America's Bank: The Epic Struggle to Create the Federal Reserve

“If men were angels, no government would be necessary,” James Madison famously wrote. The same could be said of bankers. If bankers were angels, there would be no need of a central bank. Creation of the nation’s central bank—the Federal Reserve—is the subject of Robert Lowenstein’s informative and highly readable book, but the underlying theme is of trust, as in, who do you trust? Since the beginning of the American republic, Americans trusted neither governments nor banks, particularly central governments and central banks, such as ruled the British Empire from London and governed the affairs of the American colonies—until ties were severed by the American Revolution. After the Revolution, the original 13 states struggled politically and financially until the enactment of the Federal government in 1789 and the establishment of the nation’s first central bank in 1791, the Bank of the United States. Both worked exceedingly well, so much so that Thomas Jefferson feared a new monarchy in the making and ran for president determined to reduce the power of the federal government and do away with the bank altogether. In spite of Jefferson’s antipathy, the central bank proved necessary as a lender of last resort and survived for another 36 years—until the presidency of Andrew Jackson. By then, the bank had become the object of intense hatred by Jackson as well as by working Americans. De Tocqueville, touring America at the time, was plainly bewildered. To him, as to most Frenchmen, the Bank of France seemed a natural outgrowth of the French national government. But in the U.S. the central bank reawakened Americans’ primal anxieties, the colonials’ fear that their hard-won liberties would be crushed by a far-off monarch and his scheming money men. Jackson destroyed the bank and was hailed as a hero for the next 80 years, despite a series of financial panics, bank runs, money shortages, and full-blown depressions that might have been averted or lessened had there been a lender of last resort—a central bank.In 1907, after a particularly nasty panic that was arrested only by the deep pockets of J.P. Morgan (acting as a lender of last resort) opinion began to change. Two politicians and four Wall Street bankers decided it was time to do something about it. Secretly, they boarded a train for a rural island off the coast of Georgia, to a private resort known as the Jykell Island Club. The politicians were Nelson Aldrich (a U.S. Senator), and A. Piatt Andrew (the Assistant Secretary of the Treasury). The Bankers were Henry Davidson (J.P. Morgan and Company), Paul M. Warburg (Kuhn, Loeb and Company), Benjamin Strong (Bankers Trust of New York), and Frank A. Vanderlip (National City Bank). Why a secret meeting? Because Senator Aldrich—the head of a joint Congressional committee studying the bank issue—needed help. If it were known that he was calling on Wall Street bankers to help him prepare his report and bill, it would’ve been fatal. After all, everyone knew bankers couldn't be trusted. Yet these particular bankers were well educated, convinced change was necessary, and possessed the very insider information Senator Aldrich needed to write an effective bill. What they worked out closely approximated what would become the Federal Reserve Bank. A spate of obstacles lay in the bill’s passage, including famed populist William Jennings Bryant (a noted bank basher and Jacksonian Democrat), a nation of Americans still radically opposed to a central bank, bankers in general, newspapers and politicians—in effect, nearly everyone. But things were changing. Progressivism was on the rise—antitrust laws were in force, women were campaigning for the vote, and a bill for the direct election of senators was before Congress. While opposition to a central bank remained strong, everyone knew something needed to be done to prevent another run on banks.Enter Woodrow Wilson. Wilson was a Democrat and a good friend of William Jennings Bryan. Unbeknownst to Bryan, Wilson favored a central bank. Despite being a member of the party of Jefferson and Jackson, Wilson thought highly of Alexander Hamilton, the founder of the Bank of the United States. He labeled Hamilton as “one of the greatest figures in our history.” And Jefferson? “A great man, but not a great American.” At the time Wilson wrote these words, he was the president of Princeton University. By the time Congress was looking into the possibilities of a central bank, Wilson was governor of New Jersey. In 1912, he ran for president. With the much-needed support of Williams Jennings Bryan (coupled with division within the Republican Party), he was elected president. He appointed Bryan Secretary of State and gradually brought him around to supporting a central bank. Congress, meanwhile, was having trouble hatching out a bank bill that would pass both houses. They were about to adjourn for the summer when Wilson intervened. Exercising his power as president, he ordered Congress to stay in session until they had a bill ready for his signature. All that long, hot summer and into the fall Congress wrestled over the bill, considering input from a variety of sources, including President Wilson. On December 23, Congress presented a bill for the president’s signature, which he signed into law.According to Vanderlip, the Federal Reserve Bill, despite undergoing a variety of back-and-forth changes, still looked very much like the original bill that had been drafted on Jykell Island. The Federal Reserve would be comprised of a central bank in New York and 12 branches spread across the country. There would be a seven-member Federal Reserve Board appointed by the President and approved by the Senate. The Board would oversee the district banks, generally regulate the banking system and set national monetary policy. Each of the 12 branches would have its own board of directors. There would be a single national currency, backed by one of the 12 branch banks and would be redeemable in gold. Indeed, for the first time, the United States government would begin printing paper money, which before had been the domain of state banks.There is much more to Mr. Lowenstein’s book, especially about the wild and woolly state of banking and paper money in all its forms, prior to the creation of Federal Reserve System. Prior to the Fed, any strain placed on the American banking system—if it can be called that—might cause the financial collapse of hundreds of banks overnight and the nation tumbling into yet another recession. Indeed, prior to the Fed, the American economy had nothing behind it to prevent a recession, which is tantamount to a wire walker working without a net. Mr. Lowenstein’s book reads like a novel, and like a novel, has its share of heroes and villains. Five stars.

I thought this was very informative book on the origins of the Federal Reserve. It discusses comprehensively the three-way battle over the issue: the bankers' (especially those in New York City) and the Republican Party desire for a central "lender of last resort" under the banks' control to avoid future financial panics such as occurred in 1907, the Democratic Party rural and small-town supporters' abhorrence of anything smacking of federal government control over banking, and the rising "Progressive" wing of the the same Democratic Party demanding public control over the large big city banks and corporations in general.I suspect that most people would not find this to be a very simulating subject. I thought Lowenstein did a commendable job making it as interesting a story as can be made. He describes in detail the congressional politicking that created the resulting Federal Reserve Act of 1913. President Woodrow Wilson deserves more credit for the Act than he is usually given.

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.

Nice reading.enjoyeditalot.thanks.