A History of the Federal Reserve

1907

Before the Fed was… J.P. Morgan

In 1907, as one New York bank after another fell victim to a run, the financial community, without any central bank to look to, turned to J. Pierpont Morgan, the preeminent financier of his generation. He had lived through more panics than had any other banker, in 1895 actually bailing out the United States government itself when it was within days of running out of gold and defaulting on debts to Europe. Though J.P. Morgan & Co. was by no means the country’s biggest bank, Pierpont Morgan himself had acquired an extraordinary aura of authority that gave him the right, indeed the obligation, to take command during financial crises.

— Liaquat Ahamed, Lords of Finance (Penguin Books, 2009, p. 52)

Before the Fed: J.P. Morgan: A Modest Fortune and an Outsized Personality

It helped that he [Morgan] was believed to be not simply rich, but extremely rich—like the Rockefellers or the Vanderbilts or Andrew Carnegie—and that with his fierce glowing stare and terrible temper, he intimidated most people, including his own partners. It would turn out that the first of these attributes was exaggerated, for he was not nearly as wealthy as most people thought—when he died in 1913, leaving an estate valued at $80 million, John D. Rockefeller, who himself was worth $1 billion, is said to have shaken his head and said, “And to think that he wasn’t even a rich man.”

— Liaquat Ahamed, Lords of Finance (Penguin Books, 2009, p. 53)

Before the Fed:  JP Morgan to the Rescue!

Morgan swiftly assembled the very best financiers to assist him with the rescue effort….  The task force had two assignments.  The first … was to decide which banks caught in the upheavals were to be bailed out and which left to go under.  The second… was to raise the money for the rescue effort.  By early November, despite having injected $3 million of his own cash, raised over $8 million from the other banks collectively, secured a commitment from the secretary of the treasury to provide $25 million in deposits, and even managed to extract $10 million from John D. Rockefeller, Sr., Morgan had been unable to check the panic.  Depositors continued to withdraw their money and one of the largest trust companies in the country, with over $100 million in deposits, tottered on the edge of collapse.

— Liaquat Ahamed, Lords of Finance (Penguin Books, 2009, p. 53)

Before the Fed:  JP Morgan Summons the Bank Presidents

Finally, on the night of Sunday, November 2, Morgan summoned the presidents of the major New York banks to his new library, at the corner of Madison Avenue and Thirty-sixth Street, an Italian Renaissance-style palace he had built next door to his house to showcase his collection of rare books, manuscripts, and other artwork.  Its marble floors, frescoed ceilings, walls lined with tapestries and triple-tiered bookcases of Circasian walnut, crammed full of rare Bibles and illuminated medieval manuscripts, made it an incongruous setting for a meeting of the banking establishment.  Once the moneymen had gathered, Morgan had the great ornamental bronze doors to the library locked and refused to let anyone leave until all had collectively agreed to commit a further $25 million to the rescue fund.

— Liaquat Ahamed, Lords of Finance (Penguin Books, 2009, p. 54)

Before the Fed: the denouement of the 1907 Panic

The 1907 panic exposed how fragile and vulnerable was the country’s banking system.  Though the panic had finally been contained by decisive action on Morgan’s part, it became clear that the United States could not afford to keep relying on one many to guarantee its stability, especially since that man was now seventy years old, semiretired, and focused primarily on amassing an unsurpassed art collection and yachting to more congenial climes with his bevy of middle-aged mistresses.

— Liaquat Ahamed, Lords of Finance (Penguin Books, 2009, p. 54)

Before the Fed: “The Rich Man’s Panic”

The Panic of 1907 was precipitated by several events.  First, there was stress on the American money supply due to reconstruction aid to San Francisco after the April 1906 earthquake and to the Bank of England’s rising interest rates due to British insurance companies paying out so much to American policyholders. Second, the Hepburn Act, which gave the Interstate Commerce Commission the power to set maximum railroad rates, became law in July 1906 and resulted in the depreciation of value of railroad securities. These events led to a slide of almost 18% in the New York Stock market between September 1906 and March 1907, which became known as the “Rich Man’s Panic.”

http://www.thegoldstandardnow.org/the-panic-of-1907

Before the Fed: 1907, Stocks Drop by $24%

The economy remained volatile throughout the summer of 1907 with a continual drop in the value of stocks. A series of events contributed to this decline: the failure of the New York City’s bond offering, the collapse of the copper market, and the $29 million fine against the Standard Oil Company for antitrust violations. Abroad, there were several runs on the banks in Egypt, Japan, Hamburg, and Chile. By September, the value of stocks had dropped by 24.4%. On October 22, 1907, the Knickerbocker Trust, the second-largest trust company in the United States, was forced to suspend, triggering fear throughout the country and massive cash withdrawals from New York City banks.

http://www.thegoldstandardnow.org/the-panic-of-1907

Before the Fed:  Staunching the Panic of 1907

The Treasury Department intervened with a $25 million deposit in New York banks, and J.P. Morgan organized a pool of $10 million, but these efforts were insufficient to stop the spread of panic. Public confidence needed to be restored as Morgan, the other banks, and even the U.S. Treasury were low on funds. The bankers consequently talked to the press to persuade them that the worst had passed; and, on Monday, October 26, the New York Clearing House issued $100 million in loan certificates to be traded among banks to settle balances while allowing them to retain cash reserves for depositors. These actions led to a return of stability on Wall Street, although specie payments did not fully resume until January 1908 after considerable imports of gold.

http://www.thegoldstandardnow.org/the-panic-of-1907

Before the Fed:  How Morgan Saved NYC

In November [1907], a new set of crises emerged with J.P. Morgan playing a critical role in each of them once again. By purchasing $30 million of bonds, Morgan precluded New York City from declaring bankruptcy; by organizing a $25 million loan to the Trust Company of America and other weak financial institutions, Morgan stopped another potential run on the banks; and by persuading anti-trust busting President Roosevelt to allow U.S. Steel to acquire the Tennessee Coal, Iron and Railroad Company, Morgan was able to prevent another stock market crash. By the end of the year, the Panic of 1907 had ended with Morgan preventing a collapse of the entire financial and economic system of the United States.

http://www.thegoldstandardnow.org/the-panic-of-1907

Before the Fed:  The Recession After the Panic of 1907

In the aftermath of the Panic, there was a lengthy economic contraction from May 1907 to June 1908.  According to economists Christine Romer, Nathan S. Balke and Robert Gordon, the stock of money fell 6.8% from the second quarter of 1907 to the first quarter of 1908 with estimates of real GNP falling from 4.3-5.6% from 1907 to 1908.  Industrial production dropped further than any previous bank run and 1907 saw the second-highest volume of bankruptcies to that date.  Production fell by 11%, imports by 26%, and unemployment rose from under 3% to 8%. The frequency and severity of the 1907 Panic, in addition to the outsized but critical role that Morgan played, created considerable pressure for reform of the financial system.  This reform was directed at the banking system rather than the monetary standard, as the gold standard seemed to be in good working order when the crisis began.

http://www.thegoldstandardnow.org/the-panic-of-1907

1908

Before the Fed: Congress Enacts the National Monetary Commission

The initial response of Congress [to the 1907 panic] was feeble. In 1908 it passed the Aldrich- Vreeland Act, which was designed to make the money supply somewhat more elastic during emergency currency shortages. This was not financial reform but a temporary palliative. Another provision of the law created the National Monetary Commission. This body, composed of nine senators and nine members of the House of Representatives, had the responsibility of making a comprehensive study of the necessary and desirable changes in the money and banking system of the United States.

— p. 16, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

Before the Fed:  Background on the National Monetary Commission

The chairman and dominant member of the commission was Senator Nelson W. Aldrich of Rhode Island, the single most powerful member of the United States Senate and a pillar of the eastern establishment. Aldrich’s prominence and power sharply reflected the political controversies of the period. In the 1890s the rural populists of the South and West had challenged the institutions and the power of finance and business, for they felt that the wealth and “special privileges” enjoyed by the few were resulting in the exploitation of the many.

— p. 17, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

Before the Fed: The Bitter Controversy Between Progressives and Conservatives

In the bitter controversies between the progressives, who generally represented the small business owners and the small town and farming population, and the conservatives, who generally represented the most powerful business and banking groups of the large eastern cities, Aldrich was a central figure. The Rhode Island senator was one of the most prominent critics of the progressives, and the progressives, in turn, found Aldrich to be one of the most bitter and stalwart champions of American conservatism.

— p. 17, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Balancing Act of the National Monetary Commission

While most bankers were interested in reforming the financial structure of the nation to make it more efficient and centralized, the progressives were interested in reforming the financial structure by making the banking system less powerful. The National Monetary Commission, under Aldrich’s direction, was empowered to undertake a broad study of the nation’s financial needs; while the bankers generally applauded the Commission, the progressives viewed it with suspicion, believing that anything Aldrich and the banking community supported would serve their narrow interests rather than the interests of the American people.

— p. 17, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

Before the Fed:  The National Monetary Commission’s 3 years of Exhaustive Study

Over the following three years the National Monetary Commission undertook a broad and exhaustive study of America’s financial needs and resources, conducting investigations and hearings in many American cities and visiting many foreign banking institutions. In January, 1911, Senator Aldrich presented to a group of businessmen in Washington his plan for a reform of the nation’s banking and financial institutions.

Before the Fed:  The National Monetary Commission Plan Strongly Attacked by Progressives

This plan, which was so clearly prepared under the influence of large bankers, was strongly attacked by the progressives and never appealed to the public. Moreover, the conservative Republican Aldrich presented his plan just after the election of 1910, in which the Democrats captured Congress for the first time in nearly two decades while Republican President William Howard Taft, supported by the party’s conservatives, was increasingly besieged by the party’s progressive wing. In short, Aldrich presented his plan just after his party had suffered a serious rebuff at the polls, and while a President sympathetic to his views was under growing attack within his own party.

— p. 18, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

What the Aldrich Plan Called For: The National Reserve Association

The Aldrich plan provided for one central institution, to be called the National Reserve Association, with branches all over the country and with the power to is- sue currency, and to rediscount the commercial paper of member banks. Control of the institution would reside in a board of directors, the overwhelming majority of whom would be bankers.

The Aldrich plan received scant public support and aroused strong opposition.

— p. 18, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

William Jennings Bryan Denounces the Aldrich Plan

Bryan’s denunciation of the Aldrich plan was shared by many leaders of the progressive movement. Though this opposition signaled an early demise for the kind of currency and financial plan that the bankers wanted, two significant events of 1912 helped to prepare the way for passage of a banking and currency reform program which the bankers in general feared, but which the progressives wanted—a reform designed to limit the power of the banking system and put central banking under public, rather than banker, control.

— pp. 18 -19, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

1909

From Sen. Aldrich’s 1909 Address Before the Economic Club of New York on “The Work of the National Monetary Commission” Purpose of the Commission

The immediate occasion which led to the appointment of the [National Monetary] commission was the financial crisis of 1907, whose disastrous results can never be measured, and whose destructive influences were felt throughout the world. The shrinkage in the value of property and securities which then took place, together with losses arising from a paralysis or suspension of business, amounted to thousands of millions of dollars. The country escaped by the narrowest possible margin from a total collapse of all credit and a wholesale destruction of all values.

—http://fraser.stlouisfed.org/docs/historical/nmc/nmc_406_1909.pdf

More From Sen. Aldrich’s 1909 Address Before the Economic Club of New York on “The Work of the National Monetary Commission:” The 1907 Panic

To the great majority of the people of the country the blow came without a warning. Most of our banking institutions were in excellent condition, business of every kind was prosperous, labor was fully employed at satisfactory wages, industries of every kind were flourishing. Our people were full of hope and confidence for the future. Suddenly the banks of the country suspended payment, and acknowledged their inability to meet their current obligations on demand.

http://fraser.stlouisfed.org/docs/historical/nmc/nmc_406_1909.pdf

Even More From Sen. Aldrich’s 1909 Address Before the Economic Club of New York on “The Work of the National Monetary Commission”:  More on the 1907 Panic

The results of this suspension were felt at once; it became impossible in many cases to secure funds or credit to move crops or to carry on ordinary business operations; a complete disruption of domestic exchanges took place; disorganization and financial embarrassment affected seriously every industry; thousands of men were thrown out of employment, and the wages of the employed were reduced. The men engaged in legitimate business and the management of industrial enterprises and the wage-earners throughout the country, who were in no sense responsible for the crisis, were the greatest sufferers.

http://fraser.stlouisfed.org/docs/historical/nmc/nmc_406_1909.pdf

1910

“The Problem Before the National Monetary Commission” by Assistant Treasury Secretary Andrew, 1910

“About three years ago [in 1907] most of us found ourselves in a country where business was conducted by curious methods. It was a large and prosperous country whose people had long prided themselves upon their achievements in business and upon the superiority of their commercial and financial equipment, yet, singularly enough, in all of the leading cities of the country coin and legally authorized currency circulated at a premium, while the usual means of payment were inconvertible notes issued without any sanction of law by banks, railroads, mining companies and other firms. At the time of which I write, conditions had reached such a state of demoralization that any one who had a payment to make and felt so inclined, issued notes instead of paying cash.

— Piatt Andrew, Assistant Secretary of the Treasury and Special Assistant of the National Monetary Commission, delivers “The Problem Before the National Monetary Commission” to the American Academy of Political and Social Science http://fraser.stlouisfed.org/docs/publications/books/bankingprob/1910banking_problems_ch1.pdf and http://ia700400.us.archive.org/4/items/cu31924013951755/cu31924013951755_djvu.txt

“The Problem Before the National Monetary Commission” by Assistant Treasury Secretary Andrew, 1910

These notes in a majority of cases offered no promise of immediate redemption; in the case of some issues they frankly stated that they would only be repaid when the issuers deemed it advisable ; in other cases they stated that due notice of redemption would be given in the daily papers ; occasionally they purported to be payable to Richard Roe or John Smith, or some other fictitious character ; but ordinarily they were launched with the simple statement that they would be received by their issuers and certain other affiliated firms. I made a collection at that time of nearly two hundred different varieties of this peculiar currency and as the occasion will probably never again occur when such a collection of private, illegal, irredeemable paper money can be made in any highly developed country.

— Piatt Andrew, Assistant Secretary of the Treasury and Special Assistant of the National Monetary Commission, delivers “The Problem Before the National Monetary Commission” to the American Academy of Political and Social Science http://fraser.stlouisfed.org/docs/publications/books/bankingprob/1910banking_problems_ch1.pdf and http://ia700400.us.archive.org/4/items/cu31924013951755/cu31924013951755_djvu.txt

1912

Legislative Creation of the Federal Reserve:  the Pujo Hearings

The first significant event of 1912 was the hearings before the House Banking and Currency Committee, the so-called Pujo hearings, which examined the control of the banking and financial resources of the nation. These hearings, which continued into the early months of 1913, apparently persuaded most of the American people that the ultimate control over America’s banking and financial system rested in the hands of a tiny group on Wall Street, the so-called “money trust.” In its report, issued in February, 1913, the committee said, “If by a ‘money trust’ is meant an established and well defined identity and community of interest between a few leaders of finance... which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men... the condition thus described exists in this country today.”

— p. 17, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve: The Election of Wilson to the Presidency

The second event of 1912, crucial to financial reform, was the election of Democrat Woodrow Wilson to the Presidency. Elected on a progressive platform, and with a record as a reformist governor of New Jersey, Wilson pledged himself to financial reform without the creation of a central bank. The new President, however, knew very little about banking, and he had to rely upon others for advice on the shape of his reform proposal. One leading public figure Wilson could not ignore was William Jennings Bryan, and Bryan’s views were a strong force in shaping the financial reform program that ultimately became the Federal Reserve System.

—p. 19, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve: Bryan’s Influence

For years Bryan had a reputation as one of the nation’s most outstanding and enthralling public speakers, but some people who knew him best believed that the power of his oratory concealed the paucity of his intellect.

One of his cabinet colleagues later sneered: “I discovered that one could drive a prairie schooner through any part of his argument and never scrape against a fact or a sound statement." As we have already seen, Bryan had strongly opposed the Aldrich plan as just an attempt to give the big bankers even more power; to Bryan, currency reform and curbing the power of the leading financiers were the very same thing. “The currency can be given all the elasticity it needs without increasing the privileges of the banks or the influence of Wall Street,” he said at one point.

— (p. 20, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve: Wilson’s Influence

[President] Wilson had echoed Bryan’s feelings in the past. A year before his election Wilson asserted, “The greatest monopoly in this country is the money monopoly,” and a few months later he declared that the nation would not accept, “any plan which concentrates control in the hands of the banks.” It was probably a combination of political realities and his own lack of knowledge about banking and finance that caused Wilson to reflect many of Bryan’s views, but after his election to the Presidency, Wilson relied on others for more expert advice on the currency question.

— (p. 20, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve:  the Legislative Sponsors Meet With Wilson

On December 26, 1912, [Senators] Glass and Willis traveled to Princeton, New Jersey to lay their plan before the President-elect. Wilson was suffering from a cold and he canceled all of his other appointments, but he insisted that Glass and Willis keep their interview as scheduled. With great enthusiasm the two visitors presented to Wilson their plan for reforming the financial structure (yet avoiding the creation of a central bank under banker domination) and remedying the classic problems of immobile reserves and inelastic money supply. The Glass-Willis proposal called for the creation of twenty or more privately controlled regional reserve banks, which would hold a portion of member banks’ reserves, perform other central banking functions, and issue currency against commercial assets and gold.

— p. 21, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve: Wilson’s Capstone

[President] Wilson liked much of the Glass-Willis proposal, but he wanted something else added—a central board to control and coordinate the work of the regional reserve banks, what he called the “capstone” to the entire structure. At first Carter Glass was appalled by Wilson’s proposal, fearing that it would result in the same centralization that he had so disliked in the Aldrich plan, but he kept his views fairly quiet and soon his fears faded. The “capstone” that Wilson wanted—a Federal Reserve Board —was to be a public agency unlike the banker-dominated central bank of the Aldrich plan. The Glass-Willis proposal of December, 1912, with Wilson’s modifications, formed the basic elements of the Federal Reserve Act signed into law in December, 1913.

— p. 21, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve: The Meeting on Jekyl Island

In 1912, [Harry] Davison, now a Morgan partner, frustrated by the lack of progress and fearing that without changes the next panic would be even more catastrophic, set out to convene a meeting of experts to develop a formal plan to establish an American central bank—the third in the nation’s history. Only five men were invited. Besides Davison himself, there was Senator Aldrich, Frank Vanderlip, the forty-eight-year-old president of the National City Bank, the largest in the country, Paul Warburg, of the well-known Hamburg banking family, a forty-two-year-old partner at Kuhn Loeb who, although he had only just moved to New York, was probably the greatest expert on central banking in the United States; A. Piatt Andrew, Jr., the thirty-nine-year-old assistant secretary of the treasury, who had been a professor at Harvard and accompanied the original commission on its European study tour, and Benjamin Strong, then thirty-nine-years old.

— Liaquat Ahamed, Lords of Finance (Penguin Books, 2009, p. 54)

The Creation of the Federal Reserve: The Departure for Jekyll Island

Picture a party of the nation's greatest bankers stealing out of New York on a private railroad car, hieing hundreds of miles south to an island deserted by all but a few servants, and living there a full week under such rigid secrecy that the name of not one of them was once mentioned lest the servitors learn their identity and disclose to the world this historic episode in American finance.

B.C. Forbes’s Men Who Are Making America (1922 p. 398)

The Creation of the Federal Reserve: Secrecy Maintained

After a journey hedged with the utmost secrecy, the party were landed in a small boat at the deserted Jekyl Island, off Georgia.

"The servants must under no circumstances learn who we are," cautioned Senator Aldrich.

"What can we do to fool them?" asked another member of the group. The problem was discussed.

"I have it,” cried one. "Let's all call each other by our first names. Don't ever let us mention our last names."

It was so agreed.

— B.C. Forbes’s Men Who Are Making America (1922 p. 399)

The Creation of the Federal Reserve:  The Planning Begins

After a general discussion it was decided to draw up certain broad principles on which all could agree.  Every member of the group voted for a central bank as being the ideal cornerstone for any national banking system. One by one other features were brought forward and carefully pondered. Day after day for more than a week these giant intellects wrestled with their colossal problem. They worked not five or eight hours a day, but all day and far into the night.

As quietly as they had left, the authors of the epochal Aldrich report disappeared from Jekyl Island and slipped into New York undetected.

— B.C. Forbes’s Men Who Are Making America (1922 p. 399)

The Creation of the Federal Reserve:  The Role of Warburg

Paul M. Warburg more than any other man had made banking reform possible in this country. Trained scientifically in European national and international banking, our anachronistic currency system shocked him.

“The United States is at about the same point that had been reached by Europe at the time of the Medicis.   We have been shown bricks of the time of Hammurabi, the Babylonian monarch, evidencing the sale of a crop and similar transactions, and I am inclined to believe that it was as easy to transfer the ownership of these bricks from one person to another as it is to-day for an American bank to realize upon its discounted paper, if indeed it was not easier.”

— B.C. Forbes’s Men Who Are Making America (1922 p. 400)

1913

The Enactment of the Legislation:  The Brandeis Compromise

Buffeted by this conflict within his Administration, President Wilson sought a compromise that could please both Glass and Bryan and then win the support of Congress, yet a compromise that would genuinely resolve the banking and currency problem. To sharpen his own thinking, Wilson sought the advice of the man whose opinions on economic matters he respected above all others, the prominent attorney Louis D. Brandeis. Brandeis, a man of undeniable brilliance, sided with Bryan on two key points: first, he believed that bankers must be excluded from control of the new system; and second, he believed that the Federal Reserve currency must be made an obligation of the United States government. “The conflict between the policies of the Administration and the desires of the financiers and of big business, is an irreconcilable one,” Brandeis told Wilson. “Concessions to the big business interests must in the end prove futile."

— p. 27, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve:  Wilson Meets with Glass

After several conferences, Wilson met on June 17 (1913) with Glass, Secretary of the Treasury William G. McAdoo, and Senator Robert Owen of Oklahoma (chairman of the newly created Senate Banking and Currency Committee and a supporter of Bryan’s views), and he told them that he would insist upon exclusive government control of the Federal Reserve Board and would insist upon making Federal Reserve notes the obligation of the United States. The former was clearly a victory of substance for the Bryan group, while the latter point was merely a victory of form.

— pp. 22, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve:  What Bryan Wanted and Got

What Bryan and his followers really wanted was the retirement of national bank notes and their replacement by a supply of paper money issued on the initiative of public officials and backed up only by the government’s promise to pay. What Bryan really got, however, was just the addition of relatively meaningless language to the basic provisions of the Glass bill. The Glass bill provided that Federal Reserve notes would be issued by the regional reserve banks against their own commercial assets and a 331/3 percent gold reserve, and the change which placated Bryan and other progressives was the mere declaration that these notes were obligations of the federal government. This additional language did not change the essential character of Federal Reserve notes as asset currency. Glass had been initially disappointed with Wilson’s request for a public board to control the new system, but seeing that this was the absolute minimum that Bryan demanded, Glass had no real alternative but to accept it.

— p. 23, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve:  How Bryan Saved It

With the agrarian opposition still a threat to the passage of the bill, the most prominent agrarian radical in the country—Secretary of State William Jennings Bryan—moved dramatically to save it. Promising that the Ad- ministration would work to deal with the problem of interlocking directorates in the antitrust bill, Bryan asked his friends to stand by the President and support his banking program. Bryan’s prestige was so great in the rural areas that his forceful advocacy shattered the radical opposition within the House, and the House Democratic caucus overwhelmingly approved the measure by the end of August. This approval meant that the Federal Reserve bill was a party measure, binding on all House Democrats.

— p. 27, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve: The Role of Public Support

Continuing public support for the Federal Reserve bill hastened final Senate action in December. Respected conservatives continued to speak in opposition—Republican Senator Elihu Root of New York called the bill “financial heresy”—but they were overshadowed by the steady support from Progressive leaders, and the growing support for the bill among organized business opinion and a growing minority of bankers. On December 19 the critical vote was taken in the Senate, and the Federal Reserve bill was narrowly preferred over the modified Vanderlip plan by a margin of only three votes, 44 to 41. A few hours later the Senate passed the Federal Reserve bill itself, 54 to 34.

p. 31, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

The Creation of the Federal Reserve: Signing of the Act

On December 23, just a few hours after the Senate had completed action, President Wilson, surrounded by members of his family, his cabinet officers, and the Democratic leaders of Congress, signed the Federal Reserve Act. “I cannot say with what deep emotions of gratitude... I feel,” the President said, “that I have had a part in completing a work which I think will be of lasting benefit to the business of the country.”

The Federal Reserve Act was now law, and of all the men who deserve credit for this major reform of America’s banking and currency system— Nelson Aldrich, Carter Glass, Robert Owen, William McAdoo, H. Parker Willis, and even William Jennings Bryan—none deserves more credit than President Wilson himself. Withstanding the contrary demands of the private bankers on the one hand and the agrarian radicals on the other, the President had supervised the development of a bill and had skillfully commanded Democratic support for it and led it through the congressional thicket.

—p. 32, “Historical Beginnings. The Federal Reserve” by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)

 

Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

In Memoriam
Professor Jacques Rueff
(1896-1978)

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