The list of American government financial superheroes is relatively short. The vast majority of the 74 Treasury secretaries and 14Federal Reserve chairmen lie in musty repose. After Alexander Hamilton, immortalized on the $10 bill and by Ron Chernow’s fine biography, very few financial public servants captured the public’s imagination. Yes, Treasury secretaries at times of war and crisis, like Salmon Chase, Andrew Mellon, and Henry Morgenthau Jr., were famous in their time and remain appreciated by historians. But they weren’t hailed as heroes, as was cigar-chomping Federal Reserve Chairman Paul Volcker, who single-handedly killed off inflation in the late 1970s, and Alan Greenspan, who licked the business cycle and plain English syntax. Greenspan was joined as a popular figure for a period in the 1990s by the economic policy Superfriends, Treasury Secretaries Robert Rubin and Lawrence Summers, who helped make the United States an island of stability amid global financial crises.
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.
McA-who? Most New Yorkers think the only McAdoo worth knowing is Bob McAdoo, who lit up Madison Square Garden as a power forward for the Knicks in the mid-1970s. But William McAdoo, who also plied his trade in New York, had even sweeter inside moves. He was president of the Hudson & Manhattan Railroad, which built the tunnels that house today’s PATH trains. Then, Silber argues, as Woodrow Wilson’s Treasury secretary, McAdoo executed a series of maneuvers in the chaotic fall of 1914 that turned America into the global financial leader. Combining Hamilton’s penchant for mercantilism, Rubin’s sangfroid, and Volcker’s practicality, McAdoo 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. As he worked to get the Federal Reserve system up and running, 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. In October 1915, J.P. Morgan & Co. sold a landmark $500 million bond issue for Britain and France to U.S. investors.
It’s possible to make too much of this four-month period. The final transfer of power from London to New York wouldn’t come until after the war, when Great Britain suspended the gold standard. And the performance of the Federal Reserve and economic policy-makers in the 1920s and 1930s showed that the United States was hardly ready for global leadership (see: Great Depression). It’s also possible to make too much of the role played by any single person in this process. The flow of financial leadership westward had been underway for several centuries. Events in the fall of 1914 may have helped speed the process, but the transfer of economic power from Europe to the Americas had its own massive inertia.
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.
(Disclosure: I’m the editor of the bi-annual magazine Sternbusiness, published by the New York University Stern School of Business, where Silber is on the faculty.)