The Federal Reserve
In researching the topic I found nothing but controversies surrounding the institution. Both left and right wing proponents take issue with the Fed. Being that it is a very complex and extensive topic I decided to try to focus on how the Fed was created, and how its creation has fueled controversy.
The Fed, what is it?
The Federal Reserve Act was passed on December 23rd, 1913. The act brought into existence the nation’s central bank, the Federal Reserve. The Fed is often seen as a mysterious institution, with many not even knowing what it actually is, or does. According to the Fed’s website they are responsible for: “conducting the nation’s monetary policy in pursuit of full employment and stable prices, supervising and regulating banks, maintaining the stability of the financial system, and providing certain financial services to the U.S. government.” The Fed consists of twelve regional reserve banks. These banks act as operating arms that provide services to banks and the public in their region. These regional banks are overseen by a 7 member Board of Governors. These board members are also responsible for implementing monetary policy for the United States. The board is appointed by the president and confirmed by the senate. The Fed is a unique institution in that it is both public, and private. It is considered “independent within the government.”
The Federal Reserve was not the first attempt at a national bank. In fact, there were two national banks before our current system. Both of these banks had twenty year charters and both of them expired after twenty years (1791-1801, 1816-1836). Thomas Jefferson and James Madison were strongly opposed to the first bank. They believed the bank was unconstitutional and at the expense of the majority. The second bank shared the same fate as the first, this time it was Andrew Jackson denying the renewal. Jackson was strongly opposed to the Second Bank and ultimately vetoed the bill to renew it as he thought the bank put too much power in the hands of too few.
In 1834 the United States went on the gold standard with a fixed price of gold per ounce ($20.67). This meant that one US dollar was worth approximately 1/20th of an ounce of gold. The gold standard was thought of as ” hard money,” and a “money of the people.” It was money that could not be tampered with. During the Civil War the government went off the gold standard and printed money (greenbacks) in order to finance the war. These fiat notes were legal tender, however they were not redeemable for any gold. The governments power to print unbacked currency can later be seen as one of the pillars of the Federal Reserve. After the civil war the US went back on the gold standard and experienced one of the greatest periods of prosperity the United States has ever seen. For twenty years the total output of goods and services increased at a rate of four percent per year. The US later lowered how much gold the dollar was worth to 40% of it’s initial value in order to print more money into circulation. The gold standard was essentially abandoned in 1933. This is important because some do not realize there is absolutely nothing backing our currency, just the promise of the government, and the trust in the US dollar.
Panic of 1907 and further push for a central bank
By the late 1800’s the financial elite (led by JP Morgan and John D Rockefeller) began advocating for a central bank. They wanted cheap credit and an inflated money supply to expand their empires. The effort received a boost with the banking panic of 1907. During this financial crisis there was a run on many of the banks. Since banks use fractional reserve banking and only need to keep a small amount of its customer’s deposits on hand, banks run intro trouble if enough people withdrawal their money. These runs ultimately lead to the failure of the Knickerbocker Trust, and lead other establishments to near bankruptcy. This crisis would have been worse if not for JP Morgan and other New York bankers bailing out the banking system. The fear of bank failure was adopted and used by wall street, and the financial elite to sell the idea of a central bank. A bank that could be used as a lender of last resort.
In November of 1910, several financially, and politically prominent men took part in a very secretive trip to Jekyll island, an island off the coast of Georgia. The trip was so secretive the men only used their first names and arrived separately. One member even brought a shotgun with him in order to claim he was going on a duck hunting trip. The men in attendance were:
- Frank Vanderlip – President of National City Bank of New York
- Nelson Aldrich – Senate republican leader and chairman of the National Monetary Commission
- Henry Davidson – Senior partner J.P. Morgan Co.
- Charles Norton – President of the First National Bank of New York
- Paul Warburg – Partner in Kuhn, Loeb & Co
- A. Piatt Andrew – Assistant Secretary of the Treasury and Special Assistant to the National Monetary Commission
- Benjamin Strong – Vice President of Banker’s Trust of New York
Over the course of 7-10 days the men hammered out much of the details that later became known as the Aldrich Plan. The need for secrecy was evidenced years later in an autobiography by Frank Vanderlip. In it he stated: “if it were to be exposed publicly that our particular group had gotten together and written a banking bill, that bill would have no chance whatever of passage by Congress.”
Senator Aldrich proposed his plan to Washington a few years later. Unfortunately for him, the plan came at a bad time as democrats had just captured congress. Though most republicans and Wall Street bankers favored the plan, it did not fair well with progressives, or the public, because the plan very much favored large bankers.
The Federal Reserve Act
Woodrow Wilson was voted into office in 1913. During his tenure he pledged financial reform of banking. He liked some aspects of Aldrich’s proposed plan, which would later come to be be the basis of the Federal Reserve bill. A new bill was proposed by advisers of Wilson’s; Carter Glass, and H. Parker Willis. Wilson liked the plan but wanted to add an amendment, a Federal Reserve Board to have control over the bankers. Wilson proposed the revised bill but was met with some opposition from bankers, and from conservatives who thought it was a radical break from the nation’s lazissez-faire economic policy. After many debates, and amendments, the Federal Reserve Act passed congress on Dec 22nd, 1913 and was signed by Wilson the following day. It represented a compromise of different parties and interests, including Aldrich’s Plan.
The Federal Reserve has had profound implications on our economic system. After all, they literally print our money, and printed right on each bill it says: “Federal Reserve Note.” It’s an entirely different way of doing banking that every nation has adopted, a fiat based currency. The Federal Reserve was designed in part to contain banking crises. Though, as we have learned this year this wasn’t necessarily the case. Only 16 years after the Federal Reserve Act was the start of the Great Depression. We’ve also learned about how the Fed changes the market by raising or lowering interest rates. On a few occasions the Fed would try to keep money tight by raising interest rates in order to keep inflation down. Sometimes this would have dire consequences as the nation would be plunged into recessions because of this money policy.
Many opponents of the Federal Reserve claim that it is in itself unconstitutional, and too private to be trusted to having the whole in mind. There are many who think we should scrap the Fed altogether and go back to some sort of gold standard. The meeting on Jekyll Island itself causes much controversy and has sparked many conspiracy theories; so much so that nearly every documentary I found on the Fed was a “truth” documentary. I myself found the whole topic interesting and will never think about the Fed the same way.
Money, Banking, and The Federal Reserve – http://www.youtube.com/watch?v=iYZM58dulPE