Daniel Gross: The Unknown Financial Superhero

Daniel Gross recounts the actions of William McAdoo who "executed a series of maneuvers in the chaotic fall of 1914 that turned America into the global financial leader":

The Unknown Financial Superhero, by Daniel Gross, Slate: The list of American government financial superheroes is relatively short. ... But a lively new book by New York University economist William Silber, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy, makes a convincing plea for the inclusion of William McAdoo in the Dollar Pantheon. ...

Silber argues, as Woodrow Wilson's Treasury secretary, McAdoo executed a series of maneuvers in the chaotic fall of 1914 that ... enabled the United States to seize the mantle of economic leadership from London. Almost a century later, the crown remains ours, if tenuously.

When war broke out in Europe in the summer of 1914, the U.S. economy was still immature, a global debtor with an unloved currency that was subject to recurring panics. After a particularly nasty one in 1907, the United States decided to join the rest of the developed world and create a central bank. But by 1914, Congress and the president had yet to hammer out all the details.

In the summer of 1914, panicked Europeans, who supplied much of the capital to the United States, were cashing in their U.S. stocks and bonds and dollars for gold, and repatriating the precious metal. That was bad news for U.S. securities, for the dollar, and for American banks, which didn't have enough gold to meet their commitment to redeem paper currency for hard metal. There was no Federal Reserve that could protect the dollar by raising interest rates. And J.P. Morgan, who had functioned as a sort of private Federal Reserve during his long career, had died the previous year.

McAdoo, essentially devising monetary policy on the fly, sprung into action with a series of unprecedented measures. First, to stop foreigners from cashing in their U.S.-based assets for gold, he essentially ordered the New York Stock Exchange to close its doors on July 31, 1914. The NYSE would remain shut for nearly four months. Brokers were unhappy, but the draconian move halted capital flight.

Next, to stop a run on the banks, he flooded the system with new currency. The Aldrich-Vreeland Act of 1908, which authorized the creation of the Federal Reserve, had established an emergency currency that banks could access in times of need. McAdoo made a big public show of chartering armored convoys to deliver gold, and then emergency currency, to the New York Subtreasury building across from the New York Stock Exchange. These actions, Silber argues, allowed banks to hold on to their supplies of gold while providing borrowers with access to capital.

There was more. ...McAdoo helped orchestrate a bailout for New York City, which owed huge sums to foreign creditors. And he quickly developed the strategy that would help bring gold back into the country, thus allowing the banks to retire the emergency currency and the stock exchange to reopen. There was significant demand in Europe for U.S. agricultural commodities, especially cotton. But given the hazards of the Atlantic during wartime, shippers weren't eager to book cargoes. At McAdoo's urging, Congress in August 1914 created the Bureau of War Risk Insurance, which would allow shippers to obtain government-backed insurance for their cargoes.

By the late fall of 1914, things were falling into place. The Federal Reserve Banks formally opened in November 1914. The dollar rallied against the British pound. Shipping traffic revived, and foreign buyers paid in gold, which allowed American banks to start phasing out the emergency currency. The New York Stock Exchange reopened on Dec. 12, 1914. And as the United States stuck to the gold standard and emerged as a peaceful hub of trade, the dollar gained greater, um, currency and respect. The United States, for so many years a global borrower, was well on the way to becoming a global lender. ...

The final transfer of power from London to New York wouldn't come until after the war... It's also possible to make too much of the role played by any single person...

Why did McAdoo triumph? Silber argues that it's because the former railroad executive, who had no formal economics education, thought like a businessman. He acted quickly and decisively, and focused on an exit strategy. Of course, McAdoo could not have succeeded without the support of President Woodrow Wilson, who happened to be his father-in-law. In March 1914, McAdoo had made one of the smartest career moves any executive can make: He got engaged to the boss's daughter.

Comments

[Martin]

Mark,

Without in any way wishing to comment in Silber's scholarship without having read thebank, or denigrate McAdoo's obvious achievement, there was some other action going on in 1914 that might have incentivised Americans to get its financial thang together; and which at that time gave it something of an advantage over Europe.

The First World War?

[Bruce Wilder]

A small quibble:
"The Aldrich-Vreeland Act of 1908, which authorized the creation of the Federal Reserve . . .

The Aldrich-Vreeland Act authorized the National Monetary Commission, chaired by Rhode Island Senator Nelson Aldrich, which served as the forum for the design of the Federal Reserve System. The actual authorization of the Federal Reserve System by Congress had to endure the rejection of Aldrich's bill in 1911 by a Democratic Congress, and its re-drafting by the hand of Carter Glass, and husbanding by Woodrow Wilson. Congress passed the necessary legislation, The Federal Reserve Act, in December 1913.

[Bruce Wilder]

"Why did McAdoo triumph? Silber argues that it's because the former railroad executive, who had no formal economics education, thought like a businessman."

The notion that history is but the biography of great men is a charming, but wrong-headed notion. Great achievement in the 20th century was always a matter of organization and social cooperation; Columbus may have discovered America, but Neil Armstrong did not discover the Moon.

The systematic way in which Nelson Aldrich had conducted his study of central banking, under the aegis of the National Monetary Commission, and the subsequent political struggle to pass the Federal Reserve Act, probably had more to do with McAdoo appearing to know what to do, and being able to do it, than any special qualities attached to thinking "like a businessman".

In fact, McAdoo received the cooperation and support in Congress and on Wall Street, which only prepared minds can offer, minds prepared by the long process, which had just recently passed the Federal Reserve Act in a bipartisan triumph of Progressivism.

From the Panic of 1907 forward, political leaders in Washington and financial leaders in New York had had an extensive education, which prepared them to respond to the unusual circumstances of 1914, with more than the usual mutual understanding and trust, as well as more than the usual expertise.

[real person from the real world]

REALLY INTERESTING ARTICLE! what book? I would like a title and author.

THANKS!

[Rajesh]

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[Meh]

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The critical thing here is that US prominence was assured by draconian government action to prevent capital flight. Shades of which countries weathered the Asian capital crisis the best, perhaps? Maybe if more economists studies the history of the US economy they might appreciate that histories of international development mostly don't show that "free-est market is the winner."