The Making of the Fed
The “money question” is as old as the Republic. In “America’s Bank” Roger Lowenstein tells the story as to how the United States in 1913 brought into being its first central bank since 1837. Recall that the Second Bank of the United States came to an end when President Andrew Jackson refused to renew its charter. This triumph of Jacksonian Democracy would come back to haunt the Democrats who supported the creation of the Federal Reserve.
To be sure there were panics and crashes in those intervening years, but absent a central bank the U.S. still grew to become the largest economy in the world. What triggered the need for a central bank was the Panic of 1907 which nearly brought the economy to its knees and it required the rescue of a bankers syndicate led by one James Pierpont Morgan. In response to the panic, Congress passed the Aldrich-Vreeland Act which authorized the Secretary of the Treasury to issue emergency currency and it established a National Monetary Commission to investigate the causes of the panic and to recommend policy changes. Unlike the 2008 financial crash Congress acted first with the Dodd-Frank Law and then created a financial inquiry commission whose work is already forgotten.
It here where we begin to see the leading players involved in the creation of the Fed. First and foremost is Rhode Island Senator Nelson Aldrich who chairs the commission, studies European central banks and becomes convinced of the need for a central bank in the U.S. Next is Paul Warburg, a German immigrant and scion of the Warburg banking family who worked for their U.S. affiliate Kuhn Loeb. He is rightfully called by most historians and Lowenstein as the father of the Federal Reserve as he becomes the most knowledgeable and tireless advocate for a central bank. It is Warburg and Aldrich who organize the famous Jekyll Island bankers’ retreat where all of the essential elements of the Federal Reserve Act are written in secret. Sometimes transparency isn’t such a good idea.
After the Democrats sweep the 1912 elections Republican Aldrich is moved to the sidelines and the new key players are President Wilson who deftly works around his party’s Jacksonian traditions and Representative Carter Glass of Richmond, Virginia, who though a Jacksonian becomes the leading advocate for a central bank. Glass would later as a Senator, be the coauthor of the Glass-Steagall Act separating commercial banking from investment banking. Lowenstein spends a great deal of time dealing with both Wilson’s and Glass’ maneuverings to bring about passage of the act. He tells a good story especially in regard to how the U.S., in deference to its Jacksonian traditions, doesn’t have one central bank but rather a national board with 12 district banks.
I have a few quibbles with this otherwise wonderful book. First he doesn’t’ really tell us why there is a district bank in Richmond, Virginia, perhaps it is Carter Glass’ hometown or why there are two district banks in Missouri. Is it because the Speaker of the House Champ Clark was from Missouri or was it out of concern with supplying credit to agriculture in the Midwest? Finally, although he mentions it in passing, he doesn’t really go into how successful the pre-Fed Aldrich Vreeland Act was in the summer of 1914 in supplying needed cash to the banking system after the outbreak of World War 1. Remember although enacted in 1913, the Fed did not open its doors until December 1914. Friedman and Schwartz note in their “Monetary History…” that the use of Aldrich-Vreeland money in 1914 did a far better job in protecting the banking system than what the Fed did in 1930-31.
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