The Southern Agrarian Federal Reserve

Elizabeth Sanders notes with irony that, “In retrospect, one may wonder at the pride of achievement voiced by the congressional agrarians at the passage of the Federal Reserve Act and at the dire forebodings of core Republicans. The Federal Reserve Board today is rarely viewed as a great democratic institution.”Footnote ¹¹ Indeed, why were monetary populists excited about, and northeastern banker-aligned Republicans critical of, an institution that now exemplifies a triumph of technocracy over democratic impulses? This apparent paradox is a result of the generally accepted account of the creation of the Federal Reserve (the Fed), what Alan Greenspan described as “a compromise…between the New York money center banks and the rest of the nation, still largely rural.”Footnote ¹² According to this interpretation, after J. P. Morgan single-handedly coordinated a bailout of the US economy amid the 1907 Banking Panic, policymakers realized that the country could not rely on the longevity and beneficence of its most powerful bankers. Senator Nelson Aldrich of Rhode Island secured the passage of the Aldrich–Vreeland Act, which established the National Monetary Commission to study the causes of the panic and advise on potential remedies. A secret meeting occurred at Jekyll Island in 1910, where the technical aspects of a central bank were formulated in what became known as the Aldrich Plan. When Woodrow Wilson and the Democratic Party won the 1912 elections, the Democrat Carter Glass of Virginia largely followed the Aldrich Plan in crafting the Federal Reserve Act, otherwise known as the Glass–Owen Act, with a few trivial concessions to alleviate the concerns of rural skeptics.Footnote ¹³

A recent wave of scholarship has emerged that complicates the neatness of this interpretation. As Peter Conti-Brown notes, the consensus narrative glosses over fierce feuds regarding political control and banking independence. However, the myriad of compromises extended well beyond institutional design into the technical operations of the bank, resulting in vague phrasing that, while securing the votes needed to pass the legislation, left the act open to interpretation such that each faction claimed victory.Footnote ¹⁴ Nadav Orion Peer persuasively argues that the legislation reflected a balancing act on credit distribution between three interest groups: corporate conservatives, mainstream Democratic Brandeisians, and agrarian populists.Footnote ¹⁵ Peer concludes the Federal Reserve Act was essentially a “mainstream Democrat” or “Brandeisian” bill that “…made small—through non-trivial— concessions for agrarian paper” and allied with “…corporate financiers….on orthodox real bills ideas.”Footnote ¹⁶ As in the conventional account, Peer presumes Glass exemplified a mainstream Democratic philosophy that does not account for the South’s aggressive reassertion of itself in national politics.Footnote ¹⁷

Though Robert Owen’s monetary preferences fit neatly within the agrarian periphery–industrial core framework advanced by Elizabeth Sanders, this model lacks explanatory power in the case of Carter Glass. Thus, we refine Sanders’s model to account for intrasectional divisions within the South, political cleavages not driven by industry and agriculture, but rather upon credit access and its relationship to landholding, labor, urban power, and industrial development.Footnote ¹⁸ In the parlance of the South, this was the Agrarian–Bourbon divide that drove the region’s postbellum banking and monetary politics. In the face of erratic global commodity prices, agrarians across the South and West sought lower rates and easier credit to insulate small farmers from the threat of bankruptcy. In contrast, Southern Bourbons agreed with their Northern peers that economic stability required strict monetary discipline.Footnote ¹⁹

While Christopher W. Shaw has explored the Western political reaction against the central bank during the 1920s, our pivot to a Southern-focused analysis of the Federal Reserve System is motivated by trends in American Political Development demonstrating that, far from being limited government reactionaries, Southern politicians at the national level possessed diverse aims and approached federal politics with great intentionality.Footnote ²⁰ Richard F. Bensel highlights the importance of economic sectionalism in driving American political divisions, a point further refined by Elizabeth Sanders’s argument that the tension between an industrial core and agrarian periphery animated the creation of the US state.Footnote ²¹ This was more than sturm und drang; as Charles Postel shows, agrarian populists developed a sophisticated national political and economic philosophy contrary to previous accusations of parochialism.Footnote ²² More recently, Ira Katznelson’s Fear Itself and Southern Nation, the latter co-written with David Bateman and John Lapinski, emphasize the South’s influence in creating the late nineteenth and early twentieth-century American state and its disastrous consequences for racial progress.Footnote ²³ Though acknowledging the tenuousness of a “Solid South,” Bateman, Katznelson, and Lapinski show that a significant continuity existed within the South’s national politics: a dominant preference, over the arc of time, for using the federal government to “regulate and check market capitalism,” paired with parochial “anti-colonial rhetoric.”Footnote ²⁴ In the spirit of V. O. Key’s classic, Southern Politics in State and Nation, Devin Caughey reinvigorates the importance of local competition within the region’s single-party system and demonstrates surprising competitiveness for white support.Footnote ²⁵ In a 2023 essay, Bateman notes opportunities abound to deepen the current understanding of national politics by delving into the diversity within Southern political coalitions and regional concerns.Footnote ²⁶

Moreover, recent developments in the economic history literature support the position that agrarian concerns over the link between monetary policy and their welfare were legitimate. Bruce Carlin and William Mann demonstrate that tightened discount window policies in the Chicago and St. Louis districts throughout 1920 and 1921 facilitated drops in bank lending and agricultural revenues, accounted for almost entirely by a decline in local prices. Similarly, research on the relationship between monetary policy and agriculture during the Great Depression has found that agricultural interests exerted significant influence on the New Deal and benefited from easier credit policies.Footnote ²⁷

This paper connects the splintering Southern Democratic coalition of agrarian populists and Bourbons after the Federal Reserve System’s creation with the interwar agricultural crisis and renewed significance of Southern politics at the national level. Representing the populist wing once led by William Jennings Bryan, Senator Robert Latham Owen promoted the anti-elite interests of small farmers in the South and West who wanted inflation and looser credit. In contrast, figures such as Carter Glass continued a conservative, pro-business tradition established during Redemption that fundamentally distinguished itself from Republicans by its animosity toward Republicans and tariffs. These Bourbons allied with Northern Gold Democrats to form Grover Cleveland’s political coalition. While neither term is perfect given politicians’ propensity to shift positions, they reflect historically significant distinctions within the South, where terms such as “liberal,” “Democrat,” and “progressive” were used by contemporaries so interchangeably as to eliminate coherence.Footnote ²⁸ The interpretative lynchpin for this project is the widespread vulnerability and dissatisfaction of the socioeconomic group that most expected to benefit from the reserve system—small, rural banks that primarily lent to America’s farmers.

Understanding the degree of Robert Owen’s influence on the Federal Reserve requires a reassessment of “the real bills doctrine.” The real bills doctrine, which claimed a nation’s currency should be composed solely of short-term bank notes issued against legitimate commercial transactions, is frequently interpreted by scholars as evidence that the act reflected the conservative preferences of urban banks.Footnote ²⁹ However, this ignores the advantages that country banks initially received from the real bills doctrine. For country banks, the real bills doctrine created a reliable means for rural bankers to lend on agricultural paper, despite limited local reserves. So long as the validity (or “realness”) of these loans was not called into question, country bankers used the Federal Reserve’s discount facilities to lend with complete confidence to their farmer clientele. With the Treasury in control of printing Federal Reserve bank notes and its supply managed by a publicly appointed Board, agrarians and their country banker allies reasoned that the political power of farmers ensured the Federal Reserve would keep agriculture on equal footing with other industries, ending a perceived discrimination in credit. For this reason, contrary to current wisdom, agrarians were some of the strongest supporters of the real bills doctrine.

Unfortunately, for the Federal Reserve’s agrarian supporters, the act broadly defined its expectations for the Federal Reserve’s performance. While this allowed every Democratic senator to vote in favor of the act, its vagueness created an opening for both core and periphery interests to read their preferred monetary policy into action. The “sound” banking theory embraced by Wall Street and the Bourbons held that the gold standard acted as a “disciplining” force on lending, constraining bankers to vet their loans closely on the basis of their reserves. With monetary theorists such as Irving Fisher outside the orthodoxy of American economic thought, country bankers and agrarians could not rely on elite technocrats to avoid running the Federal Reserve according to traditional banker orthodoxy. Thus, the Reserve’s monetary policy was subject to a political tug-of-war between public officials advocating low rates to facilitate the sale of government treasury notes and bankers, led by Benjamin Strong, Jr., who sought high rates to enforce lending discipline. While the Treasury dominated policy throughout the First World War, bankers gained influence over the system in 1920. This led the Reserve System to adopt a “liquidationist” philosophy, shifting the central bank from facilitating credit redistribution to serving as the arbiter of sound banking policy. The crisis it sparked in agriculture persisted through the decade.Footnote ³⁰

Rather than restoring the Federal Reserve to Owen’s original populist intent, agrarians returned to old nostrums. In the 1920s, Republicans led failed experiments with intermediate credit and orderly marketing, but the Great Depression ushered in a new cohort of Southern legislators who favored an administrative state to circumvent the failures of private credit, freeing farmers from the inelastic currency problem conclusively.Footnote ³¹

We build on the rich administrative state literature exploring the growth in state capacity under the executive branch throughout the late nineteenth and early twentieth century by connecting these developments to the congressional factions that delivered them.Footnote ³² As noted by Julian Zelizer, “Many historians have downplayed the role of Congress because they see it as a passive institution whose members react to the pressure bearing down on them… [but] the members of Congress have been able to initiate their own policy proposals, develop their own agendas and interests, and form their own distinct institutional identity.”Footnote ³³ Crucial to this project is a re-engagement with the sectionalism that defined intraparty factions, especially within the South. The early historiography of Woodrow Wilson’s administration acknowledged the importance of intraparty ideological disputes in enacting the New Freedom.Footnote ³⁴ Through original research in congressional archives throughout the South, we connect this older historiography with recent research in American Political Development and economic history to reinterpret, through the eyes of its Southern authors, the Federal Reserve’s creation.

Equality of Agriculture and The Federal Reserve

The Federal Reserve Act was crafted with a Southern twang. In April of 1913, newly inaugurated President Woodrow Wilson, a Virginian by birth, hosted a series of conferences to draft a framework for a new central bank. The meetings were a Southern affair, including Carter Glass of Virginia, the newly minted Chair of the House Banking and Finance Committee; William McAdoo of Georgia, Wilson’s son-in-law and recently confirmed Secretary of the Treasury; and Robert Owen of Oklahoma, Chair of the Senate Finance and Banking Committee.Footnote ³⁵ In an irony fitting of C. Vann Woodward, the representatives of the region most hostile to central banking were now charged with establishing an enduring one.

Only six months earlier, the 1912 Democratic platform explicitly repudiated Senator Nelson Aldrich’s central banking plan. A Rhode Island blueblood, Aldrich had recently introduced a controversial National Reserve Association bill based on a proposal hatched at a secretive Jekyll Island conclave with Wall Street bankers.Footnote ³⁶ Agrarian Democrats opposed this measure. As Congressman Joseph T. Robinson of Arkansas stated before the House, “the Democratic idea, firmly entrenched in the minds of the masses, [is] that such a bank would become the most powerful and oppressive monopoly that has existed in our country.” Robinson argued that traditional Democratic opposition to the bank must continue because “all the objections which Andrew Jackson lobbied against the national banks apply with new force against this new bank of issue… I believe the evils that would result from such an establishment, in fastening a power upon the financial system which would dominate it for all time, and which would destroy at will, if controlled by unpatriotic men, all minor financial institutions…”Footnote ³⁷ Sympathetic to the Aldrich Plan, the Bourbon Carter Glass fretted that “the Ghost of Andrew Jackson stalked before my face in the daytime and haunted my couch at nights.”Footnote ³⁸

A cynical interpretation of the Democratic change of heart to embrace a central bank in 1913 is that electoral victory grants remarkable clarity. However, the populist movement that William Jennings Bryan capitalized upon was in response to systemic failures within the National Banking System. While farmers had proposed multiple schemes for addressing this, such as deposit insurance and the sub-treasury scheme, the Panic of 1893 persuaded many country bankers that a public monetary authority was desirable. One such country banker was Robert Owen. The founder of the First National Bank of Muskogee, operating in the Cherokee Territory, Owen witnessed firsthand the devastation of 1893. Describing the crisis, he wrote:

An elite in exile west of the Mississippi, Owen was uniquely situated to connect central banking theory to periphery conditions. Born to western-Virginian aristocracy, his father, Robert L. Owen Sr., was a civil engineer turned planter and railroad magnate who served in Viriginia’s Senate and owned and operated the Virginia & Tennessee Railway that managed the Army of Northern Virginia’s fraught logistics line. The Owen family home, Point of Honor, was the most prominent mansion in Lynchburg. His mother, Narcissa Chisholm Owen, was the daughter of Cherokee sub-chief John D. Chisholm, who moved to Arkansas following his role in the Blount Conspiracy. The Panic of 1873 left the family in dire straits, with Owen, Sr., passing that year. After completing his studies at Washington and Lee College and graduating as valedictorian in 1877, his family, to escape financial ruin, left Virginia for Oklahoma to claim Narcissa’s Cherokee allotment, where the family bestowed the name “Monticello” on their new home. In Oklahoma, Owen began a successful legal career, and between 1885 and 1889, he was appointed head of the Union Agency overseeing the Five Tribes, where he dealt with white intruders, citizenship disputes, and tribal controversies. From 1889 to 1907, he served as the legal counsel for the Five Tribes, securing a major legal victory before the US Court of Claims for violations of the American treaty with the Cherokee. Alongside his legal practice, he operated the First National Bank of Muskogee from 1890 to 1899.Footnote ⁴⁰

After his bank barely survived the Panic of 1893, Owen turned his attention to monetary reform. While the Indianapolis and Baltimore Monetary Commissions investigated what reforms were necessary to the National Banking System to avoid such crises, Owen traveled to Europe in 1898 in search of a solution to the problem of an inelastic currency that dogged country banks. As a private citizen, Owen interviewed the Governors of the Bank of England and the Directors of the Reichsbank, returning committed to the virtue of securing an asset-based currency that could be issued in emergencies to stabilize bank reserves. Over the course of 1899, he published multiple articles elaborating on how Canada, England, France, and Germany stemmed banking panics. By 1900, Owen concluded that an effective central bank must be capable of issuing bank notes at interest against adequate securities with a public tax to check inflation.Footnote ⁴¹

Owen interpreted the origins of banking panics to be short-term liquidity crises induced by bank runs. So long as banks had access to a quick supply of sufficient currency that they could meet this sudden demand, panics could be prevented. To this end, Owen proposed the creation of emergency bank notes issued by the US Treasury that functioned as legal tender. In the event of a panic, banks could offer collateral to access this currency through a national network, quickly replenishing cash reserves and staving depositor demands. The abuse of this currency would be checked by a tax reducing the effective interest rate, much as prevailed in Germany. Importantly, Owen wrote that “In a time of panic a man cannot borrow money if he puts up gold dollars as collateral, for the manifest reason that it is not security, but currency, which is then required. The banker has not the currency to lend, and he cannot lend that which he has not, no matter the security.”Footnote ⁴² Thus, Owen distinguished between gold and currency, believing specie to function as security for currency rather than endow the currency with its value through convertibility.

While not a bimetallist, his preference for a quickly issued US Treasury note as a means of immediate currency found an ally in the Great Commoner, William Jennings Bryan, and Democratic National Committee chair, Senator James K. Jones of Arkansas. For Owen, Bryan provided the force of personality and political influence to advocate for banking reforms in service to the periphery that he, otherwise isolated from US national politics by virtue of Oklahoma’s territory status, did not possess. In Owen, Bryan discovered a powerful intellect capable of formulating monetary and financial policy in the technocratic terms of professional bankers. In 1900, at Owen’s behest, Jones proposed to amend the Aldrich Banking bill to create emergency treasury notes that could act as legal tender. Aldrich blocked the amendment.Footnote ⁴³

Beyond preventing panics, the quickly accessed fiat currency Owen advocated for resolved another challenge faced by country banks—the “inelasticity of the note issue.”Footnote ⁴⁴ American agriculture’s reliance on credit for production and marketing costs left farmers susceptible to the all-too-regular monetary shocks of the national banking era.Footnote ⁴⁵ Even in prosperous times, farmers struggled to access currency and credit, particularly during the peak harvest times of August through September. The crop cycle, paired with the need to physically ship cash, introduced a substantial seasonality to credit demand in the United States that the system failed to accommodate. Nationwide assets collected in New York City, where they were committed to the stock market, meant credit struggled to flow to country banks when the agricultural cycle demanded it.Footnote ⁴⁶ Moreover, the National Banking System, conceived during the US Civil War by the Lincoln administration to ensure a reliable market for federal government debt, tied note issuance to government bonds, the volume of which was hardly unlimited. Accordingly, the supply of currency was never enough to meet demand during the harvest months.Footnote ⁴⁷ This “inelasticity” led to exorbitant rates charged during the harvest season. The agrarian periphery deemed the banking system to be fundamentally broken and required reform to ensure an “elastic” currency.

At the turn of the century, a tenuous consensus emerged that banks should be permitted to issue notes backed by securities other than government bonds, creating an “asset-based currency.” Given the relatively balanced budget of the Federal government, federal bonds were only sometimes available for purchase to country banks that struggled to issue enough currency or credit to facilitate business needs. If banks could issue their own currency backed by whatever assets they owned (state-government bonds, municipal bonds, cash, commercial paper), the currency would be elastic enough to meet the needs of commerce. From 1896 to 1910, every banking reform proposal included an asset-based currency, but none were adopted, as sectional disagreements over what constituted an eligible asset doomed the enterprise.

Professor of Political Economy J. Laurence Laughlin supported an asset-backed currency, but he worried it was inadequate protection against panics. In 1895, he argued that an asset-backed currency “is intended to meet only the changing needs of the community, in normal times… but it must not be supposed that it will do all that needs to be done in the stress of a financial panic.”Footnote ⁴⁸ To solve this problem, Laughlin preferred a form of national clearinghouse system that functioned as the “lender of last resort” and prevented apocalyptic crashes in the money supply. Nelson Aldrich agreed with Laughlin, and both the Aldrich–Vreeland and Jekyll Island proposals imagined the establishment of clearinghouses as a solution.Footnote ⁴⁹

After the 1907 panic, Republican reformers became concerned that the mechanism by which a national bank panic was averted was the discretionary intervention of Wall Street bankers such as J. P. Morgan. With the blessing of Northern finance, which, no doubt, did not enjoy the economy’s health depending on their intercession, Aldrich and Representative Edward Vreeland of New York’s Alleghany Region secured a modest reform.Footnote ⁵⁰ Although no agreement emerged on a model for an asset-based currency, the Aldrich–Vreeland Bill established a national network of clearinghouses that could mint “emergency currency” based on their assets in a crisis to ensure liquidity while also establishing the monetary commission that resulted in the Aldrich Plan.Footnote ⁵¹ Owen noted with irony the emergency currency now adopted mirrored the one Jones had introduced as an amendment to Aldrich’s 1900 proposal.Footnote ⁵²

Arriving in the Senate in 1908 following Oklahoma’s statehood, Owen critiqued the Aldrich Plan on grounds extending beyond its private control. During his travels to Europe, Owen was particularly impressed by the Reichsbank, believing that the structure of German banking was such that “… a panic… is impossible.” This was due to the fact that the Reichsbank monopolized gold reserves and issued paper currency against these reserves as security. Owen noted that, when private banks requested to export gold, while the Reichsbank did not refuse to pay gold on demand, in practice its “yes” meant “no” through informal pressures.Footnote ⁵³ Accordingly, the mark could expand in line with the needs of commerce unburdened by gold reserve constraints. Inflation was managed using discount rates and the fact, in the event of a run, emergency currency would be issued with a tax penalty. In his mind, the Reichsbank’s operations proved panics did not occur owing to unsound money, but rather owing to an abrupt scarcity of cash caused by an inelastic currency. Owen conceded that the Aldrich plan “…had the great virtue of recognizing the broad principle which I had advocated in 1899 of making elastic currency available on adequate security on an interest charge to prevent inflation.” However, Owen criticized the act for “…putting the system in the control of the banks and making the currency difficult of access and expensive.”Footnote ⁵⁴ While the Aldrich Plan created an elastic currency capable of meeting the needs of commerce, Owen wryly noted the structure meant that the currency expanded only when “the gentlemen in control permitted it,” rendering it “defective” for the country banker.Footnote ⁵⁵

The broader backlash against the Aldrich Plan centered on the threat a banker-controlled monetary authority posed to democracy. The Pujo Committee, named after its chair, Louisiana Representative Arsene Pujo, created a political environment receptive to Owen’s emphasis on public control and Treasury-issued bank notes. In 1907, as details of Knickerbocker Trust Company’s failed attempt to corner the United Copper Company and the consequential run it created became apparent, the public learned how exposed their local banks were to the seemingly shadowy practices of Wall Street. Concerns especially emerged about the use of call loans to backstop brokerage accounts. While call loans served a legitimate function, they provoked accusations from public reformers and politicians from the periphery that a dangerous “money trust” used call loans to ensure the resources of the entire banking system were available for their own speculative efforts.Footnote ⁵⁶ Underscoring these fears, the Pujo Committee’s investigator-counsel, Samuel Untermyer, exposed the highly discretionary nature of Wall Street credit when he forced J. P. Morgan to concede that “the first thing [in lending] is character… A man I do not trust cannot get money on all the bonds in Christendom.”Footnote ⁵⁷ For the average American, who had no hope of meeting Mr. Morgan (let alone meet his standards of character) but relied on his bank to facilitate national credit, this admission seemingly confirmed that banking was a cozy, private game that played with the public’s money and livelihood. Enshrining the “money trust” into statutory power through the National Reserve Association was even more threatening. In the frontispiece of his book attacking the Aldrich Plan (Fig. 1), lawyer and antitrust activist Alfred Owen Crozier depicted the broader political implications of Morgan’s men controlling the currency. “Would not every banking institution… in sheer self defense find itself obliged to obey… the National Reserve Association?” feared Crozier, “Would not this create a vast and dangerous political machine that inevitably would result either in its controlling the Federal Government or itself being abolished for political action?”Footnote ⁵⁸

Figure 1. “The Octopus—Aldrich Plan,” frontispiece (Crozier, U.S. Money Vs. Corporation Currency, frontispiece).

At first glance, the Democrats’ victory in the 1912 elections threatened to derail any momentum toward a central bank. Southern agrarians, for the first time since the Civil War, attained a prominent position in Washington, and bank reform advocates such as Aldrich feared that this rabble would renew a Jacksonian hostility to central banking. However, the Pujo Committee Hearings convinced Democrats that a central bank could be acceptable, provided it was used to destroy the New York money trust.

As Southerners imagined the nation’s banking future, the challenge for agrarian Democrats was psychologically disentangling the Jacksonian notion that establishing a central bank institutionalized a money trust. However, Bourbons such as Carter Glass felt no such burdens. While claiming to be economically ignorant early in his legislative career, debt shaped Glass’s political consciousness. When the Atlantic-Mississippi & Ohio Railroad failed, Glass worked as a clerk on its reorganization during receivership.Footnote ⁵⁹ As a newspaperman, Glass supported Virginia’s Bourbons and their creditor-friendly policies (and defense of the color line) against the biracial, debt-canceling “Readjusters” during Virginia’s ongoing struggle to liquidate its prewar debt. Despite his modest upbringing and early credentials as a supposed reformer, by 1912, Glass counted among Virginia’s ruling elite.Footnote ⁶⁰

While retaining the private control features of the Aldrich Plan, Glass and the economic expert for the House Banking and Currency Committee, H. Parker Willis, decentralized the proposed system by establishing 20 regional reserve banks. Under this plan, the board comprised 43 members, with 40 members appointed by the regional Reserve Banks. The Glass–Willis plan exemplified Bourbon thought in action—private, local control empowered statewide bankers, while the decentralized format ensured Southern bankers remained politically equal to their Northern peers. As Glass noted, while the Democrats’ rejection of the Aldrich Plan meant that the proposal could not be adopted as it was, “there was never a moment when the (currency) committee could think it was not at liberty to appropriate any provision of the Aldrich Plan which might, to advantage, be woven into a regional bank scheme.”Footnote ⁶¹

Despite the Aldrich Bill initiating the Federal Reserve Act’s legislative history, the enacted law was the legislative equivalent of a Ship of Theseus as Owen’s Senate Banking Committee amended it to fit the chair’s preferences. After defeating the Glass–Willis plan with assistance from William Jennings Bryan, Owen inserted a publicly appointed board rather than a private directorate, in theory inoculating policymaking from private interests.Footnote ⁶² From Owen’s perspective, public control was especially crucial given the necessity that the national bank notes be publicly issued through a central reserve acting as the agent of the Treasury and backed by the nation’s commercial paper. The act defined commercial paper as unsecured commercial promissory notes with 90-day terms, or 180-day terms in the case of agriculture.Footnote ⁶³ In tandem, this meant that the currency expanded according to the national needs of commerce, not the needs of lenders, and that the public purse would not be directed toward private ends. The Reserve issued paper money (i.e., treasury notes) through its role as the principal discounter of commercial and agricultural paper.Footnote ⁶⁴ As collateral for these discounting services, member banks placed their reserves in their district bank. In theory, the regional reserves, acting as national clearing houses, prevented money from pooling in New York. This national system allowed for an elastic, liberal asset-based currency backed by public notes, with district autonomy to set uniform discount rates. According to Nadav Orion Peer, the Federal Reserve destroyed the money trust by replacing “…call loans with Main Street friendly commercial paper as the asset banks use to manage their liquidity.”Footnote ⁶⁵

Although continuing gold convertibility appeared to be a victory for sound banking theory, Owen’s concession to increase the gold reserve backing national notes from 33% to 40% was symbolic. Gold reserves functioned as security, not as the basis, for the US money supply despite the legally required gold cover. Multiple safeguards in the act allowed for the United States to issue emergency currency and remove the gold ratio as needed. As economist Robert Hetzel notes, “The association of populism with paper money and the gold standard with financial orthodoxy made it impossible for policymakers to comprehend that the Federal Reserve really had created a paper (fiat) money standard despite continued convertibility of gold.”Footnote ⁶⁶ This was consistent with Owen’s interpretation of the German monetary system.Footnote ⁶⁷

While the Federal Reserve Act required compromise to secure passage, in its governance and economics it clearly leaned toward Owen’s camp and the needs of country banks.Footnote ⁶⁸ With President Wilson supporting a publicly appointed board, Glass settled for the bill’s federal structure and gold cover. As a good Bourbon, Glass still shared the same business instincts as northeastern conservatives such as Aldrich, whom he otherwise despised. Accordingly, he was comfortable with banker-appointed boards and private-note issuance so long as it empowered regional elites and not just northeastern ones. In contrast, Owen, owing to his perspective as a creditor in the periphery, recognized that a conservative system would function on conservative principles regardless of where power concentrated. He did not want to replace one money trust with another.

At the law’s textual level, the agrarians were flushed with victory, securing popular control and an elastic currency that provided country banks direct access to the national credit system through the district reserves. Congressman Alben Barkeley of Kentucky celebrated the populist spirit of the new central bank: “The Government is the people, and the people act through their authorized agents, the chief of whom is the President of the United States.”Footnote ⁶⁹ Similarly, Owen reiterated in his brief account of the Reserve‘s creation that “It should always be kept in mind that it is not the welfare of the bank nor the welfare of the depositor which is the main object to be attained, but it is the prevention of panic, the protection of our commerce, the stability of business conditions, and the maintenance and active operations of the productive energies of the nation which is the question of vital importance.”Footnote ⁷⁰ In 1915, Senator Thomas Gore, Owen’s colleague from Oklahoma, articulated the law’s virtues for the farmer: “The Federal Reserve Act…places certain classes of agricultural paper on an equal footing with commercial paper for use in connection with the issuance of currency. Before the establishment of the Federal Reserve, the volume of money in this country was fixed and inflexible. The supply would not respond to the demand. The extraordinary demand for currency occasioned by the movement of crops during the few fall months was not met by a corresponding increase in the supply. The result was that the farmer had to sell at sacrifice prices.”Footnote ⁷¹ With this new institution ensuring increased liquidity and addressing the longstanding grievance that banks discriminated against agricultural producers, Southern agrarians believed the equality of agriculture in credit was finally secured.Footnote ⁷²

While the system’s dependence on asset-backed currency suggests a compromise between the bill’s legislative architects and corporate banking interests, the real bills doctrine at face value was ideologically neutral, producing differing expectations for the Reserve’s functioning.Footnote ⁷³ Evidencing conservative skepticism of real bills, Senator Elihu Root of New York decried the act as “financial heresy” dooming the United States to inflationary pressures.Footnote ⁷⁴ With agricultural paper now having reliable access to discounting, so long as country banks extended credit for legitimate transactions, the Reserve system redistributed credit from high-reserve to low-reserve areas. Despite the 40% gold reserve requirement, ultimately, the amount of credit extended was determined by the subjective application of regulators conceptions of “disciplined lending,” “legitimate transactions,” and “speculation.”

For Owen, there was no contradiction between real bills and his ambitions for the Federal Reserve. In his own words, note issuance need “…not expand or remain expanded beyond the requirements of our commerce.”Footnote ⁷⁵ The real bills doctrine enabled country banks to issue a short-term self-liquidating note on agricultural transactions that they could then discount through the Federal Reserve System. So long as the Federal Reserve System did not question the legitimacy of the loan, this enabled country banks to overcome short-term credit stringency imposed by seasonal demands and logistics issues. The system was adequate for agrarian needs provided the Federal Reserve did not question the legitimacy of agricultural paper.

One Democrat from the credit periphery remained skeptical. Representative Oscar Callaway of Texas, reflecting on this powerful Federal Reserve, noted with trepidation that nowhere in the text of the law was influence prohibited from consolidating in New York. While complimenting the competency of the current Democratic administration, he asked, “What protections have we here from the misuse of power? Faith, faith, faith; faith in man, fallible man, short-sightedness, and misconceptions of man… The money trust can take advantage of these possibilities for their own interest if they see fit. You can safely count on the bankers not overlooking anything that is to their interest, and you ought not to doubt that they will take advantage of all possibilities.”Footnote ⁷⁶

Disabusing Farmer Confidence and the Crime of 1920

In 1924, Elmer Thomas of Oklahoma announced in the House that “hundreds of thousands of farmers have lost their land through foreclosure, and that other thousands are under suspended sentences through lenience of their creditors…. The failure of agriculture has carried death and destruction in its path. Both banks and businesses patronized by farmers have been swept away. Since 1920 over 1,600 banks, both state and national, have failed, causing additional losses over $80,000,000.00. Within the past year more than 1,000 banks have failed, and banks are now failing at a constantly increasing ratio.”Footnote ⁷⁷ Nationally, the number of American banks rapidly declined from 28,885 banks in 1920 to 23,712 in 1929, despite 3,200 banks opening their doors, resulting in a net loss of over 5,000 banks between the First World War and the onset of the Great Depression.Footnote ⁷⁸ The majority of these bank failures were concentrated in the periphery, especially in export-dependent areas where agriculture required higher volumes of credit, such as the cotton belt.Footnote ⁷⁹

Thomas believed that “deflation was the direct cause of farmers’ difficulties.”Footnote ⁸⁰ From 1914 to 1920, American agriculture witnessed an increase in prices to 172% of prewar levels. However, between May of 1920 and the end of 1921, a sudden break across wholesale markets evaporated these gains as prices precipitously dropped to 48% of prewar levels.Footnote ⁸¹ National commentators accepted the convenient assessment published by the US Department of Agriculture (USDA): “The farmers had taken it for granted that war prices could not continue… [and] accepted lower prices… with their usual philosophy: borrowed money and put out ample acreage… there was no attempt on the part of the farmers to restrict production.”Footnote ⁸² This thesis, summarized as “overproduction,” was the frequent refrain of economists and policymakers and remains the most frequently deployed explanation by historians.Footnote ⁸³ However, serious reasons exist to view this explanation with skepticism—it excused and ignored the deleterious impact of how the Federal Reserve pursued checking postwar inflation.Footnote ⁸⁴

The money trust Oscar Callaway feared wore the charismatic and handsome visage of an otherwise well-meaning New York banker, Benjamin Strong, Jr. A fervent critic of Owen’s monetary laxity and Glass’s decentralized bill, Strong reluctantly agreed to lead the New York Federal Reserve at the behest of Wall Street.Footnote ⁸⁵ While the First World War submitted the board to the wartime needs of the Treasury, New York’s opportunity appeared upon the conclusion of hostilities. After the wartime gold embargo concluded in June 1919, the Federal Reserve Board became increasingly concerned about dwindling gold reserves. By December, gold reserves approached the 40% legal floor, at 42.4%.Footnote ⁸⁶ Desperate to arrest this slide amid rapid postwar inflation, Strong pushed for the liquidation of wartime credit. Writing to Montagu Norman, the Chairman of the Bank of England, Strong expressed his view that “Our problem is really confined to the liquidation of possibly four or five billions of bank expansion…,” which he surmised could be overcome by liquidating 1-billion worth of advances. In a note to Federal Reserve Board Member Adolph Miller, Strong reiterated his conviction that liquidation was necessary to re-establish the global gold standard but was weary of the severity of the economic contraction that would follow. Miller, however, had no such burdens: “The most serious part of inflation is, after all, the aftermath. We sow the wind to reap the whirlwind… I am satisfied that the expansion… is pretty nearly all pure inflation… There has got to be liquidation, there can be no question of that.”Footnote ⁸⁷

Seriously tested for the first time, the Federal Reserve’s strategy for combating this supposed “credit exhaustion” exposed the Board’s vulnerabilities to banker orthodoxy.Footnote ⁸⁸ While aware that a contraction in credit would induce a crisis, the Federal Reserve Board failed to appreciate the degree to which the system served as a means of overcoming inelastic currency for agricultural creditors. Between December of 1919 and January of 1920, the board made its first step toward liquidation through a full point-and-a-half increase in the discount rate with the approval of then-Treasury Secretary, Carter Glass.Footnote ⁸⁹ However, after delaying the rate increases to facilitate Liberty Bond purchases, inflation and accusations of speculation intensified.

Accepting a trade-off between inflation and the interest rates on Liberty Bonds, the Reserve’s accommodation of the Treasury’s needs created a dangerous situation in agriculture. The 1920 planting season, beginning in spring, was called “the most expensive” crop in the nation’s history, as farmers borrowed larger volumes of money at higher rates to cover inflated production costs. By June, the board implemented another rate increase that strengthened the dollar on international exchange markets, while commodity prices collapsed. Underestimating the power of interest rates to force the liquidation of loans, this monetary contraction wreaked devastation on agricultural credit institutions.

Chairman of the Federal Reserve Board, W. P. G. Harding, an Alabama banker of Bourbon persuasion, became the face of the sustained contractionary assault on agricultural lending. The passivity the board evinced toward rising inflation in 1919 was nowhere apparent in 1920. In addition to rate increases, the board took the following actions to encourage liquidation: (1) Federal Reserve agents issued several circulars to district banks advising them to be more discerning on the types of agricultural paper they discounted, encouraging the rejection of otherwise eligible 180-day term paper needed for warehousing or marketing; (2) Congress was lobbied to change the law to allow districts to discriminate against highly leveraged member banks seeking further discounting; (3) they increased the interbank rate (overnight rate) by a full point to 7% in September of 1920 owing to complaints from industrial districts about the volume of agricultural district discounting; and (4) alternative lending, such as the availability of Federal Reserve advances on collateralized federal securities, proved inadequate and only created more irritation, to which the board responded with indifference. The parallel collapse in the price of cotton caused farmers to blame the Federal Reserve for these low prices and, correspondingly, their misery.Footnote ⁹⁰

The Reserve justified these measures as necessary to check agricultural speculation they believed spiraled out of control during the bull years of 1917–1919, when a combination of domestic controls, low rates, wartime demand, and the passage of the Federal Farm Loan Act in 1916 encouraged farmers to take on debt for both expansion and marketing purposes. According to Harding, “during the last six months of 1919, tendencies toward unrestrained extravagance and abuse of credit were manifest all over the country. It became evident that the rediscount facilities of the Federal Reserve Banks were being used too freely and that unless corrective action was applied the situation would become exceedingly dangerous.” Particularly concerning was the tendency of country banks to lend to farmers for marketing their goods, mainly cotton. He requested that district banks and their members discern between “essential” and “non-essential” loans, the former needed for immediate production needs and the latter used for speculation. Harding wished to “prevent the further expansion (of credit) for non-essential purposes and to (begin) the gradual and orderly liquidation of non-essential loans.”Footnote ⁹¹ He argued that “…there is nothing in the Federal Reserve Act which requires a Federal Reserve Bank to make any investment or to rediscount any particular paper or class of paper… (and) the banker must be depended on to use a more discriminating judgment in granting credit accommodations to his customers.” Meanwhile, “The Board believes that the equilibrium can be restored only by speeding up the processes of production,” by which he meant that producers should be forced to bring their products to market expeditiously.

Whereas Robert Owen had assumed Federal Reserve leadership would accept agricultural marketing loans as “legitimate,” Harding perceived them as speculative and inflationary. The reason for his belief that agricultural paper was particularly prone to speculation was tied to a misconception of how the Reserve resolved inelastic currency. Wartime demand ensured bankers could lend with confidence to farmers. However, the prosperity itself did not resolve localized credit scarcity. To overcome this issue, country bankers made use of the discounting facilities enshrined in the Reserve System to facilitate the expansion of agriculture demanded by the US war objectives.Footnote ⁹² When farmers came to the bank for loans, the bankers signed off on the paper to facilitate their production and, in turn, discounted it through the system. The result was a massive redistribution of credit from the Federal Reserve banks in the industrial core to the Reserve Banks of the agricultural periphery.Footnote ⁹³ Adding fuel to the fire, farmers’ reticence to deposit money in local banks resulted in bankers further relying on discounting to furnish loans, creating the appearance of being further overleveraged as borrowing grew in proportion to their reserves. Furthermore, the reliance on renewing agricultural paper to meet the seasonal needs of production and marketing limited the self-liquidating feature of these notes. However, this interpretation of agricultural credit as engine for speculation underscored the Reserve Board’s parochial conception of the central banking system as intended to discipline unit bank practices rather than understanding its role as the monitor of a national system.

Nothing compelled the Federal Reserve Board to interpret the real bills doctrine as understood by Owen or agrarians. In the case of note issuance, where Owen saw gold acting as collateral, the board interpreted each bank’s gold contribution as a disciplining restraint on that member’s ability to borrow from the Reserve. Viewing borrowed reserves as an indicator of speculation, the board determined that agricultural districts rampantly speculated.Footnote ⁹⁴ As contemporary economist W. L. Mitchell explained, the board was empowered with considerable discretion, and it was determined to leverage that discretion to reign in agricultural speculation.Footnote ⁹⁵ This discretion included determining what transactions qualified as eligible paper for discount and offering “guidance” to discourage its members from lending on certain types of paper. Harding’s directive that banks discern between essential and non-essential loans backtracked from the Reserve’s previous accommodation of 180-day agricultural paper needed for orderly marketing.

By the August harvest, Harding was inundated with telegrams from J. S. Wanamaker, the President of the American Cotton Association, explaining the consequences of this stricter approach. Wanamaker claimed that “all buyers have withdrawn from the cotton market” and that buyers were “flooding the South with bear propaganda” urging the sale of cotton and insisting that member banks will only extend credit for the harvesting of crops, but will not permit warehousing of same and holding until legitimate demand arrives…”Footnote ⁹⁶ Reiterating the expensiveness of the crop, Wanamaker stated, “if the South [is] unable [to] secure finances enabling them to warehouse cotton but is forced to sell regardless of price, then we are facing calamity which will bring serious conditions not only to producer but to every legitimate line of cotton industry.”Footnote ⁹⁷

To complement its rate increases, the board lobbied Congress to grant it the power to issue punitive, progressive interest rates against banks it believed were speculating. Harding and the board adopted the view that each Reserve Bank member was entitled to a fixed multiplier of the amount of assets they deposited back into the reserves. Assuming the banks with higher liability-to-asset ratios were the banks speculating, i.e., draining other banks’ reserves for the purposes of furnishing their own loans, the amendment the Federal Reserve sought disproportionately impacted the credit-scarce banks that furnished credit to farmers by relying on discounting agricultural paper. This discrimination against country banks created legitimate grievances that fueled the perception the central bank was deflating agriculture. The Federal Reserve was supposed to assist farmers by smoothing out the interest rate paid across a district, removing geography as a barrier to affordable credit. After all, J. L. Laughlin, in his 1912 book Banking Reform, argued that “a national banking system must treat all borrowers, big and little, alike; and hence the rate of discount must be uniform to all applicants.”Footnote ⁹⁸ When operating as intended, the Federal Reserve System ensured that member banks paid uniform rates within a district and that proximity to a banking center did not affect the discount rates it paid and, therefore, the interest rates charged.

Nevertheless, in April 1920, Democratic Senator James D. Phelan of California responded to the Reserve Board’s lobbying and secured an amendment to the Federal Reserve Act that allowed districts to discriminate on discount rates between members. Reserve Districts were assigned a credit limit based upon the total reserves deposited by their members and, thus, each bank within their jurisdiction. If a bank discounted over its credit limit, the rate charged on further discounting was increased according to a formula tailored by individual districts.Footnote ⁹⁹ Interestingly, this formula had no ceiling, and one Alabama bank was charged 87% at the discount window.Footnote ¹⁰⁰

By threatening banks that relied on discounting agricultural paper, the Phelan Amendment appeared a reneging of the real bills bargain that created the Federal Reserve. Debating the amendment, Senator Ellison D. Smith of South Carolina expressly made the argument that, “Under the provisions of the Federal Reserve Banking legislation… the amount that could be issued to a member bank was not restricted to the capital and surplus of such bank but was measured entirely by the resources of the entire Federal Reserve System, so that a small bank having a limited capital, being a member bank, receiving paper that had been passed upon the Federal Reserve board as collateral, could discount almost an unlimited amount of paper at its Regional Reserve Bank. This proposed amendment provides… [to] restrict the facilities of that bank.”Footnote ¹⁰¹ Expressing his disdain that he did not expect a bank to investigate what he did with the money it lent him, no one else in the Senate disputed Smith’s characterization of the current practice of discounting. While the board later defended the policy by pointing to its limited enforcement, their defense overlooked how the threat of progressive discount rates fundamentally altered the psychology of agricultural credit. The country bank faced two dilemmas. Declining prices meant their depositors, frequently large farmers or planters, withdrew cash to cover their own liabilities. As their reserves dwindled, country banks called in their loans and refused to issue new credit or renew existing paper in the face of this abrupt, dramatic contraction in credit, cash-strapped farmers liquidated the only asset they possessed when the loans came due—their crops.

The damage was indifferent to crop. In Iowa, a corn district, bankers liquidated up to two-thirds of their outstanding loans to achieve compliance as corn prices fell from $2.00 to $0.76. Smith W. Brookhart of the National Farmers Union in Iowa claimed, “This forced more Iowa farmers to sell on a falling market and sent more farmers into bankruptcy than in all the history of the State.”Footnote ¹⁰² Economist Claude Benner agreed, “Any attempt to liquidate these loans (at a time of rapid price decline) would have resulted in wholesale bankruptcy, forced sales, and foreclosures.”Footnote ¹⁰³ The situation was even more drastic for cotton farmers, as prices dropped from 40 cents to 9 cents a pound over 60 days in the summer of 1920. J. R. Morgan, a cashier at the Bank of Union Springs, Alabama, described the outcome as “plain, psychological, panic.”Footnote ¹⁰⁴

Defending the Phelan Amendment, Harding suggested that, “in districts where business is largely local, [progressive discounting] works well.”Footnote ¹⁰⁵ This implied agricultural districts. While not mandatory, most agricultural Reserve districts adopted progressive interest rates. Atlanta, St. Louis, Kansas City, and Dallas introduced various formulas to punish errant banks by the end of May 1920. When one member bank wrote to Governor Maximilian Wellborn of Atlanta reporting that they were trying to liquidate their loans as directed but that their clients desperately needed extensions to continue warehousing cotton, Welborn responded dismissively, “Of course… this is a matter with which we have nothing to do… it is not our policy to demand of member banks that any particular class of paper be liquidated and the proceeds paid to us… we are merely admonishing you not to go to any greater length on your borrowings, which are already so high.”Footnote ¹⁰⁶ D. J. West, the President of the First National Bank of Berryville, Arkansas, expressed frustration that “progressive rates as charged by the Kansas City Federal Reserve District… seem to have affected the cattle and agricultural industries…. and are entirely too high.”Footnote ¹⁰⁷ In the words of J. G. Culbertson, the vice-president of the Texas Chamber of Commerce, “The [Phelan] amendment perverted the original intent and purpose of the law.”Footnote ¹⁰⁸ Beyond the violation of the uniform discount rates formulated, advertised, and expected by Robert Owen and his allies, this assault on agricultural paper betrayed the promise of the equality of agriculture in finance.Footnote ¹⁰⁹ The map below (Fig. 2), published by the USDA, reveals the impact of the Phelan Amendment when it came to creating disparate rates on first mortgages across the South and West. Notably, the Bourbon stronghold of Virginia experienced no disruption in its rates, while Owen’s Eastern Oklahoma experienced the highest rates.

Figure 2. First mortgage interest rate map by crop estimates district after the Phelan Amendment passed (USDA Bulletin 1047. Joseph T. Robinson Research Materials [MC 1959], Courtesy of Special Collections, University of Arkansas Libraries, Fayetteville, AR, Box 47, Folder 10.)

The crisis highlighted the ideological presumptions agrarians, bankers, and Bourbons brought to the Reserve System. Nonagricultural districts, embracing the view the system was to enforce sound banking practices, expressed contempt that the volume of credit borrowed by Southern districts to maintain liquidity depleted their own reserves. In August, at the peak of harvest credit demand, the Federal Reserve District of Cleveland requested the board increase the Interbank Loan Rate 1 percentage point to 7%.Footnote ¹¹⁰ Harding concurred that Cleveland “ought not to be required to lend an amount over $35,000,000 to a Federal Reserve Bank having a paid-in capital and surplus of only $11,000,000.”Footnote ¹¹¹ The Atlanta Fed, led by Maximilian Wellborn, bitterly complained about Harding’s characterization of Southern banks by claiming, “… if this bank [Atlanta Fed] had failed to stand as a buffer between the business of this section and disaster, it would not only have failed to do its duty, but it would have permitted a situation to develop which would have seriously affected all other sections of the country and every other reserve bank.”Footnote ¹¹² Cleveland was “simply taking a narrow and personal view of the situation.” Protests aside, Atlanta complied under duress and shrunk their obligations to other districts by about one-third in the first quarter of 1921. Hardly painless, the rebalancing act came at the expense of further reduced credit to Atlanta’s member banks.Footnote ¹¹³

The last safety valve that country banks could use to access elastic currency was 15-day advances from their district on federal government securities at a punitive interest rate, a tool borrowed from the Reichsbank by Owen. Yet, this failed to provide adequate relief because country banks accumulated the majority of their government securities at artificially low wartime rates. D. J. West expressed his frustration that “We bought because we felt it our patriotic duty and now, when it becomes necessary for us to borrow money on these bonds to supply our customers, none of which is used for speculation… St. Louis is charging us 6% and requiring that we renew our paper every fifteen days.”Footnote ¹¹⁴ With wartime bonds yielding only 4.75%, West paid the Reserve to save his bank. These expensive advances further eroded the strained affection farmers felt for their legislative accomplishment. To quote the same D. J. West, “The Federal Reserve System is… the greatest piece of constructive financial legislation that the world has ever had… but there is no question in my mind but that it could now be handled in such a way that would be a great deal more beneficial to the interests of the people of the United States.”Footnote ¹¹⁵

As West’s letter indicates, country bankers were still attached to the Federal Reserve as an institution, even if they grew restless with its leadership and governance. Representative Hampton P. Fulmer of South Carolina accused the board of deliberately orchestrating the 1920–1921 deflation and said, “The Federal Reserve Act is all right as originally passed and as originally planned to function. The great trouble is with the regulations formulated by the system in administering the act, which regulations created new departments, additional functions, and so forth, which are throttling country banks.” In addition to the specific deflationary measures taken by the board in 1920–1921, Fulmer complained that, “if the requisite reserve of any member bank falls just one day below the required amount under law, it penalizes them from 6 to 12 percent, while at the same time it takes from two to eight days to give that same member bank credit for its remittance.—country banks can’t afford this, [and] offer immediate credit to customers for all deposits.”Footnote ¹¹⁶ By the board’s discretion, the problem of inelastic currency returned.

Agrarians were further offended by Harding’s messaging: He continued to blame farmers for their dire financial straits. Southerners became defensive, and the publication of former Comptroller of the Currency Mississippian John Skelton Williams’s The Crime of 1920 encouraged conspiracy. None of Harding’s comments suggest it occurred to him that the Reserve’s current monetary policy factored into dire circumstances for the farmers and country banks beyond moralistic statements about “reducing speculation.” For his part, Strong’s apology came in the form of the self-delusion that he only sought to reduce the inflation rate.Footnote ¹¹⁷ However, the contractionary crusade of 1920–1921 came at the expense of significant sections of the country—sections that supported the creation of the Reserve system on the promise the Federal Reserve was there to aid them.

In October 1920, Robert Owen stingingly rebuked the board. Writing directly to Harding, Owen argued that the “…need for an alleged policy of deflation rests on the premise that the entire country is suffering from inflation which is fundamentally untrue. Legitimate borrowing and lending for legitimate purposes is not ‘inflation.’”Footnote ¹¹⁸ The Fed’s liquidation, he continued, was “producing the industrial unrest and lack of confidence necessarily checking production and breaking the commodity values below the point at which legitimate supply and demand would fix the price.”Footnote ¹¹⁹ By way of example, he explained, “Last Saturday, in the town of Muskogee, where I live, I was advised that there were no buyers for cotton at any figure. This is temporary, but it illustrates the state of mind produced in the United States by the action of the New York bankers and the cooperative action of the Reserve Board.”Footnote ¹²⁰

Compounding Owen’s fury was that the credit stringency the Reserve claimed created this economic crisis was self-imposed. “The credits are available,” Owen chastised Harding, “The purposes of the reserves in the Federal Reserve Banks is to provide credits in the event of an emergency.”Footnote ¹²¹ Anticipating Harding’s rejoinder that deflation was necessary to avoid an inflationary environment encouraging “…reserve note holders to demand gold,” he retorted, “I remind you that every such note issued by you or by the Treasury Department is covered by the best security in the world, a commodity bill backed by actual goods, backed by private credit, backed by the credit of the local bank, and backed by the resources of all the Reserve Banks in the United States amounting thirty billions of dollars; that on top of this the notes are backed by the credit of the United States.”Footnote ¹²² Fifteen years later, Owen continued his assault on Harding’s Board for being “diverted from its proper purpose on the advice of some who controlled the policies of a number of the largest banks (who) demanded the contraction of credit and currency.”Footnote ¹²³

With direct attempts at negotiating with Harding rebuffed, agricultural interests turned to their congressional representatives. In 1922, the Joint Commission of Agricultural Inquiry was formed to investigate the origins of the 1920–1921 crisis and to evaluate the Federal Reserve’s response. While the commission blamed the Federal Reserve for limiting credit too late, Congress accepted real market forces (i.e., supply and demand) drove the decline in agricultural prices. Accepting the Federal Reserve’s argument that monetary policy had a limited impact on the price level, the Commission pointed to other sources of economic disorder. Economic commentators blamed the price crash on “overproduction,” claiming farmers anticipated continued high prices and borrowed recklessly to expand acreage. The decline in prices in turn created credit scarcity by reducing deposits and the value of their commercial transactions.Footnote ¹²⁴ This interpretation was based on classical economic theory more than empirical data. Furthermore, they blamed the rise of so-called intermediate credit for exacerbating the damage caused by the deflation in agricultural commodity prices. Agricultural credit was segmented into two streams—short-term loans floated by the Reserve’s member banks to cover production costs and long-term mortgages typically handled through the Federal Land Banks after 1916. These streams of credit failed to adequately handle the rising need for larger, intermediate-term credit that covered short-term capital investment, such as improved tools, tractors, and land improvements.Footnote ¹²⁵ The makeshift solution was to load these intermediate loans onto short-term credit. The forced liquidation in 1920 meant farmers were forced to not only cover their production costs but also try and cover these intermediate investments.

In conformance to this thesis, farmers, their unions, and their congressional representatives endorsed “managed marketing” via cooperatives as the solution to reverse declining prices. At its heart, the managed marketing plan was effectively a scheme to enhance the pricing power of farmers. Beyond re-establishing the War Finance Corporation, which managed agricultural credit during the war, the bipartisan Farm Bloc, a coalition of congressmen from the South and West, passed the Agricultural Credit Act of 1923 to address this gap in intermediate credit. The act established 12 intermediate credit banks, 1 for each district of the Federal Reserve, to discount one-to-three-year notes for commercial banks, agricultural cooperatives, and lending institutions.Footnote ¹²⁶ Replicating the logic underlying the Federal Land Banks, the Federal Intermediate Credit Banks (FICBs) relied on private credit to facilitate intermediate loans primarily to cooperatives via the bundling of subprime agricultural securities into bonds. To circumvent antitrust concerns, the Capper–Volstead Act exempted agricultural cooperatives from previous regulatory legislation, opening access to broader Federal Reserve lending instruments. Ironically, in trying to attract Northern capital, the financial reassurances required to secure private investment blocked the FICBs from acting as an emergency source of credit. Along with rolling back the despised Phelan Amendment, the Farm Bloc secured the appointment of a “dirt soil” farmer to the board to check the presumably conservative prejudices of the board. This was not a uniformly welcome change in the periphery, as some country bankers expressed concern this diluted the board’s expertise with an “unqualified” appointee.Footnote ¹²⁷

The 1923 reforms were merely a bandage crafted to shape the wound as imagined by experts. The measures did not address farmers’ grievances about the handling of the 1920–1921 agricultural crisis by the central banking system, nor did it address the relationship between deflationary monetary policy and weaker commodity prices in global markets. With the Reserve committed to a liquidationist philosophy that undermined its role as a lender of last resort, this still left the country banks servicing farmers’ short-term credit deeply vulnerable to rapid deflation. Furthermore, by creating a new stream of credit, this only seemed an additional liability to debt-burdened farmers. Elmer Thomas summarized as much in a letter to a constituent in 1924, stating that he feared the policies did little more than create more avenues for farmers to become further indebted so long as agriculture prices remained deflated compared with other goods.Footnote ¹²⁸ Supporting this conclusion, farmers remained heavily indebted throughout the 1920s with the decrease in outstanding farm mortgages driven by foreclosure.Footnote ¹²⁹

Conclusions: The Legacy of 1920 and the New Deal

The 1920s provided no relief for farmers. In 1925, after a brief, uneven recovery, the price of cotton, wheat, and corn slipped into a steady deflation that persisted through the early 1930s. As Christopher W. Shaw notes, despite securing reforms, farmers never dislodged the Federal Reserve’s liquidationist school of thought.Footnote ¹³⁰ After easing credit through open-market operations to stop modest recessionary signals in 1924, the Federal Reserve repeated its earlier errors as stock prices boomed. Blaming private speculation for the perceived bubble, in August of 1929 they raised rates to begin liquidation.Footnote ¹³¹ On that count, they succeeded. The Chicago Tribune found dark humor in the Federal Reserve’s liquidationist policy finally biting the bankers themselves (Fig. 3).

Figure 3. “The Squash That Was Heard Round the World,” Front Page of the Chicago Daily Tribune (Chicago Daily Tribune, 31 Oct. 1929, 1).

In November 1930, Nashville-based investment bank Caldwell & Company became insolvent following the stock market downturn. Despite his “determination that no creditor will suffer,” the founder, Rogers Caldwell, acknowledged he “wouldn’t go so far as to say he had definite or well-laid plans.”^{Footnote 132} After illegally using bank reserves to cover his losses, Caldwell, owing to the bank’s $40,000,000 of liabilities and assets in book value, induced regionwide banking collapse and the liquidation of the South as more than 600 Southern banks collapsed between November and December of 1930.Footnote ¹³³ In Arkansas, A. B. Banks Company, the largest banking enterprise in the state, suspended operations in 27 branches immediately following Caldwell & Company’s demise. Included in these closures was the largest bank in the state, the American Exchange and Trust of Little Rock, which failed with assets frozen in the defunct Caldwell & Company and without Federal Reserve relief, despite efforts to recover its stock.^{Footnote 134} These banks serviced the largest cotton producers in the American South, many of whom were concentrated in the Mississippi Alluvial Plain. Within Mississippi, 53 state and national banks failed under the watch of the conservative liquidationist St. Louis Reserve District between 1929 and 1933.Footnote ¹³⁵

As financial ruin spread across the country, Owen blamed the Federal Reserve. He claimed that, despite the will of Congress, “…Federal Reserve Banks contracted credit to the extent of $944 million… and they contracted currency to the extent of one thousand five hundred and sixty million…” in 1933 alone.^{Footnote 136} The failure of the real bills doctrine to expand the currency fell upon Congress, whose reticence to exert “public control to regulate the expansion and contraction of money has resulted in the indefensible expansion and contraction of money by privately owned banks.” This left the money supply subject to the “hope of profit” that motivated private business interests. In Owen’s eyes, the Depression reflected the failed policies beginning in 1920, writing “16,000 banks have failed in the last twenty years… to the complete ruin of farmers and stockmen in the United States.”^{Footnote 137} Forswearing arguments that overproduction caused the current woes, the populist Alabama Congressman Henry B. Steagall similarly declared, “…a destructive contraction of credit and the circulating medium are what have thrown our economic machinery out of order.”Footnote ¹³⁸

The wave of bank failures in the 1930s signaled a failure to institutionalize vigilance against the threats that country banks faced. Once the Federal Reserve System went into operation, those concerns were viewed as resolved, despite the deleterious policies that emerged in the aftermath of the war. This suggests the strengths and limitations of business alliances with political movements tied to popular grievances. As long as there was deep-seated, widespread political resentment of the national banking system, bankers operating at the credit system’s peripheral edges could insert their problems as representative of the movement’s grievances at large. In the case of Robert Owen, he intended for the Federal Reserve System to provide ample, almost free-flowing currency for those country banks operating West of the Mississippi River. However, the technocratic nature of central banking meant that, in the absence of constant political pressure, the needs of the Reserve’s country bank framers would be suppressed by institutional inertia and elite intellectual orthodoxy.

The inability of country banks to recapture the Federal Reserve was not the result of failed political efforts, but rather a reorientation of the agrarians’ political strategy toward bypassing the Federal Reserve following the passage of the Agricultural Credits Act of 1923. Through the price control and tax redistribution scheme proposed in the failed McNary–Haugen bills, farmers rallied around the blunt use of the administrative state to immunize crops from price fluctuations and credit contractions. Upon reclaiming control of Congress in 1933, Southern agrarians, rather than forcing the Federal Reserve into submission, neutered its influence on agriculture. By abandoning the gold standard and transferring gold reserves to the US Treasury, the New Deal ended the Reserve’s golden binds when it revalued the dollar from $20.67 to $35 a troy ounce. The Farm Credit Administration established a cooperative lending system to offer short-, medium-, and long-term agricultural loans. Meanwhile, the Federal Deposit Insurance Corporation created a nationally subsidized security blanket for country bank depositors. A Mississippi country banker turned corporate farmer, Oscar Johnston, the Director of Finance for the Agricultural Adjustment Administration, convinced Roosevelt to establish an expanded version of the sub-treasury plan via executive order. The Commodity Credit Corporation offered cotton farmers direct, publicly subsidized, 12-month credit on a non-recourse basis, establishing a domestic price floor. The Federal government accepted the price risk in the cotton industry, as farmers could simply liquidate their loan by surrendering collateralized cotton if prices fell below the loan rate. It proved so popular with cotton farmers that it was soon extended to corn and wheat.

Senator Glass remained adamantly opposed to many agrarian measures, including deposit insurance and the abandonment of the gold standard. The “unreconstructed confederate” proved a headache in most debates, defending fading orthodoxies, such as the preservation of the gold standard, by reasserting his claim to authoring the Federal Reserve Act. As in 1913, Glass begrudgingly shared his claim to authorship of banking-reform acts tailored to address agrarian concerns with a Southern populist, this time Steagall.^{Footnote 139} Authored in 1932, their first bill responded to the Federal Reserve triggering another series of bank runs when it raised discount rates. The bill specifically authorized Reserve Districts to temporarily lend freely to banks on an expanded group of assets if the district assessed the banking crisis to be severe. Never escaping the shadow of Aldrich, Glass’s obsession with avoiding inflation revealed itself in the act, which insisted that banks could only access this lending during a subjectively assessed major crisis and for a limited duration. As with the Aldrich Plan in 1907, Glass demanded restrictions on accessing currency where abundance was needed. President Herbert Hoover recalled, “… the objection was raised that it would be inflationary. This was as if a doctor with a dying patient on his hands should refrain from giving him proper treatment for fear if he got well he might do something foolish. Senator Glass had this fear and was zealous to prune back the ‘inflationary’ possibilities of the measure.”Footnote ¹⁴⁰

Through the pen of Robert Latham Owen, the conventional account of the Federal Reserve’s conservative origins is upended, instead becoming an account of political capture by conservative banking elites. Believing that the real bills doctrine placed agricultural paper on equal footing with commercial paper, country banks were hardly bamboozled into supporting the new central bank. In the letter of the law, Owen accomplished the creation of a fiat currency system, founded upon real bills, and secured by “the resources of all the reserve banks in the United States… [and] the credit of the United States.” However, while Owen understood gold to serve as collateral securing these notes, the bankers who gained control of the Reserve System refused to intellectually separate gold reserves from convertibility.Footnote ¹⁴¹ When convertibility became threatened in 1920, rather than make use of the Federal Reserve Act’s features to suspend gold reserve requirements and issue emergency currency to stave panic, the board embarked on a campaign of liquidation to defend gold. Raising rates and breaking the promise of credit redistribution through the enactment of the Phelan Act, these moves induced a crisis in agriculture that persisted through the decade. Rather than attempting to recapture the Federal Reserve, the Great Depression re-awakened dormant, but hardly extinct, populist voices within the Democratic coalition. Through the New Deal, Congress bypassed the Federal Reserve and created an administrative state capable of meeting the needs of agriculture and immune to the failures of private orthodoxy.