A History of US Economic Law Part 9: Laying Groundwork
Shortly after the Panic of 1907 (that I discussed in part 7) Congress passed the Aldrich-Vreeland Act. The act was primarily the creation of Senator Nelson W. Aldrich who secretly brought together a small group of powerful bankers Henry Davison, A. Piatt Andrew, Benjamin Strong, Paul Warburg, and Frank Vanderlip. He sequestered them on Jekyll Island and they devised a rough plan. The Aldrich-Vreeland Act was presented to the Senate without anyone knowing how it was written a secret that was kept from the public until the 1930's. An account of the meeting can be found in a newspaper article written by Vanderlip, one of the attendees. The law was passed by a partisan vote and quickly signed into law by Roosevelt.
The Aldrich-Vreeland allowed national banks to join into large currency associations and issue emergency currency with the approval of the Comptroller of Currency. The idea being to formalize the process JP Morgan used in the Panic of 1907 to provide private liquidity to banks. Instead of private liquidity where JP Morgan exchanged private currency for stock or as a loan, the banks would issue emergency currency which would be paid back to the government through a special tax which started at 5% the first month and increase 1% each month until all the emergency funds were paid to the government. This aspect of the law was only used once in 1914 at the start of WWI. Future financial crises were handled by the Federal Reserve which Aldrich also played a major role in creating. Aldrich saw the Aldrich-Vreeland Act as a stepping stone to creating a European style central bank in the US, he was appointed as chairman of the National Monetary Commission which was created by the act and tasked with creating recommendations for reforms.
In a speech to the Economic Club of New York Senator Aldrich said,
Other countries, however, have been able to prevent disastrous panics and to confine the evil results of overspeculation and inflation in the main to the people directly interested- that is, to the people who have violated the fundamental laws of business and to their financial backers and supporters.
There has been no general suspension of banking institutions and no general destruction of credit in any of the leading countries of Europe for more than half a century.
He then goes on about what he sees as the virtues of banking policy in several major countries. Ultimately, the recommendations of the monetary commission led to the creation of the Federal Reserve and supposedly protect us from ever experiencing mass banking or credit panics again...
The one time the currency issuing provision of Aldrich-Vreeland was used, it successfully prevented any bank failures. At the beginning of WWI, European banks were desperate for gold, so they started selling off US stocks to exchange US currency for gold. This was leading to a rapid depletion of US gold reserves. Treasury Secretary William McAdoo asked the NYSE to shut down to prevent Europeans from selling their securities. The exchange remained closed from July 31st to December 12th. McAdoo also authorized banks to issue currency under the emergency provisions of Aldrich-Vreeland. The result was that any bank runs were averted and the US was able to stay on the gold standard.
William Silber has written extensively on the subject. There is a short paper available here. He has also written a book on this crisis http://www.amazon.com/When-Washington-Shut-Down-Street/dp/0691127476 I don't completely agree with his conclusions, but his historical account of the crisis is unmatched in detail.
In 1908, Theodore Roosevelt was approaching the end of his second term and while the economy had struggled in 1906 & 1907 things were turning around and Roosevelt remained extremely popular. This made it easy for his Vice President Taft to ride on Roosevelt's popularity to win the presidency despite internal friction between the progressives and the "old guard" in the Republican party. Like Roosevelt, Taft was a self-proclaimed progressive, but he was also more inclined to compromise with conservatives and was less willing to exercise presidential power than Roosevelt.
Under Taft's administration there were a couple of laws passed worthy of notice. First the Payne-Aldrich Tariff Act which lowered many tariffs but was generally a compromise bill that left everyone unhappy. It did include a corporate income tax of 5% which was challenged in front of the Supreme Court in Flint v. Stone Tracy Co. 220 US 107 (1911) Ultimately, the Court upheld the tax as a "special excise" tax and not an income tax. However, the point became moot when the 16th Amendment was ratified just a couple of years later making income taxes constitutional.
Taft also doubled down on trust busting using the Sherman Act filing 90 lawsuits against trusts. Yet despite this, the progressive wing of the party continued to move away from him and he faced constant criticism from Roosevelt. In the 1912 election, Roosevelt ran for President under the "Bull Moose" ticket splitting the Republican vote and Taft came in third place with 25%, the worst defeat for a sitting President in history. The democrat party became the political home for progressives under the leadership of President Woodrow Wilson.