6. The Federal Reserve System (1913)

 

There were two deficiencies of the National Banking System in the eyes of the bankers, which meant that they couldn’t expand credit as much as they wanted to:

• There was no single central bank for which all authority in the cartel derives.
• There was no “lender of last resort”, which had boosted individuals’ confidence so much in British banking system, and often prevented the whole British system from collapsing.

 

Additionally, centralized control of the National Banking System was slowly being lost; state banks became more powerful, operating with very low reserves, while the national banks became relatively less powerful, restrained by the high reserve requirement of 25% set by the National Banking Acts.  Moreover, the Wall Street banks in New York were losing their status as the only “central reserve city” banks; banks in Chicago and St Louis were declared central reserve city banks following impressive growth in those cities relative to New York.

 

The bankers started complaining to government that their National Banking System needed to be changed.  They called for greater “elasticity”, a euphemism meaning that they wanted to be able to expand faster, and for the establishing of a lender of last resort: a proper Central Bank. 

 

The bankers, led by J.P. Morgan and J.D. Rockefeller, joined forces to defeat Bryan, by supporting Republican President William McKinley (1896-1901).  Calls for an overhaul of the system began in earnest in 1896.  The bankers pointed to panics of the 1880s and 1890s as a justification for a lender of last resort.  They encouraged the view “greedy commercial banks” needed to be regulated by an “impartial, bi-partisan, non-political” central bank so that the currency could be “stabilized” (that it was the bankers who were calling for the central bank was taken as testament as to their nobility and altruism).  In fact, the same people that ran the commercial banks would run the central bank, and the currency would be anything but stabilized.  With a central bank, they said, a constant booming economy would be possible, and credit would not have to be contracted during a recession – new money could be created to ensure “liquidity” is always sufficient.

 

J.P. Morgan, a wealthy industrialist as well as banker, had been trying to set up monopolies and cartels in other industries on the free market for some time in the late 19^th century.  With their man William McKinley in office, the so-called Progressive Era (the “Great Leap Forward”), lasting from about 1900-14, was ushered in.  It was a period of massively increased government regulations and grants of special monopoly and cartel privileges.  It seemed as though cartelized banking – a central bank – was finally a real prospect again for the bankers.  But the public, highly and rightly suspicious of “the money powers”, needed special convincing.

 

And so, the big businesses and big financiers formed an alliance with the media and the opinion-molders of society – journalists, intellectuals, economists and other academics, professionals, educators and ministers.  With the help of these people, the public can be fooled into thinking that a central bank is in their interest, and will accept a new system.  Already enamored by the ideals of Prussian Statism, the opinion-molders readily accepted the challenge laid down to them by the bankers.  The line they would take is brilliant and worked wonderfully.  They would claim that monopolies and cartels were evil and happening on a free market, so government regulation was needed to temper the whims of the big, evil capitalists; the precise opposite of the truth.

 

It became far easier for opinion-molders to sell the idea of a central bank after 1900, when both the Republican and the Democratic Parties were ideologically very similar; neither party was opposed to Statism, Progressivism, or central banking.  Indeed, “Democrat” versus “Republican” became largely irrelevant.  What did become relevant was which opposing group of the power elite would get to call the shots.  Opposing the Morgan interests, were the interests of the Rockefeller-Harriman and Kuhn, Loeb alliance.

 

William McKinley was in the Rockefeller camp, while his vice-president, Theodore Roosevelt, was in the Morgan camp.  After McKinley’s assassination in 1901, Roosevelt assumed the Presidency (1901-9).  He attempted to pass legislation that would have ended the monopoly of Rockefeller’s Standard Oil, and so began a struggle between the two groups for control.  President William Taft, on the other hand, was in the Rockefeller camp, and hit back by threatening Morgan interests.  The Morgan camp responded by supporting a run for a third term as president by Theodore Roosevelt, under the banner of the new Progressive Party.  The Republican vote was split.  This was the intention of the Morgan camp; they were also supporting Progressive Democratic President Woodrow Wilson (1913-1921).  Wilson had promised the banking interests that he would authorize the creation of a central bank.

 

The opposing camps among the power elite were often in conflict at this time, but on many things, both camps agreed – they both wanted a strong centralized government, with high taxation and high spending, and, above all, a central bank.

 

In the two years leading up to the Panic of 1907, inflationary spending by the government, as always, created distortion and malinvestments.  When the bust came, the bankers unanimously declared that such a panic would not have happened had there been a central bank to act as lender of last resort.  Led by Nelson Aldrich, Rockefellers’ man in the Senate, the elite banking families joined forces to push for a central bank.

 

After laying the groundwork using the opinion-molders, leading figures in the major banking families met in secret at Jekyll Island in 1910 to finalize the central banking bill.  Banker Paul Warburg conceived the notion of calling it a “reserve bank” due to the stigma associated with the name central bank.  Identified as a bankers coup, the Aldrich Bill had to be abandoned.  The Federal Reserve Act – virtually identical to the Aldrich Bill - was passed unanimously in Congress on 22 December 1913, after most Congressmen had already gone home for Christmas.  The bill was signed into law by President Woodrow Wilson, as promised.  In the same year, the income tax was introduced (with a promise, which lasted barely a year, to never raise the income tax rate above 1% for low income earners!).

 

Finally, the global elite had succeeded in establishing a central bank in the United States.