Creature From Jekyll Island by G. Edward

the more reckless banks to 'loan up,' as they call it. Which was another way of saying to push down their reserve ratios.

A BANKERS' UTOPIA

If all banks could be forced to issue loans in the same ratio to their reserves as other banks did, then, regardless of how small that ratio was, the amount of checks to be cleared between them would balance in the long run. No major currency drains would ever occur. The entire banking industry might collapse under such a system, but not individual banks—at least not those that were part of the cartel. All would walk the same distance from the edge, regardless of how close it was. Under such uniformity, no individual bank could be blamed for failure to meet its obligations. The blame could be shifted, instead, to the 'economy' or 'government policy' or 'interest rates' or 'trade deficits' or the 'exchange-value of the dollar' or even to the 'capitalist system' itself.

But, in 1910, such a bankers' Utopia had not yet been created. If the Downtown bank began to loan at a greater ratio to its reserves than its competitors, the amount of checks which would come back to it for payment also would be greater. Thus, the bank which pursued a more reckless lending policy had to draw against its reserves in order to make payments to the more conservative banks and, when those funds were exhausted, it usually was forced into bankruptcy.

Historian John Klein tells us that 'The financial panics of 1873, 1884,1893, and 1907 were in large part an outgrowth of ... reserve pyramiding and excessive deposit creation by reserve city ...

banks. These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up.'1 In other words, the 'panics' and resulting bank failures were caused, not by negative factors in the economy, but by currency drains on the banks which were loaned up to the point where they had practically no reserves at all. The banks did not fail because the system was weak. The system failed because the banks were weak.

This was another common problem that brought these seven

men over a thousand miles to a tiny island off the shore of Georgia.

Each was a potentially fierce competitor, but uppermost in their minds were the so-called panics and the very real 1,748 bank 1. See Vera C. Smith, The Rationale of Central Banking (London: P.S. King & Son, 1936), p. 36.

16 THE CREATURE FROM JEKYLL ISLAND

failures of the preceding two decades. Somehow, they had to join forces. A method had to be devised to enable them to continue to make more promises to pay-on-demand than they could keep. To do this, they had to find a way to force all banks to walk the same distance from the edge, and, when the inevitable disasters happened, to shift public blame away from themselves. By making it appear to be a problem of the national economy rather than of private banking practice, the door then could be opened for the use of tax money rather than their own funds for paying off the losses.

Here, then, were the main challenges that faced that tiny but powerful group assembled on Jekyll Island:

1. How to stop the growing influence of small, rival banks and to insure that control over the nation's financial resources would remain in the hands of those present;

2. How to make the money supply more elastic in order to reverse the trend of private capital formation and to recapture the industrial loan market;

3. How to pool the meager reserves of the nation's banks into one large reserve so that all banks will be motivated to follow the same loan-to-deposit ratios. This would protect at least some of them from currency drains and bank runs;

4. Should this lead eventually to the collapse of the whole banking system, then how to shift the losses from the owners of the banks to the taxpayers.

THE CARTEL ADOPTS A NAME

Everyone knew that the solution to all these problems was a cartel mechanism that had been devised and already put into similar operation in Europe. As with all cartels, it had to be created by legislation and sustained by the power of government under the deception of protecting the consumer. The most important task before them, therefore, can be stated as objective number five: 5. How to convince Congress that the scheme was a measure to protect the public.

The task was a delicate one. The American people did not like the concept of a cartel. The idea of business enterprises joining together to fix prices and prevent competition was alien to the free-enterprise system. It could never be sold to the voters. But, if the word cartel was not used, if the venture could be described THE JOURNEY TO JEKYLL ISLAND 17

with w o r d s w h i c h are emotionally n e u t r a l - p e r h a p s e v e n allur-i n g — t h e n half the battle w o u l d b e w o n . , t , The first decision, therefore, w a s to follow the practice a d o p t e d in Europe. Henceforth, the cartel w o u l d operate as a central bank.

A n d e v e n that w a s to be but a generic expression. F o r p u r p o s e s of public relations and legislation, they w o u l d devise a n a m e that w o u l d avoid the w o r d bank altogether and which w o u l d conjure the i m a g e of the federal g o v e r n m e n t itself. F u r t h e r m o r e , to create the impression that there w o u l d be no concentration of p o w e r , they w o u l d establish regional branches of the cartel and m a k e that a main selling point. Stephenson tells us: ' A l d r i c h entered this discussion at Jekyll Island an ardent convert to the idea of a central bank His desire w a s to transplant the system of one of the great E u r o p e a n banks, say the Bank of England, bodily to A m e r i c a . ' But political expediency required that such plans be concealed from the public. As John Kenneth Galbraith explained it: 'It w a s his

[Aldrich's] thought to outflank the opposition by having n o t one central bank but m a n y . A n d the w o r d bank w o u l d itself be a v o i d e d . ' 2

W i t h the exception of Aldrich, all of those present w e r e