The Act provided for the establishment of Federal Reserve Banks, to be placed in districts—the number being eventually fixed at twelve. The capital for each Reserve Bank was to be supplied by the banks in its district which became member banks. In other words the Reserve Banks were to act as banks for their members, but not for private individuals. In control of the twelve was a Federal Reserve Board, composed of the Secretary of the Treasury, the Comptroller of the Currency and five persons appointed by the president for terms of ten years. It was at this point that the chief controversies raged between the bankers and the proponents of the administration measure. The bankers desired one central bank, which the administration opposed because it feared centralized control over the currency supply; and the bankers disliked the proposal for a Reserve Board appointed by the president, because they apprehended the entrance of politics into the appointments. The President and his supporters were determined, however, not to allow the bankers to appoint the Board or any portion of it, because they wished the system to be operated solely in the public interest.
Greater elasticity was given to the currency supply through the issuance of federal reserve notes, at the discretion of the Federal Reserve Board, to the several regional Federal Reserve Banks. These notes were to be obligations of the government and were expected to replace the former national bank notes. When a local bank requires more currency it may deposit with the Federal Reserve Bank such valuable commercial paper as may be acceptable—for example, promissory notes of reliable business firms—and receive at once a supply of federal reserve notes. When business is brisk and large supplies of currency are demanded, the local banks will deposit whatever paper may be necessary to meet their needs; when the emergency has passed they will withdraw notes from circulation, return them to the reserve bank and receive their paper again.[2] The second great purpose of the new system was to supply central reservoirs for the storage of the reserves of the member banks. Each local bank is required to keep certain prescribed balances in the reserve bank of its district, and the federal government may also deposit funds in it. In conformity with strict regulations the reserves thus accumulated in a Federal Reserve Bank may be directed here and there in the district as needed, and even from district to district, under the control of the Federal Reserve Board. Moreover they are not available for those speculative ventures which have caused so much trouble in the past.[3] The operation of the law has apparently more than met the expectation of its friends. It had hardly been established when a war broke out in Europe, but the unusual financial situation which resulted in America was cared for without great strain.
The third major plank in the Democratic platform of 1912 called for legislation concerning trusts, and the President accordingly turned his attention to that topic in his address to Congress on January 20, 1914. He declared that there was no intent to hamper business as conducted by enlightened men, but that, on the contrary, the antagonism between business and government had passed. He recommended the prohibition of interlocking directorates by which railroads, banks and industrial corporations became allied in one monopolistic group, and he suggested that the processes and methods of harmful restraint of trade be forbidden item by item in order that business men might know where they stood in relation to the law. Finally, he believed that the country demanded a commission which should act as a clearing house for facts relating to industry and which should do justice to business where the processes of the courts were inadequate. The results of this undertaking were the Federal Trade Commission act of September 26, 1914, and the Clayton Anti-trust act of October 15.
The former of these laws created a Commission of five persons to administer the anti-trust laws and to prevent the use of unfair methods by any persons or corporations which were subject to the anti-trust laws. Whenever it had reason to believe that such expedients were being used, the Commission was to issue an order requiring the cessation of the practice. If the order was not obeyed, the Commission was to apply for assistance to the circuit court of appeals in the district where the offense was alleged to have been committed. The purpose of the provision was evidently to prevent unfair practices rather than to punish them. Another section of the law empowered the Commission to gather information concerning the practices of industrial organizations, to require them to file reports in regard to their affairs, and to investigate the manner in which decrees of the Courts against them were carried out. Under direction of the president or Congress, the Commission could investigate alleged violations of the law, and on its own initiative it might report recommendations to Congress for additional legislation.[4]
The Clayton act specifically prohibited many of the practices common to industrial enterprises. Sellers of commodities were forbidden to discriminate in price between different purchasers—after making due allowance for differences in transportation costs; corporations were forbidden to acquire any of the stock of other similar industries, where the effect would be substantially to lessen competition; and directors of banks and corporations were prohibited, with stated exceptions, from serving in two or more competing organizations. The Clayton act also settled, at least for the time, several of the complaints raised by the labor interests, especially at the time of the Pullman strike. Labor and agricultural organizations were specifically declared not to be conspiracies in restraint of trade; injunctions were not to be granted in labor disputes unless necessary to prevent irreparable injury; and trials for contempt of court were to be by jury, except when the offense was committed in the presence of the court. The law also prohibited the railroads from dealing with concerns in which their directors were interested, except under specified conditions.
The success of the President in pushing his party program made his prestige the outstanding fact in politics. His leadership was indisputable and it was evident that he regarded a party platform as a serious program, to the fulfilment of which the party was committed by its election. While the trust legislation was under discussion, however, he asked for an act which required all the strength that he could muster.
It will be remembered that the Panama Canal act of 1912 had exempted American coast-wise traffic through the canal from the payment of tolls. The law had been passed under a Republican, President Taft, and both the Progressive and Democratic platforms of 1912 had favored exemption. On March 5, 1914, Wilson appeared before Congress and urged the repeal of the act on the ground that it was a violation of that part of the treaty with Great Britain in which this country agreed that the canal should be open to all nations upon an equality, and that it was based on a mistaken economic policy. He was opposed by Underwood and Champ Clark, two of the most powerful Democratic leaders, but he had the aid of Senator Root, a distinguished Republican who had been Secretary of State under President Roosevelt, and in the end he was victorious. The division in the party was quickly healed and forgotten.
The Congressional elections of 1914 greatly reduced the Democratic majority in the House, although leaving control with that party, but they slightly increased its margin in the Senate. European affairs and the election of 1916 occupied political attention during the second half of the administration, nevertheless the President and Congress proceeded with their program of legislation. Important acts were those providing for the development of the resources of Alaska, the Newlands act for the arbitration of disputes among railway employees, a law providing for federal aid in the building of state highways, measures giving a larger amount of self-government to the Philippines and Porto Rico, and one establishing a series of Federal Farm Loan Banks intended to enable the agricultural population to get capital at low rates of interest.[5] The major items, as well as the smaller ones in the Democratic program were in line with many of the proposals made by the Progressives in their platform in 1912. Attracted by these accomplishments and by the forceful leadership of the President large numbers of the Progressives made the transition into the Democratic party, and from 1913 to 1916 much of the political strategy of both Democrats and Republicans was devoted to attracting the insurgent wing of the Republican organization.
The enactment of such a body of legislation, with the resulting appointment of many officials and clerks, brought the President face to face with the same civil service problem that had caused so much trouble for Cleveland. Upon their accession in 1913 the Democrats had been out of power so long that they exerted the pressure, usual under such circumstances, for a share in the offices. The merit system, however, was even more firmly entrenched than in 1897 when Cleveland had made such additions to the classified lists, for both Roosevelt and Taft had extended the merit principle to certain parts of the consular and diplomatic service. Roosevelt had also made considerable extensions in the application of the system to deputy collectors of internal revenue, fourth-class postmasters, and carriers in the rural free-delivery service; Taft had also increased the number of employees who were appointed under the merit system, notably about 36,000 fourth-class postmasters not touched by his predecessor. Some of the acts passed early in President Wilson's administration—the Federal Reserve law, for example—expressly excepted certain employees from civil service examinations. Bryan, as Secretary of State, showed a lack of devotion to the cause of reform in the conduct of his department. On the other hand the President took a most important step in relation to postmasters of the first, second and third classes, which had always been appointed by the president with the advice and consent of the Senate, and had been among the plums in the gift of the executive that had been most sought after. On March 31, 1917, Wilson announced that thereafter the nominees for postmasters of the first three classes would be chosen as the result of civil service examination.
While the United States was absorbed, in these various ways, in the task of internal construction, an event was occurring in a town in Bosnia which was destined to affect profoundly the course of American history. On June 28, 1914, Archduke Franz Ferdinand, the heir-apparent to the throne of the Austro-Hungarian monarchy was assassinated by a youth of Serbian blood and sympathies in Sarajevo. In Austria the act was looked upon as an incident in a revolutionary movement intended to detach a part of the Austro-Hungarian monarchy and unite it with Serbia. A month later Austria declared war on Serbia, and in a brief time, such was the state of the European alliances, Austria and Germany were opposed to Serbia, Russia, Belgium, France, Montenegro and Great Britain in a devastating war. In August, Japan joined the "Allies," as the nations on Serbia's side were known, and Turkey, in November, took the side of the Teutonic powers. The act that brought Belgium into the war was of interest to the United States. Germany had declared war on Russia, the friend of Serbia, and expected that France, Russia's ally, would step into the fray. Being thoroughly prepared for war, Germany believed that she could crush France before the latter could take any effective steps. The most convenient path into France lay through Belgium, a small, neutral nation with no interest in the conflict, and the German armies were thereupon poured across the boundary. High German authority freely admitted the wrong of the act, but excused it on the ground of military necessity. Belgium felt that she could not do otherwise than resist the invader and was thus drawn into the vortex. Her danger helped bring Great Britain into the conflict.