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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