking and monetary policy.
The origins of the Federal Reserve Act
How can we make sense of the peculiar decentralized and split-level design of the Federal Reserve as created through the Federal Reserve Act of 1913? Conventional explanations for why the Federal Reserve was created emphasize the role of Wall Street financiers and other corporate interests in pushing the United States to overcome hostility toward central banking.Footnote 34 However, these frameworks predict the creation of a centralized system: most actors who prioritized financial stability in their rhetoric also favored centralization,Footnote 35 and there is clear evidence that Wall Street-affiliated central bank proponents opposed decentralized monetary policy.Footnote 36
Instead, there are two main interpretations of the decentralized structure of the early Federal Reserve. The first traces this unique structure to a broader shift in US state developmentFootnote 37 and, in particular, to the role of rural interests and farmers’ politics in these developments.Footnote 38 Elizabeth Sanders, for example, argues that the hostility of agrarians toward the central-banking idea pushed policy makers to create a decentralized institution with significant public oversight.Footnote 39 This highlights an important political dynamic, but the focus on farmers’ politics emphasizes the overrepresentation of agricultural states in the Senate, glossing over the money trust investigation and the articulation of the Democratic reform plan in the House of Representatives. Others, given the difficulty in linking the design of the Federal Reserve Act to any one dominant interest, have instead concluded that the design was a compromise solution.Footnote 40 Sarah Binder and Mark Spindel, for example, argue that “a decentralized system of reserve banks was the price of enactment,” not an institutional structure that any political party or interest group wanted.Footnote 41 Political compromise was certainly necessary in the fractured political environment of the progressive era, but this argument does not explain why the compromise solution took the particular form that it did and thus does not explain the institutional logic of the decentralized Federal Reserve System.
The point here is not to dismiss the role of Wall Street-affiliated central bank proponents, the political influence of agrarian interests, or the need for political compromises to navigate a divided Congress. Yet these factors are insufficient on their own. To account for the institutional logic and substantive design choices behind the Federal Reserve System, we must also pay attention to the ideas that informed the politics of banking and currency reform leading up the adoption of the Federal Reserve Act. More specifically, in the context of broader progressive-era political debates, actors involved in debates on currency and banking reform articulated distinct theories of monetary federalism. Attention to the ideational dimension of these debates is not new. Nicolas Thompson, for example, has explored the influence of four distinct ideologies of central banking during the early twentieth-century in the United States, and he argues that the Federal Reserve Act was a compromise between Jeffersonianism, populism, and progressivism.Footnote 42 Yet this approach to studying the influence of already articulated and circulating ideas about central banking on the design of Federal Reserve overlooks the degree of reimagination and institutional innovation that went into creating a new federal monetary system. Broad ideological categories such as progressivism did not operate as a coherent, ready-made, and static ideational package to be implemented by politicians but rather constituted forms of political discourse and lines of conflict.Footnote 43 The argument developed here is that as policy elites “puzzled” and “powered”Footnote 44 over currency and banking, they articulated distinct conceptions of what constituted a just, efficient, and appropriate federal monetary government.
Importantly, this article argues that president Woodrow Wilson played a crucial role in shaping the design of the Federal Reserve by incorporating two competing strands of Democratic thought—the conservative Jeffersonian emphasis on small federal government and laissez-faire and the anti-monopolist tradition—into a novel theory of federal monetary government. The role of Wilson is widely recognized. Existing scholarship has highlighted the activist presidency of Wilson and his ability to shape politics, and the Federal Reserve Act has been framed as one of Wilson’s major legislative achievements.Footnote 45 This article builds on these insights by identifying Wilson’s role in articulating a novel theory of federal monetary government, thereby going beyond the notion of a pragmatic “Wilsonian compromise”Footnote 46 by highlighting Wilson’s substantive contributions to the design of the Federal Reserve.Footnote 47
Thus, the objective of this article is to analyze how ideas about federal monetary government were articulated in debates on currency and banking reform and to trace the role of these political-economic conceptions in the design of the Federal Reserve System. In the remainder of this section, I will provide a brief overview of the two main reform proposals leading up to the Federal Reserve Act, including an introduction to their underlying theories of federal monetary government.
The Federal Reserve Act was the product of a protracted policy process spanning from the panic of 1907 to the end of 1913. Financial and monetary orthodoxy had survived the onslaught of late nineteenth-century populism,Footnote 48 and some consensus emerged regarding the mechanics of monetary policy. Yet currency and banking reform remained high on the political agenda in the early twentieth century,Footnote 49 and for policy elites involved in these debates, a controversial dilemma was how to organize a new monetary authority given the country’s federal political tradition.Footnote 50 A variety of proposals for the creation of a central bank circulated,Footnote 51 but while many looked to European central banks for inspiration, even most central-bank proponents agreed that there were no existing models suitable for American conditions and traditions.Footnote 52 In this context, legislative debates centered on two reform plans articulated in the aftermath of the panic of 1907. The first, spearheaded by Republican Senator Nelson Aldrich, ultimately failed in Congress. Control shifted to Democratic legislators following elections in 1910 and 1912, and the Democratic Glass–Wilson plan, developed under the Congressional leadership of Representative Carter Glass, culminated in the Federal Reserve Act.
Although many scholars trace the origins of the Federal Reserve directly to corporate interests and Wall Street-affiliated central bank advocates and reduce the Democratic legislative effort to a mere political rearticulation of the Aldrich plan,Footnote 53 this ignores critical differences between the two plans. As summarized in Table 1, the Aldrich and Glass–Wilson plans provided distinct solutions to the dilemmas of monetary federalism. In short, although both the Aldrich and Glass–Wilson plans proposed federal (multilevel) structures for the government of money, they entailed different spatial imaginaries for the formulation and implementation of monetary policy and envisioned different mechanisms for balancing local, regional, and national control and the influence of private and public interests. The Aldrich plan proposed a National Reserve Association (NRA) under private banker control to centralize a nationally uniform monetary policy.Footnote 54 In terms of governance, the plan provided for an intricate multilevel structure of local associations and district branches whereby bankers could exercise control and hold the association accountable. NRA board members were elected by member banks via the branches, and the government was represented by a small contingent on the board.Footnote 55
Summary of the Two Major Central-Banking Reform Plans
Table 1. Long description
The table consists of three columns. The first column lists the criteria, the second column describes the Aldrich plan, and the third column describes the Glass-Wilson Plan.
* Proposal: The Aldrich plan proposed a National Reserve Association, while the Glass-Wilson Plan proposed the Federal Reserve System.
* Policy: The Aldrich plan featured a uniform national or federal policy. The Glass-Wilson Plan featured a differentiated regional policy.
* Governance - Level of control: The Aldrich plan was decentralized at the regional or local level. The Glass-Wilson Plan used a split-level approach involving both national/federal and regional levels.
* Governance - Core principal: The Aldrich plan was private, led by banks with government oversight. The Glass-Wilson Plan was public-private, involving central government and regional banker-government cooperation.
* Conception of monetary federalism: The Aldrich plan is categorized as National-corporatist. The Glass-Wilson Plan is categorized as Regional-administrative.
This stands in sharp contrast to the Glass–Wilson plan and the ultimate structure of the Federal Reserve System. The Glass–Wilson plan involved decentralizing monetary policy and reserves in regional reserve banks, and the Federal Reserve Board was not to engage in banking activities. The plan also proposed a split-level public–private governance structure: a government-appointed Federal Reserve Board to monitor and coordinate the system and shared public–private control of the regional reserve banks. Each reserve bank would have nine directors: three elected by member banks to represent them, three elected by member banks to represent other agricultural and industrial interests in their respective regions, and three appointed by the Federal Reserve Board in Washington.Footnote 56
These plans clearly diverge from the norms of unity and uniformity that are characteristic of modern central banks, including the ECB and the Federal Reserve since the Banking Acts of the 1930s. The thesis explored in the remainder of this article is that these plans centered on distinct conceptions of monetary federalism, grounded in different readings of the American federal-constitutional tradition and that the institutional blueprint provided for in the Federal Reserve Act was deeply influenced by Wilson’s New Freedom political program. To trace the articulation of these reform plans and the ideas and considerations that informed them, the empirical strategy focuses on the expressed ideas of actors who were central to the development of the two plans. These include ideas communicated to influence the policy-making process, as evident in public statements (speeches, essays, pamphlets, books, and congressional debates and hearings). The analysis also complements and cross-validates the interpretation of these sources with private communications (correspondence, unpublished memoranda), formal policy documents (committee reports, bills, and acts), and secondary historical and biographical sources.Footnote 57
The national-corporatist model and the Aldrich plan
In response to the panic of 1907, Congress appointed the National Monetary Commission (NMC), chaired by Senator Nelson Aldrich. The NMC was to investigate and develop “necessary or desirable” recommendations for new currency and banking legislation.Footnote 58 The resulting reform plan, as discussed above, combined centralized reserves, a uniform national monetary policy, and decentralized and private mechanisms for accountability and control. The first draft of the Aldrich plan did not, however, originate with the work of the NMC but from a secret meeting held at Jekyll Island where Aldrich met with his closest economic advisor, economist A. Piatt Andrew, and three Wall Street representatives—Paul Warburg, Frank Vanderlip, and Henry Davison. It was these Wall Street-affiliated central bank proponents that convinced Aldrich to save the Hamiltonian vision of a national bank from “the ghost of Andrew Jackson.”Footnote 59 The result of the meeting was a draft plan, embodying several provisions advocated in Warburg’s scheme for a United Reserve Bank,Footnote 60 which was presented to the NMC by Aldrich in 1911,Footnote 61 without disclosing its origins.
Wall Street-affiliated central bank proponents argued that the main weakness of the US banking system was its decentralized organization of reserves and lack of central coordination and agency.Footnote 62 Mobilizing the country’s banking reserves was likened to the creation of a water reserve for fighting fires,Footnote 63 and central bank proponents emphasized the need for a central agency to coordinate a banking sector that was “like an army of scattered detachments with no head and no organization.”Footnote 64 Looking to Europe for inspiration, they argued that central banking was critical to a stable currency and banking system,Footnote 65 and this trope was taken up by Aldrich and the NMC.Footnote 66
Yet in response to critics of the plan who emphasized that the United States was too large and economically heterogeneous for a central bank and a uniform monetary policy,Footnote 67 Aldrich and his allies recognized the importance of designing an institution which resonated with American conditions and traditions.Footnote 68 They sought to build a political coalition by framing the idea of a centralized monetary agency under private banker control within a national-corporatist conception of federal monetary government. This narrative centered on Republican economic-nationalist doctrine, a neo-Hamiltonian conception of bankers as the natural representatives of the commercial interests of the nation, and the decentralized system of control as embodying the federal-constitutional tradition of checks and balances.
Drawing on Republican economic doctrine, Aldrich’s quest for a national authority implementing a uniform policy went beyond the technical reasoning behind central banking. Aldrich saw the currency problem as one of disunity and he framed the organization of currency and banking as “essentially a national question,” which had to “be settled upon national lines.”Footnote 69 This was not just cheap talk. Building on the Hamiltonian vision for an “energetic government”Footnote 70 being “a common directing power”Footnote 71 geared toward national economic progress,Footnote 72 twentieth-century Republican economic doctrine centered on pro-business economic-nationalist principles and a federal government that promoted national economic integration and prosperity.Footnote 73 The Republican party had pursued national monetary and financial integration through the National Banking Acts of the 1860s,Footnote 74 and many saw the creation of “an agency whose influence can be made effective in securing greater uniformity, steadiness, and reasonableness of rates of discount in all parts of the country”Footnote 75 as a natural next step.Footnote 76 The Aldrich plan would create a national agency that takes “individual banks from a condition of helpless isolation and dependence and places them in a position where their integrity and independence is assured, through an unfailing source of support.”Footnote 77 Within this economic-nationalist doctrine, it was crucial that the plan provided for a nationally uniform policy and discount rate that would encourage national economic homogenization and avoid favoring certain regions and sectors.Footnote 78
The nationalist doctrine does not, however, explain the provisions for decentralized banker control of the NRA. Although Aldrich and his allies defined the money problem narrowly in terms of financial stability—framing the nationalization of reserves as the key solution—nationalizing monetary government and privatizing control exposed the Aldrich plan to criticism, especially concerning the influence of Wall Street. Aldrich and his allies sought to stymie fears and provide an ideological justification for a banker-controlled institution working in the public interest by, once again, mobilizing the legacy of the Federalist tradition. In doing so, they articulated a novel conception of federal corporatist government.
For the Federalists, the crux of constitutional government was to shield the republic from the corrupting influences of “factions”—whether special interest or the tyranny of the majority.Footnote 79 The dual concern with factions and majority rule lingered in American political thought, including the idea that the federal government should stand above conflicting private interests. Late nineteenth-century industrialization and the rapid rise of corporate conglomerates and organized economic interests put significant pressure on traditional conceptions of political legitimacy and state–society relations, and the principles of representative government reemerged as a salient political issue in the progressive era.Footnote 80 Among Republicans, President William Howard Taft, for example, referring extensively to the Federalists, argued that it was not popular control but interpretation of the popular will that made a good democratic government, and “[m]en of experience in governmental affairs and special knowledge are certainly better able to carry it on than those who have neither.”Footnote 81
Aldrich and his allies could not escape this new political reality, so they framed their solution through a particular reading of the Federalist tradition. As noted by his biographer, Aldrich was an avowed Hamiltonian,Footnote 82 and his justification for banker control can be found in Hamilton’s theory of economic government. For Hamilton, effective government should be controlled by representatives who, in pursuit of their own self-interest, would ensure common interests and the material well-being of the many. In a commercial society, Hamilton argued, merchants constituted such a group. Because they did not have a vested interest in any particular industry or sector but in trade and economic activity in general, they were the “natural representatives” of the common interests of other commercial classes.Footnote 83 In line with this, Aldrich began to think in terms of a novel conception of “economic constituency” and to “look on economic interests as the statesmen of the elder day looked upon geographical interests,”Footnote 84 and he envisioned a partnership between corporate interests, to which significant powers were delegated, and government, which was to provide a check on that power.Footnote 85
Based in this conservative corporatism, Aldrich held that government should mostly be kept out of the governance of the NRAFootnote 86 and that monetary organization should not be considered “in any sense a political question” but should rather be seen as “a business question affecting the material interests of the entire people of the United States.”Footnote 87 For Aldrich, bankers were analogous to Hamilton’s merchants; they were attuned to the needs of the economy, they did not privilege any particular sectors, and they had the necessary expertise to manage the system efficiently.Footnote 88 Bankers were framed as representatives of the various parts of the US economy—the NRA was to represent the banks of the country and, in doing so, it would operate in the nation’s interest. This narrative, placing bankers as the guardians of national prosperity, was succinctly summarized by Taft:
[The NRA] will be influenced only by a general anxiety and care for the welfare of its constituents, which are the seven thousand or more national banks of the country, which represent, as completely as they could be represented, the general business interests of the country. It is, therefore, a plan which follows out the genius of our representative system, and it makes certain that the general trend of the policy must always be in the interest of general business and of the people at large.Footnote 89
However, worries about the disruptive consequences of common banking practices—the seasonal scramble for liquidity and the recent experience with monetary panics—challenged the idea that self-interested banking was conducive to national welfare. In response, Aldrich and his allies sought to absolve bankers of blame. They recognized that it that bankers during the panic of 1907 had engaged in a “life and death contest” to obtain cash, “forgetting for the time being the solidarity of their mutual interests and their common responsibility to the community at large.”Footnote 90 Yet the main fault was not with the bankers but with the legal-institutional framework within which they operatedFootnote 91: the flow of banking reserves to Wall Street was a product of necessity due to the inflexible regulation of bank reserves.Footnote 92 Bankers, furthermore, had reached “toward some coherent organization and leadership” during the panic by creating clearing houses,Footnote 93 but this was insufficient in the absence of centralized coordination. A central agency was necessary to create a unified, strong, and permanent national system.Footnote 94
This caused concern that the central agency would simply be a puppet to Wall Street.Footnote 95 To assuage these fears, the solution assembled in the Aldrich plan—drawing from a plan previously developed by WarburgFootnote 96—was to decentralize the system by which members of the NRA were selected and held accountable by bankers across the country.
A decentralized governance structure was not the obvious choice for conservative Republicans; although it could serve instrumental purposes, it was a potential threat to national unity. Proposals to decentralize reservesFootnote 97 were dismissed by the NMC and by central bank proponents,Footnote 98 and Aldrich later criticized the Federal Reserve Bill for establishing regionally discriminatory monetary policy.Footnote 99 As put by the NMC, a system decentralizing monetary policy and reserves would lack the “means to insure cooperation between these different local organizations in the public interest.”Footnote 100 For Republicans, decentralized self-government was a means to an end—it was a “safety valve” ensuring the harmony of the unionFootnote 101—and ultimately, it was the national government that defended individual rights against “aggression of a State.”Footnote 102 Decentralization would serve a similar function in the NRA.Footnote 103 By providing a “more liberal representation to minorities than any method in general use”Footnote 104 and by constituting “the channel through which local banking institutions exercise their federated powers,”Footnote 105 the arrangement was said to mirror the “distinctively American model of representative government.”Footnote 106 In this way, decentralization would ensure the “solidarity in the interests of all sections of the country” while “no harm can come to the interests of any district.”Footnote 107 Thus, nationally uniform policy in the interest of banker constituents, disciplined through federal representative mechanisms, was presented as a uniquely American form of monetary government.
The Federal-Administrative Model and the Glass-Wilson plan
Following the demise of the Aldrich plan, a new reform plan formed in 1912–13 under Democratic congressional leadership. The task to investigate and improve the US monetary and financial system was distributed across two subcommittees within the House Committee on Currency and Banking. The subcommittee chaired by Arsène Pujo focused on the “money trust” question, whereas the subcommittee chaired by Glass was to develop recommendations for currency and banking reform. This division reflected a deeper tension within the Democratic political-economic doctrine and between different factions within the party. A conservative-Jeffersonian emphasis on small federal government, laissez-faire competition, and state rights contended with the progressive and anti-monopolist emphasis on federal government intervention. These conceptions were unified by a concern with competition,Footnote 108 but they disagreed on how to achieve it.
Once introduced, the Glass Bill faced a divided Senate where the party’s progressive and populist wings were stronger,Footnote 109 and details of the ultimate Federal Reserve Bill were forged through political maneuvering by Glass, President Wilson, and Senator Robert Owen. Key to this was the ability of Wilson and his New Freedom programmatic narrative—grounded in his interpretation of the American political and constitutional traditionFootnote 110—to provide an institutional blueprint bridging the competing doctrines of economic government that divided the Democratic party. The result was a novel conception of federal monetary government combining centralized government oversight with regional policy autonomy.
Glass and his chief economic advisor, H. Parker Willis, developed a plan for a fully decentralized system of reserve banks in 1912. The policy field was already discursively organized around the central-banking idea as the NMC and the Wall Street-financed National Citizens’ League had prepared the country for a new monetary policy framework.Footnote 111 Yet, the 1912 Democratic Party Platform proclaimed that “[w]e oppose the so-called Aldrich bill or the establishment of a central bank,”Footnote 112 and Glass and Willis were careful to differentiate their work from that of Aldrich.Footnote 113 Their plan, although not circulated, constituted the first iteration of the Glass–Wilson plan and provided the foundations for the Glass Committee hearings on banking and currency held in early 1913.Footnote 114
The proposal for a decentralized system of reserves and monetary policy was not merely a rejection of the Aldrich plan; it resonated with traditional Democratic-Jeffersonian principles. Glass was a conservative Democratic representative from Virginia who ascribed to Jeffersonian ideals of state rights and free competition. Like many southern Democrats, he was skeptical of a powerful federal government and criticized Northeastern financial interests.Footnote 115 Willis was a disciple of laissez-faire economics and the real bills doctrineFootnote 116 and, before joining Glass, had argued in favor of banking centralization through a bottom-up process of banker self-organization.Footnote 117 In line with this, Glass and Willis saw decentralization of monetary policy and reserves as a mechanism for the regional mobilization of resources for local and regional needs. This would also take power over banking away from the federal government and from Wall Street, providing an alternative to the national and centralized framework of the defunct Aldrich plan.Footnote 118 Whereas Aldrich and his allies searched for inspiration among European central banks, proponents of the Glass–Wilson plan tended to compare the United States to continental Europe as a whole, emphasizing Europe’s socioeconomic heterogeneity and the parallel operation of autonomous central banks implementing distinct policies.Footnote 119
Glass and Willis’s draft for a decentralized system also resonated with Wilson’s regional conception of the socioeconomic structure of the United StatesFootnote 120 and with his effort to harmonize decentralized self-governance with a modern administrative central government. For Wilson, as the US economy moved away from the local economies of the Jeffersonian imaginary, the country faced a dilemma. Economic regulation on the state level was not merely insufficient in this context; it constituted a potentially disruptive “new war of conflicting regulations.”Footnote 121 Yet replacing state regulation with national legislation could mean overriding the “real variety of opinion among our people in the several regions of the country” and abandoning “democratic self-government.”Footnote 122 Wilson traced the vitality of American society to the “independent and irrepressible life of its communities,” which had saved it from “the paralysis which has sooner or later fallen upon every people who have looked to their central government to patronize and nurture them.”Footnote 123 Decentralized self-government was clearly key, and yet Wilson’s solution did not conform to the traditional conception of federal government versus state rights. Although political authority was divided between the federal government and the states, Wilson felt that the United States was “socially and economically divided into regions rather than into States.”Footnote 124 This regional structure constituted a particular challenge to traditional conceptions of federal economic government. As the United States was developing a modern administrative state, Wilson argued that it must be adapted to “a complex and multiform state, and made to fit highly decentralized forms of government.”Footnote 125
The regionally decentralized system of monetary policy and reserves constituted the most radical departure from the Aldrich plan, and it was the provision that received the most intense criticism from central bank proponents. Aldrich criticized the power of the Board to “review and determine” the discount rates charged by the reserve banks, arguing that there “can be no justification for fixing a different rate of discount to be charged by a government institution, supposedly created in the public interest, on the same class of paper in one section of the country as distinguished from another.”Footnote 126 Similarly, Vanderlip criticized the decentralization of reserves and instead proposed a government-controlled central bank,Footnote 127 whereas Warburg argued for a reduced number of reserve banks.Footnote 128 Ultimately, in line with the regionalist conception of the US economy, the Reserve Bank Organizational Committee was tasked with creating reserve districts and choosing reserve bank cities based on “the convenience and customary course of business,” with the further specification that districts “shall not necessarily be coterminous with any State or States.”Footnote 129
The original draft from Glass and Willis did not provide for any government oversight and control beyond that the Comptroller of the Currency (a Treasury official) would serve in the same role for reserve banks as it did for national banks.Footnote 130 When Glass presented his draft plan to the president-elect, Wilson responded favorably, but requested a federal board as a capstone for the system.Footnote 131 This political push for increased government control over monetary policy stemmed from the progressive wing of the party and concern with the money trust, but although the trust issue was important to Wilson,Footnote 132 he integrated this issue into a broader theory of administrative government that was central to his New Freedom program.
As discussed above, one of the major challenges facing Aldrich and his allies was concern over Wall Street’s power, and when Democrats took over the legislative effort, the money trust issue dominated the debate on banking and currency reform. The Pujo Committee defined the “money trust” problem as the concentration of control of money and credit (not just the concentration of money) in New York,Footnote 133 and the Committee argued that it had clear evidence of “[a]n established and well-defined identity and community of interest between a few leaders of finance […] which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men.”Footnote 134 This concentration of control was rooted in, among other things, bank mergers, interlocking directorates, and the emergence of “banking ethics” that inhibited direct competition.Footnote 135
The money trust narrative had two conclusions, with implications for the design and legitimation of currency and banking policy. Progressive Democrats argued that any new system had to be designed to delimit the concentration of financial power in money centers and break the power of Wall Street and the money trust. As argued by Louis Brandeis, “[t]he beneficent effect of the best conceivable currency bill will be relatively slight, unless we are able to curb the money trust” and establish “the conviction that whatever money is available, will be available for business generally, and not be subject to the control of a favored few.”Footnote 136 Furthermore, it was generally believed that the federal government was the only authority capable of challenging the power of interconnected financial institutionsFootnote 137 and that government intervention was necessary to ensure a level playing field and a vital economy.Footnote 138 Unlike Aldrich’s framing of banks as “natural representatives,” progressive Democrats argued that the self-interest of bankers did not necessarily align with the public’s general interest.Footnote 139 They pointed out that because banking was a public-utility business, banks had to be stopped from “making unjust discriminations or giving undue preference.”Footnote 140 The money trust constituted such a discriminatory system, and it was the role of legislation to align private interests and the general public interest.
Glass did not coordinate with the Pujo Committee, and the Pujo Committee had no formal role in formulating a banking bill, so one might imagine that the money trust investigations did not directly influence the Glass–Wilson plan. However, the Pujo investigations received significant public attention, ensuring that any reform effort would need to address the money trust issue. The issue also reappeared when the Glass Bill reached the Senate, where the populist and progressive wings of the Democratic Party were more vocal,Footnote 141 and the investigations had a significant influence on one of Wilson’s main political advisors: Louis Brandeis.Footnote 142 Although some observers have dismissed the progressive attack on trusts as inconsequentialFootnote 143 and the Federal Reserve has not proven to be an effective counterbalance to Wall Street,Footnote 144 the trust issue was evidently a salient policy problem during the construction of the Federal Reserve.Footnote 145
The apparent tension between the initial decentralized plan, informed by traditional Democratic ideals of small government and laissez-faire, and the strong federal-government apparatus needed to challenge the power of the money trust constituted a significant political challenge to the Democratic reform effort. The way in which Democratic reformers dealt with this was central to the design of the Federal Reserve. Importantly, Wilson agreed that government intervention was necessary to break the power of trusts, but he worried that such intervention would undermine the constitutionally enshrined right to self-governance. For Wilson, the question was how to adapt the administration of monetary government to suit the regional structure of the US economy.
Wilson’s political program centered on a particular conception of rational administration in modern democratic government, grounded in a critique of “trustee government.” In recent decades, Wilson argued, American government had been rooted in the Hamiltonian theory that “the only people who could understand government, and therefore the only people who were qualified to conduct it, were the men who had the biggest financial stake in the commercial and industrial enterprises of the country.”Footnote 146 Wilson’s conception of modern democratic-administrative government was articulated in response to what he saw as the three main problems of trustee government: it had perverted the balance between private and public spheres of interest, it was contrary to rational administrative management, and it undermined democratic accountability. Modern administrative yet democratically responsive government was the only viable response.
Wilson’s program sought to redraw the boundaries of public and private spheres of authority. During the presidencies of Roosevelt and Taft, Wilson argued, the government relied on a small coterie of big manufacturers and financiers when formulating policy, making trusts and organized economic interests into the main instrumentalities of government.Footnote 147 Wilson was critical of Roosevelt’s claim that trusts could be made “good by discipline,”Footnote 148 and he argued that trustee government had devolved into “the control over the government exercised by Big Business,”Footnote 149 enabling these businesses to “dominate every industry in the country.”Footnote 150 Whereas the founding fathers had been concerned with the power of government, capital had become “the most readily wielded, and the most formidable power.”Footnote 151 “[C]ombined capitalists” had become the “masters of the government,” and the government now represented only “a small portion of the population.”Footnote 152
The money trust investigation reaffirmed Wilson’s belief that the trustee theory constituted an untenable foundation for legitimate monetary government. Although monied “trustees” might believe that they alone can govern in the interest of the whole nation, Wilson argued, such special interests, however well-meaning, will never “understand the business of the nation as contrasted with their own interest.”Footnote 153 In line with progressive Democrats, Wilson held that the problem of trusts necessitated more forceful government intervention through expansion of the regulatory state.Footnote 154 However, consistent with the traditional Democratic emphasis on competition and free enterprise,Footnote 155 he argued that it was “intolerable for the government to interfere with our individual activities except […] in order to free them.”Footnote 156 Wilson sought to strike a new balance between private and public spheres of authority and between pure individualism and government domination—a balance that “gives wide freedom to the individual for his self-development and yet guards that freedom against the competition that kills.”Footnote 157 To achieve this, legislative intervention was necessary, but the goal of such intervention should be to ensure that the individual “gets fair play.”Footnote 158 In other words, “[i]t should be the end of government to assist in accomplishing the objects of organized society”—that is, to create conditions for “self-development.”Footnote 159
How should government be adapted to create these conditions? As a scholar, Wilson pioneered the study of administration, arguing that the United States had been preoccupied with making government “just and moderate” but had overlooked the need to make it efficient. Defining administration as “government in action” and as “a field of business … removed from the hurry and strife of politics,” Wilson contended that the United States was ready for a modern administrative apparatus to complement its democratic institutionsFootnote 160 to ensure that government was “devoted to the general interest and not to special interests.”Footnote 161 This was central to how Wilson envisioned his role as president.Footnote 162
Although Wilson argued that partisan politics should not meddle with day-to-day administration,Footnote 163 his approach to modern administration remained distinct from that of most progressive economistsFootnote 164 who expected economists-as-administrators to find scientific solutions to (previously) politically contentious issues.Footnote 165 The Wilsonian narrative carved out a different relationship where administration was subservient (and accountable) to democratic processes. To ensure government based on “the popular will,” government by self-interested “guardians” had to be replaced with democratic “processes of common counsel.”Footnote 166 This meant replacing the “Newtonian” constitutional theory of checks and balances with an organic conception of government.Footnote 167 Because “no living thing can have its organs offset against each other, as checks, and live,” all parts of government must be designed to ensure “their quick co-operation, their ready response to the commands of instinct or intelligence, their amicable community of purpose.”Footnote 168 Politics, thus, was essential both for establishing the principles for administration and then for holding administrators accountable and ensuring that they operated in accordance with public opinion.Footnote 169
In sum, Wilson played a key role in the iterative drafting and management of the Federal Reserve Bill, interacting regularly with Glass and Senate Democrats.Footnote 170 In line with recent scholarship on Wilson’s politics,Footnote 171 the argument developed here highlights Wilson’s activist and ideologically grounded approach to reform, adding important dimensions to notions of the Federal Reserve Act as a Wilsonian compromise. His New Freedom program provided an ideological repertoire for balancing federal government with decentralized self-government, and this basic imaginary was superimposed on the delineation of public and private spheres of authority and the balance between autonomous administration and democratic political accountability. Whereas Aldrich sought to insulate the NRA from politics by giving control to bankers, Wilson envisioned a much closer relationship between the Federal Reserve and the federal government. In Wilson’s view, administrative efficiency and democratic accountability were co-constitutive, and the designers of the Federal Reserve, informed by this regional-administrative program, sought to create an institutional balance between democratic accountability, federal administration, and decentralized self-governance: “the reserve-bank plan retains to the Government power over the exercise of the broader banking functions, while it leaves to individuals and privately owned institutions the actual direction of routine.”Footnote 172
Conclusion
This article has sought to show that the arcane design of the Federal Reserve System was not a coincidence; it was the product of a deliberate political effort to reimagine central banking in the context of a federal society. In the early twentieth-century United States, political and economic elites faced the challenge of organizing monetary authority in a federal society, responding to three related dilemmas: the organization and location of authority in a multilevel policy, the mechanisms of control and accountability, and the spatial structure of monetary policy. Design choices along these dimensions have important political and distributive implications, and the two plans vying for influence in Congress between 1907 and 1913 sought to resolve the dilemmas of federal monetary policy in distinct ways. The Aldrich plan sought to establish a national organization implementing uniform monetary policy. The proposed governance structure was devised to ensure that the NRA represented the interests of the country as a whole via an intricate decentralized system of private banker representation. Uniform policy would ensure that the NRA did not favor certain regions over others, and the centralization of reserves would ensure financial stability. The Glass–Wilson plan, by contrast, proposed the creation of a split-level governance structure. The decentralized system of reserve banks would implement monetary policy with a significant degree of regional autonomy. The Federal Reserve Board, in turn, would be politically appointed and would monitor and coordinate the system. This arrangement, according to its proponents, ensured the regional mobilization of regional resources, systemwide stabilization through rediscounting between reserve banks, centralized mechanisms for democratic accountability, and a cogent method for challenging the power of the money trust.
These plans were grounded in particular conceptions of federal monetary government. The national-corporatist model that informed the Aldrich plan had its roots in a Federalist-Republican reading of American federal constitutionalism. Aldrich and his allies mobilized Republican economic-nationalist doctrine and the Hamiltonian conception of representative government, rearticulating these into a nationalist-corporatist model of federal monetary government. The federal-administrative model that ultimately provided the ideological basis for the Federal Reserve System entailed a very different conception. Although the Democratic reform effort required a strategic effort because the Democratic Party was still wrestling with a significant populist faction, Wilson’s New Freedom political program provided an ideological toolkit to bridge the divide. Thus, the design of the Federal Reserve System was not a coincidence; it was informed by a deliberate political effort to reimagine central banking in the context of a federal society.
The case of the early Federal Reserve highlights the importance of exploring the broader political and institutional logics of different central banking regimes, especially in multilevel societies with multiple loci of political authority and competing claims to legitimacy. The dimensions of policy universality/differentiation and centralized/decentralized governance provide a basic framework through which such issues can be explored. The national-corporatist and federal-administrative models do not exhaust the range of alternatives, and these models were articulated in the distinct political environment of the progressive era. Decentralization can mean many things—systems can be distinguished both categorically (different types of decentralization) and quantitatively (different degrees of decentralization). Current debates on central bank legitimacy tend to focus on central bank independence vis-à-vis governments, and should be complemented by further analysis of the multilevel nature of such issues in compound polities. In Europe, with the traditional connection between national central banks and member states, there might be other opportunities for a more democratically responsive monetary policy between the extremes of uniformity and disintegration, without wholly undermining the independence of the ECB from political influence.
Acknowledgements
I would like to thank the anonymous reviewers for their valuable comments and suggestions. Previous versions of this article have been presented at Midi du CeDIE (UCLouvain, 2024) and at the 36th Annual Meeting of the Society for the Advancement of Socio-Economics (University of Limerick, 2024). The article has also at various stages of its development benefitted greatly from comments and suggestions from Pieter-Augustijn Van Malleghem, Dilara Aydogus, Aldo de Cesare, and Miriam Ramliden. All remaining errors are my own.
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