The story of the creation of the Federal Reserve.
In the mid-19th century, American banking was antiquated and chaotic. In other industrialized nations, centralized banking systems ensured monetary stability. By contrast, the banks in the United States were “disconnected and isolated, left to prosper or flounder (or fail) according to the reserves of each individual institution.” Most were small, rural institutions chartered by state governments and issuing thousands of currencies. As a result, there were frequent “financial panics, bank runs, money shortages, and indeed, full-blown depressions,” bank failures, and note forgeries were commonplace. But as veteran financial journalist Lowenstein (The End of Wall Street, 2010, etc.) makes clear in this dramatic creation story, Americans remained wary of the idea of a central bank. “When the subject was money, central authority had always been taboo; it was a demon that terrified the people,” he writes. Mainly rural Americans favored “the comfortable Jeffersonian principle of small government.” After the severe Panic of 1907 (when financier J.P. Morgan stepped in to shore up the banking system), Sen. Nelson W. Aldrich formed a commission whose investigation of the crisis paved the way for passage of the Federal Reserve Act of 1913. Lowenstein traces the heated congressional battles that led to establishment of the Federal Reserve System, consisting—then as now—of 12 banks with power shared between the federal government and private banks and with responsibility for supervising the banking system, setting short-term interest rates, and guiding national monetary policy. His well-researched account for general readers takes us from Aldrich’s secret meeting with leading Wall Street figures on Jekyll Island, off the Georgia coast, to plot banking reforms, to Woodrow Wilson’s Princeton bedchamber, where the ill president persuaded Virginia Congressman Carter Glass of a key compromise to ensure creation of a national bank.
Lowenstein doubts the Federal Reserve Act could be passed in today’s volatile political climate, but he provides an unusually lucid history of our nation’s central bank.