After the 1907 panic ignited by Knickerbocker Trust's failure, Congress created the National Monetary Commission to reform the banking industry. Its leader formed a clandestine club that largely shaped the Federal Reserve Act.
Rob Hajduch, Principal Credit Analyst
As the dust settled following the Panic of 1907, financial and political leaders turned their attention to reforming the rickety U.S. banking system. In May 1908 Congress passed the Aldrich-Vreeland Act, creating the National Monetary Commission (Commission). Chaired by Senator Nelson Aldrich (chairman of the Senate Finance Committee), the Commission hired Henry Davison (partner at J.P. Morgan) and A. Piatt Andrew (economics professor at Harvard). Over the following two years the 18-member Commission studied international financial systems, hosted public hearings across the United States and travelled to European financial centers to meet with private and central bankers.
Ultimately convinced of the need for a U.S. central bank, in November 1910 Aldrich assembled a small party of individuals chosen for their respective expertise to assist in condensing the Commission's findings and create a proposal to present in the upcoming Congressional session. With Aldrich and his personal secretary, Arthur Shelton, the group included Davison, Piatt (by then the Assistant Treasury Secretary), Frank Vanderslip (president of National City Bank, now Citigroup) and Paul Warburg (partner at investment bank Kuhn, Loeb, and Co.). Cognizant that the individual members' connections to the banking system could provoke a backlash on Capitol Hill, Aldrich went to extremes to shroud the group and its purpose in secrecy.
Under the guise of a duck hunting trip, members arrived individually at a railroad station in New Jersey where they boarded a private train car. Aldrich insisted upon complete confidentiality and en route they addressed each other by first names to prevent the crew from discovering their identities. Thereafter, they referred to themselves as the "First Name Club" and the individuals did not even acknowledge that the conference had occurred until the 1930's. Their destination was the Jekyll Island Club off the southern coast of Georgia.
Founded in the late 19th century, the Jekyll Island Club was described in a 1904 magazine article as "the richest, the most exclusive, the most inaccessible" club on the planet. Members included Marshall Field, William Vanderbilt and J. Pierpont Morgan - who appears to have arranged for its sole use by the First Name Club. While the members of the First Name Club broadly agreed on the need for a central bank, it took over a week of long, intense workdays to hammer out proposal details. Upon returning home, the First Name Club added Benjamin Strong (vice president of Bankers Trust Company) to its members. Strong and Vanderslip edited and prepared the group's plan for a "Reserve Association of America" for presentation to Congress.
The proposal encompassed a single central bank with 15 self-governing district branches established across the country. Respective boards of directors would be elected by member banks within each district, with larger banks relegated more votes. Aldrich presented the plan to Congress in early 1912, where it immediately ran into the same resistance to centralized economic power from the same political quarters that had doomed both the First and Second Banks of the United States. With the presidential election coming in the fall of 1912, the Democratic Party made the defeat of Aldrich's plan a central plank in its national platform.
Despite the Democrats winning the presidency and control of both houses of Congress, momentum to establish a central bank emerged shortly after the new government was inaugurated in January 1913. Carter Glass and Robert Owen, respectively the new chairs of the House and Senate Committees on Banking and Currency, each introduced legislation to form a central banking system - ironically after consulting with the First Name Club's Paul Warburg. If additional motivation was needed to maintain impetus in Congress, it came that spring when news arrived from Europe that J. Pierpont Morgan had drawn his last breath at the St. Regis hotel in Rome. That Morgan was a mortal man was no longer an unpleasant hypothetical to be pondered. He was gone forever and federal leaders would never again be able to turn to his larger than life force of will - and pocketbook - during economic emergencies.
Glass and Owen shepherded what emerged as the Federal Reserve Act through their respective houses over the rest of 1913. After passing Congress, it was signed into law by Woodrow Wilson on December 23, 1913. While similar to the Aldrich plan, what emerged from Congress in 1913 differed materially in some respects. Branches were eliminated in favor of 12 autonomous regional banks supervised by a central board that would be comprised entirely of Presidential appointees serving staggered eight-year terms. The Act provided for a Reserve Bank Organization Committee to select the 12 regional bank locations and draw the respective district boundaries. Its task would prove to be every bit as challenging as those of the First Name Club and Glass and Owen, but that is a story for another day.
Bagwell, Tyler, The Jekyll Island Duck Hunt That Created the Federal Reserve, Jekyll Island History website
Federal Reserve History, Reserve Bank Organization Announces Selection of Reserve Bank Cities and District Boundaries, April 1914
Federal Reserve History, Reserve Banks Open for Business, November 1914
Wheelock, David, Federal Reserve History: The Fed's Formative Years, November 22, 2013