Woodrow Wilson was President of the United States (1913-21), Governor of New Jersey (1911-13), and President of Princeton University (1902-10). As a Progressive Democrat, he pushed through a legislative agenda in his first term that included the Federal Reserve Act, the Federal Trade Commission Act, the Clayton Antitrust Act, the Federal Farm Loan Act, and the Revenue Act of 1913. In his second term, Wilson oversaw the United States’ entry into World War I and participated in subsequent peace treaty negotiations in Paris. During the War, Wilson reinstituted the draft, raised billions of dollars through government bonds, and established several government agencies to control the economy. After the War, Wilson tried to shape peace negotiations with his Fourteen Points program that included the League of Nations, although the United States ultimately rejected the Treaty of Versailles.
Wilson’s tenure saw a number of fundamental changes occurring in American politics and society, many of which were championed by the Progressive Movement in response to the rapid modernization of American society and the conglomeration of American business. These reforms also came in response to an unsteady market, an unstable currency, and a perceived increase in corruption within political institutions. After the Panic of 1907, the security of the dollar was brought into question as there was no centralized banking system in the United States. A series of new acts and regulations were enacted as countermeasures against such instability. Some of these acts predated the Wilson Administration, but the importance lies within the Wilson Administration’s adherence, compliance, and implementation of these reforms during its tenure. Wilson outlined this vision of progressive social, economic, and political reform in his first inaugural address, stating:
During his first term, Wilson oversaw the creation of the Federal Trade Commission, which was authorized to issue “cease and desist” orders to large corporations to curb unfair trade practices. He also supported passage and then implemented the Clayton Antitrust Act, which strengthened the 1890 Sherman Antitrust Act, and the Federal Farm Loan Act that created a federal farm loan board that issued credit to rural, family farmers. Other significant progressive and economic legislation during his first term included the Adamson Act, which imposed an 8-hour work day on the railroad industry; the Keating-Owen Act, which regulated child labor but was later declared unconstitutional by the Supreme Court; and the Revenue Act of 1913, which re-imposed federal incomes taxes following ratification of the Sixteenth Amendment and lowered tariffs from 40% to 25%. But the most significant and lasting economic policy of Wilson was the creation of the Federal Reserve System.
In response to the Panic of 1907, Congress passed the Federal Reserve Act in 1913 to create a new form of currency, the Federal Reserve Note, and to establish a central bank known as the Federal Reserve System. Wilson appointed William Gibbs McAdoo Jr. as his Treasury Secretary to oversee the creation of the Federal Reserve System. The Federal Reserve was divided into twelve federal districts that were controlled by private banks but were also supervised by a national board of governors that were appointed by the President and confirmed by the Senate. This compromise, known as the Glass-Owen Act, appeased both conservatives, who wanted private banks to influence monetary policy, and progressives and agrarians, who wanted the government to control the U.S. money supply. The result of this arrangement was a continuous struggle over monetary policy between the board of governors and the district banks, particularly the Federal Reserve Bank of New York, which tended to dominate debate as “first among equals.”
By being able to expand or contract the money supply in amounts warranted by economic conditions, the Federal Reserve was designed to add stability to the dollar that would slow or cease a run on banks as occurred in the Panic of 1907. At the time of the Federal Reserve Act’s passage, the maintenance and perpetuation of the gold standard was taken for granted. However, by the time the Federal Reserve System began operations in November 1914, World War I had been declared four months earlier. To finance the costs of war, most European countries suspended convertibility of their currency into gold and, as a result, suffered significant inflation. Although suspending convertibility had happened before, as with the British during the Napoleonic War or the United States during its Civil War, some countries chose not able to return to gold standard after the conclusion of the World War I. Due to the pressures of war, technological change, wage rigidity, and reparation provisions in the Treaty of Versailles, a quick return to the gold standard was not feasible given the large deficits and surpluses that existed in the balance of payments. For example, Germany, which had gone off the gold standard in 1914, could not quickly return to it as Germany had lost most of its gold reserves in reparations. The German central bank could only issue unbacked marks which eventually became worthless.
At the start of World War I, European nations began an exodus of assets from the United States, which was still a debtor nation, and converted them into dollars and then into gold which were used for their war efforts. As this would depreciate the dollar to such an extent that it would trigger an economic depression, McAdoo closed the New York Stock Exchange for four months in 1914 to prevent Europeans from selling American securities and exchanging them for gold. Lacking access to their U.S. financial assets, European countries quickly exhausted their net foreign exchange holdings, currency, and gold reserves and issued sovereign bonded indebtedness (IOUs) to pay for war materials they were purchasing from the American market. As the American industry built up to meet allied war needs, the United States moved from a net debtor to a net creditor position.
Unlike their European counterparts, U.S. banks continued to operate normally due to McAdoo’s invoking the emergency clause of 1908 Aldrich Vreeland Act, which allowed bank to issue an emergency currency that were backed by government bonds or any securities the banks were holding. But more importantly, the Federal Reserve discounted bankers’ acceptances which allowed the flow of trade goods from the United States to Europe and indirectly financed the war until 1917, when the United States entered the war and became concerned with financing its own war effort. By the time the United States entered World War I, the Federal Reserve gold reserves were $3.12 billion which was double the legal requirement. This growth in the gold reserves pushed the Federal Reserve to sell off other earning assets in order to avoid increasing the money supply and triggering inflation. Thus, the gold standard was no longer an effective control over the U.S. money supply: the system was no longer autonomous and self-regulating. In the place of a self-regulating gold standard was the decision of Federal Reserve policymakers.
When the United States entered World War I, the U.S. government’s priority was to raise revenue to finance its own war effort. The Federal Reserve issued and supervised government bonds, known as Liberty Bonds, which became a symbol of patriotic duty and raised $17 billion. In addition to raising revenue, the Wilson Administration took control of the economy by establishing such agencies like the Council of National Defense, the War Industries Board, and the Food Administration. Wilson also passed the Espionage and Sedition Acts of 1917, the Immigration Act of 1918, and set up German internment camps that severely restricted civil liberties; created the Committee on Public Information to provide pro-war propaganda; and reinstituted the draft in the Selective Service Act. By the end of World War I, the U.S. government had unprecedented control over the social, economic, and political lives of its citizens.
Although leading the United States to victory in World War I, Wilson was not able to secure the peace; the Senate refused to ratify the Treaty of Versailles. Incapacitated by a stroke in 1919, Wilson would remain ineffective until his the end of his presidency. However, the legacy of his presidency was set as a progressive model in both domestic and foreign policy. His economic policies would be seen later as examples for subsequent Presidents like Franklin Roosevelt and Lyndon Johnson to emulate; and his League of Nations would be seen as a forerunner to the current United Nations.
Monetary History Highlights
The Rueffian Synthesis