Creature From Jekyll Island by G. Edward

The servants and train crew may have known the identities of oneor two of us, but they did not know all, and it was the names of allprinted together that would have made our mysterious journeysignificant in Washington, in Wall Street, even in London. Discovery,we knew, simply must not happen, or else all our time and effortwould be wasted. If it were to be exposed publicly that our particulargroup had got together and written a banking bill, that bill would haveno chance whatever of passage by Congress.

THE STRUCTURE WAS PURE CARTEL

The composition of the Jekyll Island meeting was a classic example of cartel structure. A cartel is a group of independent businesses which join together to coordinate the production, pricing, or marketing of their members. The purpose of a cartel is to reduce competition and thereby increase profitability. This is accomplished through a shared monopoly over their industry which forces the public to pay higher prices for their goods or services than would be otherwise required under free-enterprise competition.

1. "From Farm Boy to Financier," by Frank A. Vanderlip, The Saturday Evening Post, Feb. 9, 1933, pp. 25, 70. The identical story was told two years later in Vanderlip's book bearing the same title as the article (New York: D. Appleton-Century Company, 1935), pp. 210-219.

12 THE CREATURE FROM JEKYLL ISLAND

Here were representatives of the world's leading banking

consortia: Morgan, Rockefeller, Rothschild, Warburg, and Kuhn-Loeb. They were often competitors, and there is little doubt that there was considerable distrust between them and skillful maneuvering for favored position in any agreement. But they were driven together by one overriding desire to fight their common enemy.

The enemy was competition.

In 1910, the number of banks in the United States was growing at a phenomenal rate. In fact, it had more than doubled to over twenty thousand in just the previous ten years. Furthermore, most of them were springing up in the South and West, causing the New York banks to suffer a steady decline of market share. Almost all banks in the 1880s were national banks, which means they were chartered by the federal government. Generally, they were located in the big cities, and were allowed by law to issue their own currency in the form of bank notes. Even as early as 1896, however, the number of non-national banks had grown to sixty-one per cent, and they already held fifty-four per cent of the country's total banking deposits. By 1913, when the Federal Reserve Act was passed, those numbers were seventy-one per cent non-national banks holding fifty-seven per cent of the deposits.1 In the eyes of those duck hunters from New York, this was a trend that simply had to be reversed.

Competition also was coming from a new trend in industry to finance future growth out of profits rather than from borrowed capital. This was the outgrowth of free-market interest rates which set a realistic balance between debt and thrift. Rates were low enough to attract serious borrowers who were confident of the success of their business ventures and of their ability to repay, but they were high enough to discourage loans for frivolous ventures or those for which there were alternative sources of funding—for example, one's own capital. That balance between debt and thrift was the result of a limited money supply. Banks could create loans in excess of their actual deposits, as we shall see, but there was a limit to that process. And that limit was ultimately determined by the supply of gold they held. Consequently, between 1900 and 1910, seventy per cent of the funding for American corporate 1. See Gabriel Kolko, The Triumph of Conservatism (New York: The Free Press of Glencoe, a division of the Macmillan Co., 1963), p. 140.

THE JOURNEY TO JEKYLL ISLAND

13

growth was generated internally, making industry increasingly independent of the banks.1 Even the federal government was becoming thrifty. It had a growing stockpile of gold, was systemati-cally redeeming the Greenbacks—which had been issued during the Civil War—and was rapidly reducing the national debt.