Ruthless Empire Builders
Henry C K Liu

A major event of high culture unfolded in a series of elegant receptions during the third week of November in New York, a city of seriously moneyed art collectors, scathing critics and a discriminating public. Three years in design and construction, the Museum of Modern Art reopened on its 75th anniversary with a new US$850 million building on the same site as the old museum in midtown Manhattan. Loved by all who have been fortunate enough to have their lives enriched by it, this cultural flower in one of the world's greatest cities, affectionately referred to as The Modern, has been cultivated in the supercharged greenhouse of modernist milieu, aiming to define fundamental issues of meaning and truth through the vehicle of esthetic preference at the forefront of modern civilization.

The Museum of Modern Art is the beloved legacy of an extraordinary woman of impeccable pedigree, Abby Aldrich Rockefeller, born in Providence, Rhode Island, on October 26, 1874, to elitist senator Nelson Wilmarth Aldrich (1841-1915), the most powerful politician in a nation rising fast as a world power at the turn of the 20th century. Miss Aldrich was educated at home by a Quaker governess whose pacifist philosophy placed value on inner spirituality, attentive listening, compassion, non-violence, equality (particularly for women), non-evangelistic worship, silent devotion, inner-directedness and respect for consensus.

Such values, central to the ideal American character, had been coming into increasing conflict with evolving socio-economic reality and a new political climate as the young girl blossomed into womanhood. At 17, as proper for young women of her privileged class, she went to Miss Abbott's School to study English, French, German, art history, the classics, gymnastics and dancing. After graduating, she traveled to Europe in 1894 to view first-hand the art she had studied at school. At age 26, she became the wife of John D Rockefeller Jr, son of the founder of Standard Oil, the nation's wealthiest man. After a courtship that lasted more than five years, the couple, who first met in 1894 when the groom-to-be was a student at Brown University, were finally married at a super-lavish wedding on Warwick Neck, Rhode Island, on October 9, 1901. The vibrant bride was given away by her powerful father, Senator Aldrich, to the reserved heir of the nation's greatest fortune. It was a union of wealth and power. But while John D Rockefeller (1839-1937) created and accumulated wealth through the brutal imposition of efficiency on a chaotic oil-refining industry, it was Nelson Aldrich who brought about the private control of currency that made such wealth accumulation structurally systemic.

Elected to the Senate as a Republican from Rhode Island in 1881, Aldrich joined and eventually chaired the Senate Finance Committee, which set tariff rates, the principal means of raising federal revenue in the era before income tax. He was a strong proponent of protective tariffs for the benefit of young industries in the northeast, and helped force the populist Silver Republicans out of the party, and was the power behind the passage of the Gold Standard Act of 1900.

In the era of state-chartered banking, banks were free-standing individual entities that practiced predatory competition on each other in an unregulated free market, with no sense of solidarity or common interest as an industry nor shared responsibility to the community at large. Faced with recurring systemic credit crunches associated with the gold standard in an expanding economy, banks routinely engaged in internecine competition to corner cash, deny new credit to financially weak customers to expose them to predatory takeover raids by preferred customers, suspend cash payments abruptly with no warning, and hoard money regularly for profit. The sound-money regime and its associated credit crunches periodically failed the expanding economy, resulting in sudden layoffs of hundreds of thousands as credit-starved firms fell into insolvency, bringing trade a standstill.

In the summer of 1907, the US economy crashed, with a large number of big businesses and major Wall Street brokerages going bankrupt. By October, the venerated Knickerbocker Trust in New York City and the blue-chip Westinghouse Electric Co had both failed, touching off what came to be known as the Banking Panic of 1907, the latest and most severe of four nationwide banking panics that had occurred in three decades. The stock market plummeted and panic-stricken depositors made massive runs on the nation's banks.

Once more J P Morgan (1837-1913) acted to restore financial order. This was not his first exercise to save finance capitalism from free market forces, each time making his control of the financial markets more complete. He summoned leading bankers and financial titans to his palatial home on 36th Street and Madison Avenue in New York, where they set up a rescue operation in his ornate library. Over the course of the next three weeks, Morgan and his team bypassed legal constraints to channel money from the stronger institutions they owned to the weaker ones they had just acquired through predatory fire sales to keep the system afloat, halting the panic with the cooperation and gratitude of the government. Morgan strong-armed banks to agree to settle accounts among themselves with clearinghouse certificates rather than cash and thus increased the money supply without involving the government, and ended up owning a much larger share of the financial sector paid for with paper. In the finger-pointing following the crisis, reformers in both political parties agreed that the US banking system was fundamentally flawed and needed structural reform.

Conservative business leaders, however, held that it was president Theodore Roosevelt's progressive agenda that had upset the natural order of an otherwise self-balancing market and that if government would only stop meddling in commerce, all would return to normal. Typical of US politics, reform in form gained acceptance only by yielding to conservatism in essence. An emerging consensus affirmed that bank reform was indeed necessary to provide badly needed currency elasticity, which had been a major issue in the panic. But reform was not directed toward providing credit constructively to where the economy needed it most, but toward achieving general soundness in the banking system at the expense of fair competition to develop the full potential of the economy. Under the leadership of Aldrich, Congress responded by passing a hastily prepared stopgap legislation, the Aldrich-Veerland Currency Act of 1908, to provide short-term aid to distressed banks to ease the ongoing credit crunch to save big business. The legislation allowed national banks to issue notes on a wider range of securities than previously, with the effect of putting more money into circulation to prevent further corporate bankruptcies.

To seek a long-range solution to the complex issue of recurring financial crises, Congress created a National Monetary Commission (1808-12) under the Aldrich-Veerland Currency Act, with Aldrich as chairman, to study the matter in depth. A report recommending the Aldrich Plan was issued by the commission four years later in 1912 and not acted upon until 1913 at the beginning of the Democratic administration of president Woodrow Wilson (1913-21). In 1913, Congress passed the landmark Owen-Glass Act, which created the Federal Reserve System to act as lender of last resort to distressed private banks. Aldrich's work on the Aldrich-Vreeland Currency Act of 1908 and his chairmanship of the National Monetary Commission paved the way for the Federal Reserve Act of 1913.

Wilson, being nearly illiterate on the technicalities of banking reform, was strongly influenced by William Jennings Bryan's populist outlook. Bryan, a chronically unsuccessful Democratic contender for presidency, became Wilson's secretary of state. Wilson said a year before he was elected, "The greatest monopoly in this country is the money supply," adding a couple of months later that he would not accept "any plan which concentrates control in the hands of the banks". Under Wilson, Representative Arsene P Pujo of Louisiana, chairman of the House Banking Committee, led the Pujo Commission in 1912 in a wide-ranging congressional hearing on the nation's financial problems. Pujo brought in J P Morgan to testify and eventually came to the conclusion that a "money trust" existed in the nation's financial sector, just as "corporate trusts" existed in oil, mining and the industrial sectors. In the view of the Pujo Commission, the central-banking solution outlined in the Aldrich Plan as recommended by the Monetary Commission did not solve the "money trust" problem.

The Fed is born

In 1913, the Democrat-controlled Congress adopted a regional, rather than fully centralized, approach to banking reform. Carter Glass of Virginia headed matters in the House and Robert L Owen of Oklahoma did so in the Senate. The final legislation created 12 Federal Reserve Banks that would act as central banks for all nationally chartered banks and other state-chartered institutions that voluntarily elected to be members. The idea of regionalism was to have a banking system responsive to the different monetary needs of various regions in the vast nation. The 12 Reserve Banks would not be federal bodies but private institutions owned by the member banks of the system. The compromise was a response to rising regional conflict rather than conflict between private or public control of the nation's money. A Federal Reserve Board was formed to oversee the system and establish policy. Members of the board would be appointed by the US president, providing a considerable measure of federal direction over the private system. Thus, like the Supreme Court, the "politically independent" Federal Reserve Board membership is politically appointed, albeit for fixed terms rather than life.

A new form of currency was created: the Federal Reserve Note, which has remained legal tender to this day, as a way to solve the problem of monetary inelasticity, to provide a national currency that would expand and contract as needed by the economy. The notes were to be backed by reserves of gold of at least 40% of the face amount of the notes issued. Government funds were to be deposited in the Reserve Banks, which ended the old sub-treasury system. The dollar did not become a fiat currency until 1971.

On December 23, 1913, Wilson laid to rest decades of monetary debate when he signed the Federal Reserve Act into law. Wilson's signature catapulted the Federal Reserve System into an monetary adventure that would evolve from a passive institution designed to prevent banking panics into what came to be known as a central bank, with an independent mandate from the body politic as an active promoter of monetary stability, a multi-faceted player and rescuer in the ever-more-reckless financial-services industry and supremely powerful financial arbitrager over the economy of the nation and the world, an institution owned not by the people and controlled not by democratically elected officials, but by political appointees acceptable to private bankers.

The National Monetary Commission had identified two related flaws in the nation's banking system: 1) Venerability to recurring bank panics and 2) An inelastic currency that was unresponsive to changes in demand in a dynamic economy. To combat these two problems, the commission made an urgent plea for timely sovereign lending to distressed banks (referred to as "rediscounting" in the Federal Reserve Act). The greatest power bestowed on the new Federal Reserve system was the setting of the discount rate - the rate of interest charged by the Reserve Banks when lending to member institutions collateralized by government securities. Raising the discount rate generally increases the cost of borrowing and slows the economy, while dropping it stimulates economic activity, since banks set their loan rates above the discount rate, and not by market forces.

Federal Funds include funds deposited by commercial banks at the Federal Reserve Banks, including funds in excess of bank reserve requirements. But Fed Funds can be created at will by the Federal Reserve now that the dollar is a fiat currency not backed by gold. Commercial banks may lend federal funds to one another on an overnight basis at the Fed Funds rate, which is the most sensitive indicator of the direction of interest rates since it is set daily by the market in response to the Fed's open-market operation: the buying or selling of government securities to meet Fed Funds rate targets. Thus the real function of sovereign debt is to provide an instrument through the buying and selling of which the Fed can inject or withdraw money from the money supply without appearing to create or destroy money while actually doing so.

The Federal Reserve Act of 1913 was an important reform measure related to the operation of the banking system, but it failed to address the "money trust" problem of private control of money, a public monetary instrument. The control of the nation's money and credit that had gradually been taken away from the people over decades since the founding of the United States became institutionalized through the creation of the Federal Reserve System and stayed firmly and legally in the hands of a small circle of supremely powerful elite, depriving the nation of the financial democracy on which political democracy ultimately depends. Democracy requires the fair sharing of political power, which cannot be accomplished without fair sharing of financial power.

During the presidency of Theodore Roosevelt (1901-09), Aldrich opposed many of Roosevelt's progressive antitrust reforms against what Roosevelt called the "malefactor of great wealth", particularly against government regulation over private railroads built with massive government subsidy. Although the Aldrich-Rockefeller union combined power and wealth, the reputations of Nelson Aldrich and John D Rockefeller Sr were less than stellar. In a series of articles for Cosmopolitan magazine in 1906, muckraking journalist David Graham Phillips portrayed Aldrich as a corrupt political boss who contributed to the "Treason of the Senate". Similarly, writer Ida Tarbell (History of the Standard Oil) exposed the senior Rockefeller as a ruthless robber baron. President Roosevelt included Rockefeller among the "malefactors of great wealth".

Remembering Rockefeller

When Ida Tarbell traveled to Cleveland to observe John D Rockefeller Sr, the man she had been writing about for two years, she chose not to confront him face to face. She studied Rockefeller's every move at a distance, gathering ammunition for a scathing character piece. For his part, Rockefeller never got back at the feisty reporter. "Let the world wag" was his favorite motto, and long silence his response to Tarbell's attacks.

Tarbell wrote that Rockefeller had the powerful imagination to see what might be done with the oil business if it could be centered in his hands, the intelligence to analyze the problem into its elements, and to find the key to control. He had the essential element to all great achievement, a steadfastness to a purpose once conceived that nothing can crush. The reporter characterized Rockefeller as "good". There was no more faithful Baptist in Cleveland than he. Every enterprise of that church he had supported liberally from his youth. He gave to its poor. He visited its sick. He wept for its suffering. Moreover, he gave unostentatiously to many outside charities he deemed worthy. He was simple and frugal in his habits. He never went to the theater, never drank wine. He was a devoted husband, and he gave much time to the training of his children, seeking to develop in them his own habits of economy and clarity. Yet he was willing to strain every nerve to obtain for himself special and unethical, if not outright illegal, privileges from the railroads that were bound to ruin every man in the oil business not sharing his vision of order. Religious emotion and sentiments of charity, propriety and self-denial seem to have taken the place in him of notions of justice and regard for the rights of others.

" It may be that Mr Rockefeller is one of those double natures that puzzle the psychologist. A man whose soul is built like a ship in air-tight compartments to use the familiar figure - one devoted to business, one to religion and charity, one to simple living and one to nobody knows what. But between these compartments there are no doors," wrote Tarbell.

Rockefeller finally responded late in life