Originally posted on Tuesday, December 31st, 2013
December 23 was the 100th anniversary of the signing of the Federal Reserve Act, creating the Federal Reserve System.
This was not without controversy. A contemporary cartoon:
From Alfred Owen Crozier’s U.S. Money vs. Corporate Money, “Aldrich Plan,” Wall Street Confessions! Great Bank Combine!
The Board of Governors of the Federal Reserve System publishes an official narrative of its creation from which this is excerpted:
Federal Reserve Act Signed
December 23, 1913
by Staff of the Federal Reserve Bank of Kansas City
With the nation confronting another financial crisis in 1907, and the United States the only one of the world’s major financial powers without a central bank, the nation was forced to turn to Wall Street. Finance mogul J.P. Morgan, who had bailed the government out of a financial crisis in 1895, organized private sector investments and lines of credit to stabilize the banking system amid its latest panic.
Recognizing that the nation could not continue to rely on wealthy individuals to stem an economic and financial crisis, Congress passed the Aldrich-Vreeland Act on May 30, 1908. The legislation provided for the issuance of emergency currency and created the eighteen-member National Monetary Commission, chaired by Sen. Nelson Aldrich, to determine what changes were necessary to the nation’s monetary system and laws related to banking and currency.
Over the next three years, the Commission traveled to the major capitals of Europe and hosted a number of hearings in the United States. In January 1911, Aldrich unveiled a plan that, after a year of revision by the Commission, was presented to Congress in 1912 and called for a National Reserve Association.
Although the bill did not come forward until 1912, it had been under development for years, going back to a November 1910 meeting investment banker Paul Warburg, Treasury official Abram Piatt Andrew, and others on Jekyll Island, Georgia. The then-secret meeting was organized by financiers and bankers who recognized the nation’s need for a central bank and wanted to begin the process. Because they did not think the public would welcome a plan crafted in part by bankers, they made extraordinary efforts to keep the meeting secret, using only first names and telling others they were on a duck hunting trip.
Aldrich’s proposal was attacked by committees in both chambers for giving too little control to the government and too much power to bankers, especially those who ran the largest institutions. Among other features, the plan called for a forty-six-member Board with only six appointed by the government and one of those – the head of the organization – selected from a list of three names supplied by the association. Unlike the First and Second Banks of the United States, the government would have no stake in the National Reserve Association.
After the 1912 election, any chance the Aldrich plan had of success was gone. Opposition to the proposal was a plank in the Democratic platform.
With Democrat Woodrow Wilson winning the presidential election and Democrats holding control of both houses, the banking community, which had strongly backed the Aldrich plan, became anxious about what plan the new administration would propose.
The House Banking and Currency Committee assigned a subcommittee under the leadership of Rep. Carter Glass to explore reform proposals. Glass quickly enlisted the help of Henry Parker Willis, a professor at Washington and Lee University. Willis, who also wrote for the New York Journal of Commerce, would come to wield enormous influence over a subcommittee whose members had little knowledge of banking and finance.
The legislation Glass introduced had some aspects in common with the Aldrich plan, but there were some major differences. While Aldrich would have created a central body, the Glass bill provided for a system of regional banks. Glass, in fact, favored as many as twenty regional banks throughout the country and did not like the idea of a central coordinating board.
Glass also believed firmly in autonomous regional banks, later writing in a memoir: “In the United States, with its immense area, numerous natural divisions, still more numerous competing divisions, and abundant outlets to foreign countries, there is no argument, either of banking theory or of expediency, which dictates the creation of a single central banking institution, no matter how skillfully managed, how carefully controlled, or how patriotically conducted.”
Glass also did not like the idea of government control. Like Aldrich, his plan gave most of the authority to bankers. Wilson, however, felt the plan needed an oversight agency. He also believed strongly that neither Congress nor the public would support a proposal that gave the government little control.
History suggests a profound error in judgment, in substance whether or not in politics, by President Wilson. The more control the government has exercised — especially since Richard M. Nixon infamously “closed the gold window” on August 15, 1971 — the worse the economic conditions and equitable prosperity of American workers and middle class has grown.
Recent Comments