Bits and Bobs

The Fed, Reserve Currencies, and a Return to 120 Broadway

Money Talk

In a comment on a previous post, AI provided a link to a very interesting paper by J. Lawrence Broz titled “Origins of the Federal Reserve: International Incentives and the Domestic Free-Rider Problem”. AI was gracious enough to provide a great & succinct summary: “Argues that a big and underrated reason for creation of federal reserve was so that we could make use of bankers acceptances which had not been allowed under national banking system, a development which allowed the dollar to become an international currency for the first time”.

The Broz argument, at the initial level, both follows closely and moves way in significant ways with the analysis offered by James Livingston in Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890–1913 and others, which highlights the problems of the pre-Fed regulatory framework in the context of the growing disjuncture [contradiction] between the “sound money” of an inelastic currency and the growing demand for a currency that was more elastic (my take, of course, is that this is a ‘secondary’ contradiction to a more primary one, which was the gradual obsolescence of the contours of liberal capitalism by seismic advances in production—Marx’s “breakdown of production based on exchange”). Livingston writes that

Almost everyone who wrote or spoke on the subject of banking after 1892 denounced the inelasticity of the currency instituted by the national banking system. National banks were able to issue currency only upon deposit of federal government bonds with the comptroller, in amounts equal to go percent of the par value of the bonds so deposited; furthermore, each national bank could retire its outstanding notes only up to $3 million per month. The problem, then, was that banknote circulation fluctuated not according to the variable demand for a generally acceptable medium of exchange but according to the state of the bond market. In fact, because of the premium on government bonds after 1880-their market value was normally greater than their face value-bankers found that purchasing them to secure note issues was ultimately not profitable (or, more accurately, not profitable enough); hence national banknotes in circulation declined from $363 million in 1882 to $163 million in 1891 (the national banks of New York issued only $4 million of these notes in 1891).

But why did this situation represent a problem? As early as the 1880s, after all, deposits against which checks or drafts were written, not banknotes, constituted by far the largest proportion of national banks' demand obligations. The answer given by most nonpopulist critics of the banking system was that the currency was so "inelastic" that banking reserves could not be mobilized in times of crisis…

Charles Conant, Alfred Noyes, and others following Bagehot, argued that elasticity in the amount of notes that could be issued would serve as a "powerful weapon for restoring financial confidence" following a market crisis. Indeed, without "loans in times of panic up to the utmost limit," the danger of utter collapse-and the complete breakdown of stability in a society whose component parts were held together by commodity production and exchange-became acute. Thus the maintenance of the social system was seen as dependent in part on the banks' ability to expand their note issuance quickly in times of incipient crisis which meant the ability to convert their assets into a generally acceptable medium of exchange. The national banking system was therefore woefully deficient with respect to the needs of an emergent modern industrial society.

In a similar mode, Broz summarizes the situation like this:

The National Banking Acts of 1863, 1864, and 1865 determined the basic structure of the U.S. banking system until 1914.6 The legislation had two main purposes: to provide a uniform national currency and to raise revenue for the federal government during wartime. Prior to 1863, the national currency supply consisted primarily of notes issued by literally thousands of state-chartered banks. The problem was that the notes of these banks circulated at various discounts from par, depending on the reputation of the issuing bank, the time passed since the note was issued, and the distance to the issuing bank. Determining the quality of a particular note involved unnecessarily high transaction costs. The national banking legislation substantially reduced these costs by allowing for the incorporation of banks chartered by the federal government ("national banks") that would issue currency backed fully by U.S. government bonds. By effectively making all bank currency a liability of the government, and, therefore, risk-free, the bond collateral feature did create a uniform currency that circulated at par throughout the country. Another motive, however, was to create an artificial market for government debt. Requiring banks to secure their note issue with Treasury securities increased demand for government bonds, and the provision was thus valued jointly as a revenue-raising measure during the Civil War.

Although the system succeeded in establishing a uniform currency (and raising revenue for the government), it did not solve all the defects of the financial system. The remaining flaw was that the currency was "inelastic" in the short run, which led to large seasonal swings in interest rates and banking panics. None of the various forms of currency in circulation-national bank notes, gold and silver coin, gold and silver certificates, and greenbacks-could vary much in the short run. Law fixed the quantity of greenbacks, gold and silver certificates could be issued only if the Treasury held equivalent specie as backing, and the use of silver was rigidly controlled. The supply of national bank notes, in turn, tended to exhibit "perverse elasticity," contracting when it should have expanded. National banks had to obtain government bonds to issue additional notes, a slow and expensive process; moreover, they could not issue notes against general assets. When bank reserves were low and business very active, banks could ill afford to have their funds tied up in bonds and redemption deposits, resulting in a contraction of the note supply.

What Broz then adds is the linkages between this domestic situation and the dynamics of international trade, going so far as to argue that this was a key plank in the ‘banker’s lobby’ to push for the legislation that formed the Fed. Prior to 1914, the US dollar played very little role in international trade; its boundaries were effectively limited to the borders of the United States itself. Instead, the pre-1914 world market saw the UK’s sterling as the dominant international currency, with Germany’s mark and France’s franc playing supporting roles. “Sterling”, writes Broz, “was used to invoice from 80 to 90 percent of world trade by the nineteenth century”.

From 1870 to around 1913, there was a moderation in the usage of the sterling, which Broz links to the UK’s “relative economic decline”. This phrasing is slightly deceptive. The exact period that he is highlighting here corresponds precisely to the time period that is known as the “Long Depression”, a worldwide and protracted phase of economic stagnation that was coupled to an overall shrinkage in the volumes of world trade, a decline in the rate of profit, and a return by many countries to protectionist strategies to build up domestic economic bases.

Many might also recognize that Lenin, in Imperialism, The Highest Stage of Capitalism, also zeroed-in on this exact period as the phase of transition from classical, liberal capitalism to the age of monopolies, cartels, and financial capital. In Lenin’s periodization, the decade leading up to 1870 was “the apex of development of free competition”, while the upbreak of crisis in 1873 (the beginning of the ‘Long Depression’ saw the “wide… development of cartels”. Around 1900, monopolies and cartels “became one of the foundations of the whole economic life”. Finally, Lenin declared that at this historical juncture “Capitalism [had] been transformed into imperialism”.

In the age of imperialism, the cartels that dominated the world economy were closely related to the nations in which they were stationed, but began to form chains of alliances with the cartels and monopolies of other nations. The persistence of competition between these economic actors led to political competitions between nations and the colonial pursuit of raw materials—culminating in the “territorial division of the whole world among the greatest capitalist powers”.

Reading Broz’s argument in light of this, we can say that the cascade of events in the nineteenth century’s latter half included the pursuit by nations to obtain dominant currency status in world trade. While the sterling slipped, it still invoiced between 60 to 80 percent of world trade, but the mark and the franc rushed into to explode the void let by its contraction. Berlin and Paris made themselves into formidable rivals to London. The dollar, however, was nowhere on the scene.

The reason for this lay in the usage of bills of exchange and banker’s acceptance (bank’s commitment on a future payment) as a means of financing international trade from London:

In London (and Berlin)… banks bought, sold, and rediscounted bills and bankers' acceptances, and secondary markets in these instruments were deep and articulated. "A very high proportion of international trade among countries other than Britain was financed by sterling bills drawn on importers by exporters, which were due in 90 days or 6 months. If these commercial bills were guaranteed against default by an acceptance house, exporters, in turn, could freely sell these sterling bills to a London bank (discount house) at the world's lowest open-market rates of interest." More succinctly, “London without its specialized discount market would be London without its greatness”.

In the US, no such market existed, largely in part thanks to lack of authorization for such activities in the National Banking Act. What this meant, in turn, was that US banks were missing out on one of the primary benefits of the invoicing international trade in a domestic currency—“denomination rents”. Denomination rents are special profits that banks can obtain when they can expand banking services to “nonresident” economic actors. Or, to put it more simply, the greater capacity for a national banking sector to play in the international arena, the more profits they will accrued from those activities that otherwise would not take place.

The National Monetary Commission, formed in the aftermath of the Panic of 1907 to study banking reform, was a ground zero for bankers and public figures to work through the issues of the elastic vs inelastic currency debate. The problem of the dollar’s weakness in international trade, and retrograde state of its financial markets, also factored heavily in the Commission’s work. Lawrence Merton Jacobs, for example, drafted a report for the Commission titled “Bank Acceptances”, where he wrote that

New York is in a class by itself. Without bank-accepted bills, it can have no discount market. Without a discount market, funds cannot move to it as they do between financial centers of Europe, because there are no bank-accepted bills in which foreign banks can invest. Our commercial paper is not suitable. Foreign banks will not purchase it because they are not acquainted with, or sure of the rating of miscellaneous mercantile establishments, and because such paper could not be readily disposed of in case it became necessary or profitable to withdraw funds from New York for remittance elsewhere.

Broz notes that when it came to the issue of these markets, “National City Bank, the most ambitiously international New York bank, estimated that English banks earned $150 million per year in commissions just from financing U.S. exports before 1914”. What he doesn’t mention is that the author of the above report, Lawrence Jacobs, is listed in the 1861-1910 Alumni Directory of the University of Chicago as working at National City Bank. This bank, in turn, effectively an extension of the Rockefeller empire: it was the primary banker for the family’s Standard Oil, and its president from 1890 - 1909, James Stillman, was a close Rockefeller ally. We will have more to say about this bank momentarily.

A mild critique of Broz: though his argument is rather complementary to that of Livingston, he takes the time the offer a soft rebuttal of the latter’s work towards the end of his paper by noting that Livingston “ties the origins of the Fed to the emergence of the modem corporation in the 1890s. He asserts that the new corporate class was very sensitive to financial instability”. Broz then goes on to comment “to Livingston a corporate economy fares much worse, although from an industrial organization perspective it is easy to infer just the opposite”, because transactions in an economy composed of highly centralized firms tend take internally, rather than externally.

This seems misguided to me on several points. In the most basic sense, the history is quite clear that the tendency towards the formation of the Fed—such as the formation of the National Monetary Commission—emerged as a crisis-response mechanism, particularly from the 1907 Panic (and Broz does concede this, alluding to how “ panics and severe seasonal interest-rate fluctuation” did beset the US economy prior to 1914). On a deeper level, the issue doesn’t lay strictly in transaction volumes in general, but pivots on particular types of transactional relations. A key issue facing corporations was the immense size of capital outlays, particularly those allocated to the production of the means of production. Financial instability led to situations where firms occasionally had difficulties making good on their investments, which most frequently required massive loans from the banks to which they had become fundamentally woven.

Finally, the ‘corporate capitalism’ to which Livingston refers is precisely the monopoly and financial capitalism that Lenin concerned himself with in Imperialism. There, Lenin had noted that far from smoothing out crisis conditions, the tendencies of centralization and concentration in fact worsened crisis:

The statement that cartels can abolish crisis is a fable spread by bourgeois economists who at all costs desire to place capitalism in a favorable light. On the contrary, when monopoly appears in certain branches of industry, it increases and intensifies the anarchy inherent in capitalist production as a whole. The disparity between the development of agriculture and that of industry, which is characteristic of capitalism, is increased… the extremely rapid rate of technical progress gives rise more and more to disturbances in the co-ordination between the various spheres of industry, to anarchy and crisis.

Along similar lines, a September 2023 paper by a group of researchers titled “Survival of the Biggest: Large Banks and Financial Crisis” analyzed this same problem from the point of view of banking capital. They found that “history shows that, contrary to widely held beliefs, banking systems dominated by a few large banks are not measurably safer than more fragmented banking systems. The frequency of banking crises is not lower in large-bank-dominated banking systems. In fact, conditional on experiencing a crisis, real economic outcomes are more severe in banking systems dominated by a few big banks”.

Far from being competing interpretations—Fed as effort to smooth over the contradictions of capitalism, Fed as ensuring the dollar’s role in international trade—we should treat this as unified refractions through a common prism, the prism being the overall, crisis-ridden and uneven development of capitalism towards a higher stage.

120 Broadway and the Federal Reserve

In the next part of their comment, AI pointed out that “Broz doesn't mention it (remains in basic macroecon-theoretical framework) but it is right after this that the Morgan-Rockefeller American International Corporation is trying to expand in China. Their headquarters were in 120 Broadway same as empire trust, and you know all about that”. This is such an important insight, especially given the deep ties that existed between the 120 Broadway crew and the tendency towards the formation of the Federal Reserve (the Federal Reserve Bank of New York even maintained its offices, for a time, at this location). Plus the American International Corporation, or AIC, has been a longstanding interest of mine.

A little summary for people who might not be familiar with 120 Broadway, the unmistakable neoclassical-style officer skyscraper in Manhattan that was the domicile of the powerful Equitable Life Insurance Company. The many, many mysteries of this location first became a subject of interest in the research that led to my first appearance of the Pseudcast for the JFK assassination episode. People might recall that a key person of interest in that episode was Jack Crichton, an OSS officer turned oilman that appears 1) to have continued working for the CIA in a number of different capacities; and 2) to have played an essential role in the Kennedy assassination. Crichton, in the late 1950s, turned up as a vice president of the New York-based Empire Trust Company, a little-known but extremely prominent firm that was had significant interests in Texas oil and real estate (and owned at least one CIA proprietary company).

Empire Trust was headquartered at 120 Broadway.

Then, in our Iran-Contra episode, we became interested in a shadowy magnate swimming in the dark waters of offshore finance, murky banking, and shipping named Bruce Rappaport. Rappaport was, of course, party to all sorts of things like arms deals and money laundering, and had a close relationship with CIA director William Casey. In the late 1980s and all throughout the 1990s, Rappaport was bound at the hip to the Bank of New York, and was implicated in the bank’s facilitation of the widespread looting of Russia after the fall of the Soviet Union.

We learned that the Empire Trust Company had been absorbed into the Bank of New York.

Next, we found that 120 Broadway was a hotbed of Russian-related intrigue before and during the First World War. The military attaché of the Russian embassy in New York, Colonel Nikolai Golejewski, was the man in charge of “obtaining supplies for the Russian government”. One of Golejewski’s supplier was the Petrograd Trading Company, located at 120 Broadway, and run for a time by Abram Zhivotosky—who was reportedly the uncle of Trotsky. Another supplier was Marcus Friede, an agent of American industrial interests in Russia who maintained his offices at 120 Broadway. Friede, also a friend of Abram Zhivotosky, was connected to the American Ambulance in Russia, a so-called relief organization that held some offices at 120 Broadway.

In December 1917, it was revealed that American Ambulance in Russia had funneled money to Russia in order to support Kerensky.

Clearly, something very strange was afoot at 120 Broadway, and this is clarified by turning to another company housed at the location—the aforementioned American International Corporation (AIC). The AIC was neck-deep in this all this funny Russia business: it was, for example, a member of the American-Russian Chamber of Commerce, a consortium of American business interests that came together in 1916 to promote investment in Russia (though the Chamber wasn’t housed at 120 Broadway, records show that it often had meetings at the Bankers Club, which was on the top floor of 120 Broadway). In another instance, an AIC subsidiary—also located at 120 Broadway—called Allied Machinery did existence business in Russia, and maintained an affiliate office in Petrograd. The president of Allied Machinery, Samuel McRoberts, acted for a time as the head of the American-Russian Chamber of Commerce.

On a grander level, the AIC dispatched experts to assess the natural resources of Russia, poured money into railroads, set up export-import arrangements with Russian trading companies, arranged for massive loans from American banks to Russian industrialists through their Russian counterparts, and advised companies looking to do business in pre-revolutionary Russia. Here’s how the New York Times described it in July 1917:

Russia's Department of Trade has a Mining Commission whose director recommends that the gold mines of the Atlas Mountains, the copper mines in the Caucasus, the railroads of the Urals district, and the Island of Sakhalien be placed under the control of our capitalists.... To some extent they [these propositions] are the result of what the American International Corporation Corporation has been doing in Russia since the first year of the war. ... American capital will be invested in Russia's industries, but investment must be delayed until the end of the war. Those who saw the opportunity some time ago ... will regard with much satisfaction the responsive attitude of Russia's present government.

It seems awfully convenient that the AIC, a company with such a high degree of involvement in Russia on the eve of the revolution, would be located in the same building where the Tsarist government was obtaining war materiels, where family members of Trotsky had ties, and where covert support for Kerensky was being marshalled. But what does this have to do with the Federal Reserve and the role of the dollar in international trade?

The AIC was formed in 1915 by a consortium of New York banks and industrialists, with investors and corporate leadership reading like a Who’s Who of the leading lights of American capitalism. Among those involved included:

• Frank Vanderlip of the Rockefeller-linked National City Bank, as principle organizer of the AIC

• Charles A. Stone of Stone & Webster (headquartered in Boston but with New York offices at 120 Broadway) as president

• Willard Straight, formerly of J.P Morgan, as vice president

• Percy Rockefeller, of the Rockefeller family and Standard Oil, as director

• J. Odgen Armour of the Armour meatpacking company (offices at 120 Broadway) as director

• John D. Ryan of Anaconda Copper as director

• Cyrus McCormick of International Harvester and National City Bank as director

• William Grace of W.R. Grace & Company as director

• Pierre DuPont of the DuPont family as director (the DuPonts had a large take in the Equitable Building Company that owned 120 Broadway, and numerous DuPont family companies were parked there)

The AIC was also closely interrelated with 120 Broadway’s other shadowy company, Empire Trust. Just as with the AIC, the DuPonts held large amounts of Empire Trust stock. In another instance, an AIC subsidiary launched in partnership with Stone & Webster, the American International Shipbuilding Corporation, was designed to obtain obtain contracts from the Emergency Fleet Corporation (EFC). The EFC was a corporate entity organized by the US Shipping Board in 1917 to construct a merchant marine fleet for wartime purposes; the director-general of the Emergency Fleet Corporation was Charles M. Schwab, the head of Bethlehem Steel—and a director of the Empire Trust Company.

Finally, one of Empire Trust’s directors, Matthew Brush, became vice president of the AIC in 1918.

According to historian Harry Scheiber, the AIC had first been organized as part of a more generalized and concentrated push to drive American investment capital into overseas ventures, motivated in large part by the worldwide opportunities that had been opened by the advent of the First World War. The AIC targeted three key foreign regions for investment capital: Russia, China, and Latin America. The corporation's pointman in Petrograd was Frederick Holbrook, a senior executive in the Boston construction firm Holbrook, Cabot & Rollins (the Cabot family was one the leading families of the so-called Boston Brahmins, the city's ruling class. Numerous Cabots would later be found operating at high levels in the US government, particularly in the foreign policy establishment. Long before this, however, the Cabots were closely tied to Stone & Webster).

In China, the AIC was carrying out similar work, although political turbulence would ultimately cut short their long-term plans. These schemes included a partnership with the Chinese government to construct some 1,500 miles of railroad and an adjoining canal project. Financing for these projects was to be handled by the Finance Corporation of America; as historian George Mazuzan notes, the Finance Corporation began its life as “a wholly-owned subsidiary of the [Rockefeller-dominated] National City” for overseas financing, before being fully absorbed into the AIC.

Meanwhile, in Central and South America, AIC interests were expansive. A subsidiary company, the American International Steel Corporation, was active in Brazil, Argentina and Chile. National City Bank moved in lockstep with the AIC, establishing banking centers in the same places that the AIC was mobilizing its industrial push. W.R. Grace was a key partner of the AIC in the region: in 1915 the two purchased the shipping fleet of the Pacific Steamship Company (controlled by the Vanderbilt family). The AIC's statement on the acquisition outlined that it had been necessary to “maintain the shipping service” with Latin America, “so that trade relations may be continued”. The statement continues: “W.R. Grace and Company, who have had wide experience in shipping, will manage and direct the operations of the ships”.

Clearly, the AIC was positioning itself to be a major player in the new world of American-dominated international trade. Henry Scheiber directly links its emergence to the internationalization of both American industry (through an export-orientation accelerated by wartime purchasing) and American finance (though the underwriting of those exports and often the financing of foreign war purchasing). But while the war acted as a fuel for these transformations, they were already underway before the war began—after all, the AIC itself formed before the outbreak of world conflict. Like AI points out, we can read the emergence of the AIC back onto the earlier concerns of the bankers in ensuring the central position of the dollar in international trade.

The clearest structural linkage between the AIC and those earlier debates can be found in National City Bank and its president who had initiated the organization of the AIC, Frank Vanderlip. Vanderlip was regarded as one of the nation’s leading experts on financial markets, industrial combinations, and the needs for a centralized banking authority to ensure smooth functioning of domestic and international monetary systems; because of this, he became a close confidant to Senator Nelson Aldrich, who had set in motion the legislation to establish the National Monetary Commission in 1908.

(It’s intriguing that both were in the Rockefeller orbit: Vanderlip, through his position at National City Bank, the banker for Standard Oil, and Aldrich, by the fact that his daughter had married John D. Rockefeller.)

In 1910, Alrich convened a secret meeting at the illustrious Jekyll Island Club off the coast of Georgia to hash out a program for a central bank. According to the Federal Reserve’s own published history of the event, Aldrich was likely urged to organize the meeting by one of his advisors, Henry Davison of J.P. Morgan. Those attending included Frank Vanderlip, several assistants and advisors to Aldrich, and Paul Warburg of Kuhn, Loeb (itself allied with Morgan interests). Benjamin Strong of Bankers Trust (located at 120 Broadway) may or may not have attended the actual meetings. Here’s how the Fed describes the events:

Aldrich and his colleagues quickly realized that while they agreed on some broad principles—establishing an elastic currency supplied by a bank that held the reserves of all banks—they disagreed on details. Figuring out those details was a “desperately trying undertaking,” in Warburg’s words. Completely secluded, the men woke up early and worked late into the night for more than a week. “We had disappeared from the world onto a deserted island,” Vanderlip recalled in his autobiography. “We put in the most intense period of work that I have ever had.”

By the end of their time on Jekyll Island, Aldrich and his colleagues had developed a plan for a Reserve Association of America, a single central bank with fifteen branches across the country. Each branch would be governed by boards of directors elected by the member banks in each district, with larger banks getting more votes. The branches would be responsible for holding the reserves of their member banks; issuing currency; discounting commercial paper; transferring balances between branches; and check clearing and collection. The national body would set discount rates for the system as a whole and buy and sell securities.

It was Vanderlip and Strong who prepared the report on how this system would function, and Aldrich presented it to the National Monetary Commission in January, 1911. This report would become the foundational basis for what would eventually emerge, in 1913, as the Federal Reserve Act, finally establishing the US’s central bank. Benjamin Strong was appointed at the Fed’s first executive officer, a position then known as the president of the bank. Soon, Vanderlip would be working hard to set up the AIC.

Taken together, we get a clearer sense of the importance of the position of the central bank within the transformations of capitalism in the new age of imperialism. What more could one ask for?