Federal Reserve Bank of Atlanta and Rutgers University
November 5–6, 2010, Jekyll Island Club Hotel, Jekyll Island, Georgia
Jekyll Island and the Creation of the Federal Reserve
Meetings can have lasting meaning, and a meeting on Jekyll Island, Georgia, 100 years ago this month was an important moment in the evolution of U.S. central banking. That meeting is also the reason for the gathering being held here today. An important outcome of the 1910 meeting was a proposal for an institution with multiple branches, which became the model for the Federal Reserve System.
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The Aldrich-Vreeland Act of 1908. After a series of financial panics culminating in the Panic of 1907, Congress passed the Aldrich-Vreeland Act in 1908. This act established an eighteen-member National Monetary Commission chaired by Senator Nelson Aldrich of Rhode Island. The commission was charged with finding a way to reform the nation's monetary system. Progress toward that proposal began with the commission taking trips to major European banking centers and holding hearings in the United States. But by 1910 the commission could not agree on a plan.
The Jekyll Island Meeting of 1910. Aldrich then took matters into his own hands, meeting secretly with a group of bankers on Jekyll to formulate a plan. The group included Henry Davison, Frank Vanderlip, and Paul Warburg; also present were Aldrich's secretary, Arthur Shelton, and A. Piatt Andrew, a Treasury official. Warburg's attendance was critical because of his knowledge of European banking practices. Aldrich was well aware that his meeting with bankers outside of the commission proceedings would generate controversy; for this reason, the group met in private at a remote location.
Over the years, the clandestine nature of the meeting has been criticized as allowing undue Wall Street influence over the founding of the U.S. central bank. However, the meeting itself was just one step in the process that led to the creation of the Federal Reserve.
The Aldrich Plan. What emerged from the Jekyll meeting was the so-called Aldrich Plan, which was presented to the National Monetary Commission as a legislative blueprint.
The Aldrich Plan was a catalyst for debate about the role of the government and banking in the central bank's governance. The plan, and the bill that followed in 1912, proposed that a National Reserve Association would function as the U.S. central bank. The association would consist of a federation of regional bank associations, each presided over by boards of directors elected by local banks. This diffuse governance represented a departure from the centralized governance of European central banks. Aldrich's proposed central bank would promote macroeconomic stability. The proposals that came out of the Jekyll meeting remained the core of the subsequent steps in the creation of the Federal Reserve.
Aldrich put forward his central banking bill to the U.S. Senate in January 1912. The Senate did not act on it.
The Glass-Owen Bill. After the election of Woodrow Wilson in 1912, Congressman Carter Glass of Virginia assumed leadership of monetary reform. Glass had served for ten years as a minority member of the House Banking and Currency Committee and had led an investigation into concentration of power on Wall Street. Also working on monetary reform was Oklahoma Senator Robert L. Owen.
The Glass-Owen Bill kept the key macroeconomic stabilization mechanisms of the Aldrich Plan, but it differed in terms of the proposed institution's structure and governance. The Glass-Owen Bill provided for eight to twelve districts, with a reserve bank in each district—a departure from the Aldrich Bill, which called for fifteen districts, with a central bank branch in each. However, the most salient difference was the governance of the central bank. The debate about a U.S. central bank had been mired in disagreements about who would control the system—bankers or appointed government officials. The Glass-Owen bill limited banking interest representation. Of the nine-member reserve bank board of directors, only three could be bankers. Three other directors engaged in commerce, industry, or agriculture were to be elected by bankers, and the remaining three directors were to be named by the Federal Reserve Board in Washington, D.C.
The bill also identified the Federal Reserve Board as the controlling agency. The Board was made up of two ex officio members—the Secretary of the Treasury and the Comptroller of the Currency—and five other members appointed by the president and confirmed by the Senate.
The Federal Reserve Act of 1913. The reconciled bill was passed as the Federal Reserve Act and signed into law by President Wilson in 1913, and the twelve Reserve Banks opened about a year later.
The 2010 Jekyll Island conference will examine how well the Federal Reserve's historical performance has matched the collective vision of its founders and what lessons the Fed's near-100-year track record offers for its role going forward.