The train left Hoboken after dark… and no one seemed to notice that a private railcar had been coupled to the rear of it.
Anyone observing wouldn’t have thought much of it anyway. Six men boarded that private car, but each separately and through different doors. To any keen observers, it would have appeared to be a random group of travelers.
But nothing about it was random. The men who boarded that private railcar had been given their instructions in advance.
They were to arrive separately at their own designated time. And they were to address one another by a fictitious first name only. There would be no mention of titles or surnames. And if anyone were to ask, they were to state that they were going duck hunting and leave it at that.
By the time the railcar reached the coast of Georgia, those six men felt confident that they had avoided detection. Stepping off the railcar, a launch carried them across the narrow sound to a private island.
“Leave the guns in the case,” the man who organized the excursion said as they stepped onto the dock. “We won’t be needing them today.”
The year was 1910, and those six men had not come to hunt ducks. They had much bigger ambitions in mind.
Between them, by some estimates, those men controlled roughly a quarter of the world’s wealth. And the island they gathered on was named Jekyll Island. It was a private retreat owned by an exclusive club whose members included the Morgans, the Rockefellers, and the Vanderbilts.
For this visit, the club had been closed to its ordinary members. The men who gathered in secret and under false names had the island to themselves in total privacy for nine days. Their mission was to shape the legislation that would restructure the very nature of the American financial system.
Now, those men didn’t gather on Jekyll Island to invent anything new. The blueprint already existed. It had been fleshed out by a man named Paul Warburg some four years earlier, in 1906.
The Blueprint
Warburg had come to New York from Hamburg by way of London in 1902. He was a European banker, trained in the great banking houses of the continent. And Warburg was intimately familiar with how the European model of central banking worked.
As we noted previously, Warburg traveled to the United States specifically to agitate for a European-style central bank. Warburg had grown up around the Reichsbank, the Bank of England, the Banque de France — institutions built for one purpose above all others: to operate as a “lender of last resort” and to exert control over the nation’s monetary system and its domestic banks.
Of course, Warburg harped on the former but conveniently left out details on the latter – the part about controlling the entire monetary system.
America had no such institution at that time. As such, the American banking system was prone to panics and bank runs.
But what shocked Warburg was how Americans were largely content to endure those periodic panics. There just wasn’t much of an appetite in America for a central bank. Indeed, there was outright hostility to it in some circles.
To Warburg, that was not just wrong. It was incomprehensible.
He raised the issue with his partners at Kuhn, Loeb & Co. They listened to him the way men listen to a colleague’s pet theory — politely, without argument, and without the slightest intention of doing anything about it.
Their apathy prompted Warburg to sit down and put the whole case for a central bank in America on paper. And he did so in the plain, careful language of a man trained to document everything precisely, even when no one had asked him to.
Warburg gave his paper a deliberately modest title — A Plan for a Modified Central Bank. In it, he laid out exactly what America was missing and how to build it: an institution that could expand credit when the system needed liquidity and pull it back when the system needed discipline.
Warburg explained the concept of a “lender of last resort”. He tried to get Americans to see how such a system would make their bank runs a thing of the past.
Nobody in Washington read his paper initially. And nobody on Wall Street expressed much interest in it in 1906, either.
But Warburg didn’t let it go. He kept making the argument to colleagues, in private correspondence, and in the occasional published article. His persistence paid off…
Warburg’s Opening
In October of 1907, a failed attempt to corner the stock of a copper company set off a chain reaction that nearly collapsed the American banking system.
Trust companies failed. Depositors lined up around city blocks to pull their money out.
And the man who ultimately stopped the bleeding was not a government official. It was J.P. Morgan and his associates… and it was the second time he had come to the rescue.
Morgan, by then an old man, locked the leading bankers of New York in his private library and refused to let them leave until they had assembled the funds to stop the run. He acted as the lender of last resort because there was no institution to do it for him.
And that was exactly the point Warburg had been making for years. JP Morgan’s 1907 rescue made the case far more powerfully than any paper ever could.
So the Panic of 1907 prompted Congress to do what Congress does after a crisis. It formed a commission.
The National Monetary Commission was created in 1908 and placed under the chairmanship of Senator Nelson Aldrich of Rhode Island.
By contemporary accounts, Aldrich was the most powerful man in the Senate. He was also, not coincidentally, deeply connected to the financial world. His daughter had married John D. Rockefeller Jr., and his own fortune and sympathies lie with Wall Street.
Aldrich’s critics had a nickname for him. They called him “the general manager of the nation.” And they weren’t too far off…
The commission’s first task was to assess how other countries had solved the problem of financial panics and bank runs. So Aldrich got on a boat bound for Europe.
The European Tour
For roughly two years, from 1908 to 1910, Aldrich traveled through Europe studying its central banks.
He examined the Bank of England, which had been managing British credit since 1694. He studied the Reichsbank in Germany, the model Warburg knew best. Then he looked at the Banque de France.
As part of his work, Aldrich met with the bankers and officials who ran these institutions, and he came home convinced that America needed something similar.
To be fair, it appears that Aldrich was indeed looking for ways to solve the problem of financial panics and bank runs that had occurred periodically in America. Whereas Warburg had been agitating for a central bank from the moment he arrived in New York in 1902, the historical record suggests that Aldrich wasn’t on board with the idea until after his time spent in Europe.
And the reality is that the US financial system had been prone to instability for much of its history. There were fierce political battles over national banking and over the nature of the monetary system. That’s not in question.
However, it is debatable how much of that instability was due to political intervention and infighting. And the bigger question is this – what kind of financial system should America have, who should have leverage over it, and whose interests should it serve?
That question was answered in secret on Jekyll Island in 1910.
The Jekyll Island Conspirators
You know the story of how those six men found themselves together on Jekyll Island in 1910. They concealed their identity and their plans from the public at the time, but the historical record shows us exactly who they were.
The Jekyll Island conspirators consisted of:
- Nelson Aldrich: The powerful US Senator running the National Monetary Commission.
- Henry Davison: A senior partner at JP Morgan & Co.
- Frank Vanderlip: President of the National City Bank of New York – the country’s largest bank with close ties to Rockefeller interests.
- Charles Norton: President of the First National Bank of New York, which was closely tied to JP Morgan’s interests.
- Benjamin Strong: A rising star in Morgan’s orbit who would later become the single most powerful figure in the new system.
- Paul Warburg: The architect and the man who understood the European central banking model better than anyone else in the room.
By some reckonings, these six men represented institutions controlling a quarter of the world’s wealth. And they assembled in secret, under false pretenses, on a private island, to shape the legislation that would reshape the American financial system.
As we noted earlier, these men didn’t hatch a plot on that island. The plot already existed. Warburg had been refining its design for years.
What happened at Jekyll Island was an implementation meeting. Those men took Warburg’s framework, hammered out the technical details, resolved their disagreements, and produced a concrete plan that could be worked into legislation that Aldrich could carry back to Washington.
Still, the fact that they knew they needed to act in secret tells us everything we need to know. Vanderlip admitted as much in his memoir years later. He wrote:
“I was as secretive — indeed, I was as furtive — as any conspirator. Discovery, we knew, simply must not happen, or else all our time and effort would be wasted. If it were to be exposed publicly that our particular group had gotten together and written a banking bill, that bill would have no chance whatever of passage by Congress.”
These men understood perfectly well that if the American public knew who had crafted the plan and written their bill, the public would never accept it. Yet, they carried forward anyway.
The Dilemma – As They Saw It
Americans did not want a central bank. The country had killed two of them already — Hamilton’s First Bank of the United States and, later, the Second Bank of the United States. President Andrew Jackson destroyed the latter in a political war that defined an era.
And here’s the thing – neither the First nor the Second Bank of the United States operated as European-style central bank. They didn’t set national monetary policy, regulate or supervise other banks, hold the reserves of the banking system, or reliably act as a lender of last resort. Thus, they were fundamentally less powerful.
Even so, Americans did not tolerate them. The very phrase “central bank” carried, for many Americans, the smell of European finance, of concentrated money power, and of the kind of imperial system that both Alexander Hamilton and Thomas Jefferson had worried about at America’s founding.
Hamilton, despite championing a national bank, warned in his writings that such institutions must be carefully structured to avoid abuse. And in modeling the First Bank of the United States, he emphasized strict limits so it would “serve the public good” rather than become a “powerful engine of influence” in private hands.
Jefferson was far more hostile. Writing in 1816, he said: “I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
That’s why those six men had to meet in secret. And it’s why they could not call their creation a central bank. They could not let it look like a single institution that would control the nation’s money and credit… even though that’s exactly what the blueprint called for.
Their solution was a matter of packaging. On Jekyll Island, those six men agreed to frame the system not as a single central bank but as a network of fifteen regional reserve banks scattered across the country.
The design wore the costume of decentralization. It looked, on paper, like power spread out across many regions rather than concentrated in one place. But the regional structure was, to a significant degree, just a presentation.
To be fair, the regional banks did have some degree of autonomy initially. The system was further centralized several decades after its creation.
Still, the real power was vested in the system’s regional bank of New York… which aligned perfectly with the interests of the men backing the system.
So their design didn’t look like a central bank – at least not unless one took the time to examine its inner workings. In just the same way, the Jekyll Island conspirators would later give it a misleading name: Federal Reserve.
Though it came later, the name implied that the system represented some kind of reserve structure for the US government. And given what people endured with the Panic of 1907, that sounded like a desirable thing to many.
Such was the deceitful genius of what they crafted there on Jekyll Island in 1910. Those men knew that political optics mattered, so they built enough misdirection into the system such that its true nature was largely masked.
The whole thing was explicitly dishonest, built by men who embraced that dishonesty as necessary for political expediency.
As such, they created a powerful central bank for a country that was deeply suspicious of European finance and their own monied interests… while being intentionally misleading as to the true nature of the system.
What the Blueprint Left Out
We have touched on this before, but I think it’s an important nuance that was largely lost to history.
With the First Bank of the United States, Alexander Hamilton created America’s first central bank. But it was a distinctly American central bank. Its primary purpose was to direct American credit towards productive activity. That is to say, toward factories, infrastructure, and agriculture.
Productive credit was a core tenet of Hamilton’s American System. And in his view, the First Bank of the United States would channel domestic credit toward activity that would make the country wealthier and raise standards of living across the board.
The system designed at Jekyll Island contained no such principle. Its central concept was “elastic currency” — the idea that the money supply should expand and contract to meet the short-term needs of the banking system. That’s a power neither the First nor the Second Bank of the United States had.
The distinction matters enormously.
An elastic currency can be used to prevent bank runs… but at the cost of gradually abandoning sound money. And an elastic currency means that credit can be created at will – ex nihilo.
When that’s the case, credit tends to flow towards those most closely connected to the government and the financial system – as classical economist Richard Cantillon pointed out in his 1755 Essay on the Nature of Trade in General.
As we’ll see in the next chapter of this story, that dynamic changes the entire nature of your country. More on that to come…
-Joe Withrow
P.S. In this week’s episode of The Phoenician League podcast, we discuss the American System’s comeback and we assess the investment implications. If the current administration is resurrecting Hamilton’s ideas – what does that mean for our finances today?
You can find the podcast at: https://phoenicianleague.com/podcast-episode-11-the-american-system-comeback-hamilton-bessent-and-the-new-investment-thesis/
And if you would like to explore the investment implications more deeply, we have scheduled our next public-facing strategy session for Wednesday, July 22 at 7:00 pm Eastern. Please mark your calendar for that – I’ll follow-up with additional information a little closer to date.