The Not-So-Strange Case of Jekyll Island: The 1910 Plan to Create a Central Bank

Jekyll Island, with its stately oaks, historic Victorian-era architecture, and beautiful marshlands and beaches, hardly seems the setting for mystery and intrigue but more of a hidden gem, part of what is known as the Golden Isles—four barrier islands, including Jekyll, off the coast of Georgia. Spanish explorers occupied these islands in the 16th century when they landed there during their quest for New World gold. When the island transferred from Spanish to English control in the 18th century, General James Oglethorpe named the island after his friend Sir Joseph Jekyll, a British parliamentarian and financial supporter of the Georgia colony. (In case you are wondering if there were any connection with the famous Robert Louis Stevenson character, a descendent of Sir Jekyll's was an acquaintance of the author.)

For much of the 18th century, William Horton, commander of the military post on nearby St. Simons Island, used the island for his residence until its 1790 purchase by the DuBignons, a French family seeking refuge from their country's revolution. In 1886, the family sold the island to the Jekyll Island Club. The club was an exclusive, members-only winter retreat for families with names we still recognize today: Vanderbilt, Goodyear, Pulitzer, Macy, Astor, Marshall Field, and Morgan. So prestigious and financially successful were club members that it was often said that they represented one-sixth of the world's wealth at the time. When the clubhouse opened in 1888, members built their own residences, known as "cottages," surrounding it to escape northern winters and enjoy such leisurely pursuits as horseback riding, golfing, playing tennis, skeet shooting, and hunting.

Bank panics pave the way for currency and banking reform
Before the club had been open even 20 years, a series of financial panics began plaguing the nation. These plagues culminated in the Panic of 1907. Like most panics of the era, the crisis began with the downfall of a prominent financial speculator—in this case F.A. Heinze. Heinze had financial connections to many major New York City banks, so his downfall created a series of bank runs and failures that spread to the stock market and created a severe liquidity crisis. Because no central bank existed to serve as a lender of last resort, the city's bank clearinghouses scrambled to keep members solvent. The crisis was abated only when three events took place: the U.S. Treasury intervened, John D. Rockefeller contributed $10 million of his own fortune, and J.P. Morgan, acting as self-appointed head of the financial system, prevailed on solvent New York City financial institutions, including his own, to extend a total of $25 million in emergency funds.

This experience led to calls for currency and banking reform and ultimately to the Aldrich-Vreeland Act, which established the National Monetary Commission. Led by Rhode Island Senator Nelson Aldrich, the 18-member commission was tasked with coming up with a plan to reform the nation's monetary system. Aldrich himself traveled across Europe studying models of European central banking, but after two years the commission still had not produced a working proposal. To break the gridlock and come up with a draft of the report due to Congress, Senator Aldrich called a meeting with prominent European banker and Kuhn, Loeb, & Co. partner Paul Warburg, who would later serve on the Federal Reserve's first Board of Governors; J.P. Morgan & Co. senior partner Henry Davison; National City Bank of New York president Frank Vanderlip; Banker's Trust of New York vice president Benjamin Strong, who would later head the Federal Reserve Bank of New York; and A. Piatt Andrew, Assistant Secretary of the Treasury. Aldrich drew these attendees primarily from the banking industry because their expertise was necessary to produce a feasible plan. Critics often point to the group's composition as a flaw, but no one would think of drafting major agricultural reform, for example, without gathering input from farmers, and this legislative attempt was no different.

"We were engaged in patriotic work"
The group traveled in Aldrich's private train car from New Jersey to Brunswick, Georgia, and then by boat to the remote Jekyll Island location, all seemingly for a private duck hunting retreat. Jekyll Island Club Member J. P. Morgan had granted the group exclusive use of the island for two weeks. In a country that was still distrustful of bankers and the so-called "Wall Street" influence, Aldrich took great care to keep the plan low-key to avoid controversy. Both the first and second Banks of the United States failed in part because of the public's perception that they were puppets of big banking and rich financiers. Members felt that an acknowledged association with Wall Street and the New York banking establishment would mean that any plan conceived at the meeting would be dead on arrival in Washington. To this end, members even traveled by first name only. (Later, the group was sometimes referred to as the "First Name Club.")

Jekyll's remote location served not only to downplay the event, but also to hasten the group's focusing on the task at hand—they had no telephone or telegraph access during their stay. As Vanderlip described in his 1935 autobiography, From Farmboy to Financier, the group used their professional knowledge to restructure the banking system in America and draft the currency legislation ordered by the National Monetary Commission. Vanderlip later wrote, "None of us who participated felt we were conspirators; on the contrary we felt we were engaged in patriotic work." Working around the clock, the group grappled with questions such as who would own the central bank, how many institutions it would contain, and how open market operations would be conducted. The group even spent the Thanksgiving holiday together on the island, pausing for a dinner of wild turkey before resuming their work on the plan.

From the Aldrich Plan to the Glass-Owen bill
The results of their efforts became known as the Aldrich Plan, which called for 15 regional banks, known as Reserve Associations, that would be directed by a national board of commercial banks. These associations would give emergency loans to member banks, create an elastic currency, and serve as the fiscal agent of the federal government. When the plan was brought to Congress, concerns over its banker-centered structure resulted in the legislation's demise, but elements contained in the bill would become a blueprint for the Glass-Owen bill. That bill would eventually become known as the Federal Reserve Act, and was signed into law in 1913.

Like the U.S. Constitution, which represented a compromise between small and large state plans, the Glass-Owen bill brought together elements from the Aldrich plan and the ideas of two opposing congressional camps: one that favored a reserve system and currency owned and controlled by the government; the other, a decentralized system in private hands. The compromise between these groups resulted in a system made up of 12 regional reserve banks, overseen by the Federal Reserve Board of Governors in Washington, D.C. Also mirroring the type of compromise found in the constitution were the checks and balances built into the bill: bankers would occupy only three of the nine seats on each bank's board of directors, and each member of the Board of Governors would be nominated by the U.S. president and confirmed by the Senate. (The Secretary of the Treasury and the Comptroller of the Currency served as ex officio members of the Board until their seats were eliminated by the Banking Act of 1935 in an effort to strengthen the Board's independence and reduce political influence on the Board's decision making.) In addition, each Federal Reserve Bank's board of directors has a chair and vice chair chosen from among their Class C directors. The Board of Governors chooses Class C directors; they cannot have any ties to the banking system.

The Federal Reserve, a century later
The Jekyll Island Club had its last season in 1942. The Great Depression had caused membership to dwindle, and the nation began focusing on the war effort. Five years later, the State of Georgia saved the island from condemnation when it purchased it for $675,000 with the intent of opening it as a public park. In 1972, the Jekyll Island Club gained a place on the National Register of Historic Places, and seven years after that, the grounds were designated a National Landmark, creating what is known as the Jekyll Island National Historic Landmark District. Work began in an effort to restore the clubhouse and 33 historic buildings on the grounds. By 1985, the clubhouse reopened as a hotel and resort.

Visitors to the Island today can travel back to the Victorian age with a visit to the District. They can even take a peek inside the room where the historic proceeding took place, marked with a name plate on the door engraved simply with "Federal Reserve." Five hours north and west, at the Federal Reserve Bank of Atlanta, the culmination of the committee's work can be seen in a tour of the monetary museum, where visitors can learn more of how central banking has evolved since the 1910 meeting and how it works today. Rather than a clandestine meeting shrouded in secrecy, the meeting on Jekyll Island was more a forerunner of today's executive retreat, a way for peers to regroup and get down to work in a setting that allows for clear thought and new ways of thinking. Although the group's final product was not passed into law directly, it was an important contribution to the foundations of our current central banking system, inauspiciously shaped on a small island off the coast of Georgia that still pays honor to the era's historic heritage.

Related Links
Christmas Present for the President (Federal Reserve Bank of St. Louis)
Federal Reserve Act
Federal Reserve System: Purposes & Functions
Financial Crises, Reform, and Central Banking: Establishing the Federal Reserve (Federal Reserve Bank of St. Louis)
"From Farm Boy to Financier" (article on Frank A. Vanderlip in the Saturday Evening Post, February 9, 1935)
Historical Beginnings (Federal Reserve Bank of Boston)
Jekyll Island and the Creation of the Federal Reserve
Jekyll Island Club Hotel
Jekyll Island History website
The Panic of 1907 (Federal Reserve Bank of Boston)
National Monetary Commission (FRASER, short for Federal Reserve Archival System for Economic Research)
Paul Warburg's Crusade to Establish a Central Bank in the United States (Federal Reserve Bank of Minneapolis)

By Lesley Mace, economic and financial education specialist with the Jacksonville Branch of the Federal Reserve Bank of Atlanta

November 6, 2013