The Origin

It is likely that Nelson W. Aldrich, J.P. Morgan, and their associates perfected the formula for the way in which price moves in an attempt to add stability to U.S. financial markets after the stock market crash of 1906–1907. Notwithstanding the adroit inspiration of Alexander Hamilton in managing the financial panic of 1782, as late as the early twentieth century, the American banking system lagged behind its European counterparts by its failure to incorporate a strong central bank at its core that could lend stability across all markets during periods of stress. Senator Nelson Aldrich was asked by Congress in 1908 to chair the National Monetary Commission (NMC). The NMC charge was to find ways to stabilize U.S. markets during periods of financial instability. Aldrich traveled extensively in Europe during 1907 to 1908 to research the strengths of the European system. European central bank policies were superior to the U.S. system of loosely knit, independent banks of the time. On Aldrich´s return from Europe the senator held a secret meeting at Jekyll Island, Georgia, in November 1910. There he met with senior power brokers of the U.S. banking system, “seven men who represented an estimated one fourth of the total wealth of the entire world.”¹

  1. Senator Nelson W. Aldrich, Chairman (Aldrich´s daughter married John D. Rockefeller Jr.)
  2. Abraham Piatt Andrew, Assistant Secretary of the United States Treasury
  3. Frank A. Vanderlip, President, National City Bank of New York (later Citicorp)
  4. Henry P. Davidson, Senior Partner, J.P. Morgan
  5. Charles D. Norton, President, J.P. Morgan´s First National Bank of NewYork
  6. Benjamin Strong, Head of J.P. Morgan´s Bankers Trust Company
  7. Paul M. Warburg, Partner, Kuhn, Loeb & Company, a representative of the Rothschild banking dynasty in Europe. A founding director of the Council on Foreign Relations, Warburg was married to Nina Kuhn. (Kuhn & Loeb merged with Lehman Brothers in 1977—later Shearson Lehman/American Express.)

Subsequent to this meeting the NMC proposed the Federal Reserve Act with its mandate for a strong central bank that could stem future instability in U.S. markets. With the encouragement of President Woodrow Wilson, Congress passed the Federal Reserve Act in 1913. (See Appendix C: Timeline of Events, page 259)

Aldrich may have gained the base formula during his travels in Europe. Regardless of origin, the formula fit well with observed historical price fluctuation and the effects of crowd psychology active in financial markets around the turn of the twentieth century. Since that time, world governments have undoubtedly adopted the formula in order to monitor price movements, rationalize and stabilize investment price fluctuations, and regulate and verify fair trade.

[Authors note: The Federal Reserve was subordinated to the executive branch from 1933 to 1951 and then became autonomous. The Fed failed to raise interest rates sufficiently to stem irrational exuberance in demand during the 1990s. The sustained surge of the rsi(x) led to a complete exhaustion of demand. At best, the Fed mishandled its charge; at worst, it abused its powers and should be subordinated to Congress while the Treasury should remain under executive branch control. Age-old problems in the U.S. government: lack of oversight, inability to anticipate future trends, too much power in the hands of too few individuals, and the lure of being recognized in the courts of Europe.]

In the absence of some standard, how are governments to regulate price action? How are they to oversee global markets without some artificial, nonintrusive means of price verification? Shouldn´t there be some path or road for the price of gold to follow rather than letting the price of the precious metal be determined by the number of people who show up at some forgotten counter on a given day? What if there’s a snowstorm? What if the tram is down? Should price be set only by those who persevere through the inconvenience? How is one to catch Enron?

The formula must have been the centerpiece at Bretton Woods and again at the Palm Accord, as it continues to serve as the common denominator in deciding the course of world finance. From Bretton Woods to the Palm Accord, the G8 and today’s G10 and G20, the formula has acted as the core routine that underpins investment price fluctuation, verification, and regulation. Without a solid, secure, and agreed upon method for understanding economic fundamentals, how would governments engage in trade negotiations? How would they adjust pegged or floating currencies? Without an agreed upon standard, a common denominator among their currencies, how would governments begin to settle international trade payments? How would government envoys speak with authority in trade negotiations? There must exist some set standard, some baseline upon which international trust is built. How else could anyone even begin to plot the financial future of the world with any degree of certainty? Fairness?