“After the Panic of 1907, bankers and politicians alike sought a more stable banking system, though for different reasons. Despite J. P. Morgan’s ability to harness backing from the Treasury Department when he needed it (and vice versa), he desired a more permanent solution to financial emergencies. The rest of the big bankers concurred. But they wanted such a mechanism to be established on their terms.”
“In Washington, Republicans and Democrats both concluded that excessive reliance on bankers to stabilize the financial system in times of turbulence was too high a risk to their own influence over the country, and possibly damaging to America’s status in the world. The axiom that the group that controlled the money controlled the country remained true. But with the nation struggling economically, such a condition had political implications and had to be navigated accordingly.”
“William Howard Taft knew this when he campaigned on a vow to continue Teddy Roosevelt’s reform policies, including the trust-busting activities Roosevelt had set in motion. Though his own background was largely blue-blooded and warm toward the financiers, he knew the population blamed the bankers for their problems and that the Democrats would capitalize on those suspicions if he didn’t balance his support for business interests with empathy for the public. The tactic worked. In the presidential election of 1908 Taft won handily over populist Democrat William Jennings Bryan, even as the country was experiencing a post-Panic recession.”
“Congress established the bipartisan National Monetary Commission to develop a banking reform proposal and study the problems underlying the panic and alternative foreign central banking systems, for analytical and competitive purposes. The commission had no populist bent; it was headed by Senator Nelson Aldrich and largely made up of men sympathetic to bankers and their lawyers.”
“During the summer of 1908, Aldrich and some subcommittee members journeyed to Europe. Their official mandate was to study the operations of European central banks for background information with which to fashion some sort of central bank for the United States. Unofficially, Aldrich and the bankers wanted to strengthen America’s economic position relative to its European counterparts-that would require establishing a means to further consolidate or centralize a method of creating currency in downturns, or for other purposes, as the European central banks could. Aldrich was expected to provide a summary of his findings and draft a currency bill that fall. Yet when he and his men returned, they did not bring home a fully formed strategy for a U.S. equivalent to the English and French central banks that would both create a stronger national currency and support the desires of the bankers. Also, constructing the first central bank in the United States required a fair bit of maneuvering; the idea did not yet have broad bipartisan or popular support. With elections looming, it was risky to push for a system that might be deemed unacceptable or too bank-centric by voters who didn’t understand that this was already the premise of the Aldrich-Vreeland Act. There was a recession going on, after all, and public opinion equated this matter as residue from the Panic of 1907.”
Read full American Banker article here.