Roger Lowenstein - Americas Bank: The Epic Struggle to Create the Federal Reserve

S O PERVASIVE IS ITS INFLUENCE that Americans today can scarcely imagine a world without the Federal Reserve. To begin with, the FedAmericas central bankissues the Federal Reserve notes that we call money. It sets the short-term interest rate that affects the market for mortgages, car loans, corporate debt, and even the level of the stock market. It manages, sometimes adroitly and sometimes wantingly, the supply of credit whose ebb and flow alternately buoys and batters business. It supervisesor it is supposed to supervisethe nations banks. And as Americans were vividly reminded during the meltdown of 2008, the Federal Reserve acts as the lender of last resort, providing loans to banks when credit shuts down.

Barely a century ago, the Fed did not exist. Every other industrialized nation had such a central bank to oversee its banking system and to assure stability, yet Americas financial systemif system one can call itwas antiquated, disorganized, and deficient. The United States boasted the worlds largest economy, its vast territory was ribboned with railroad tracks and telephone wires, its cities were bursting with factories churning out iron and steel. Yet, almost as if history had missed a turn, its banks were disconnected and isolated, left to prosper or flounder (or fail) according to the reserves of each individual institution. As Paul Warburg, one of the heroes of this story, was to observe with his trademark acuity, Americas banks resembled less an army commanded by a central staff than they did an inchoate legion of disjointed and disunited infantry. It was hardly surprising that throughout the latter half of the nineteenth century and into the early twentieth, the United Statesalone among the industrial powerssuffered a continual spate of financial panics, bank runs, money shortages, and, indeed, full-blown depressions.

This book tells the story of how, culminating in the days before Christmas 1913, the Federal Reserve came to be. It was not a gentle or an easy birth, nor was it swift. To Americans of the early twentieth century, especially farmers, the prospect of a central bank threatened the comfortable Jeffersonian principle of small government. To a people for whom local autonomy was sacrosanct, the notion of a powerful bank, joined to the even more powerful federal government, was deeply unnerving. Opposition to central authority had animated the minutemen at Lexington and Concord, and the battle to establish the Fed resembled a second American revolutiona financial revolution.

America had, of course, experimented with central banking early in its history. After the War of Independence, a military success but a financial disaster, the government was saddled with debt. When in due course the Constitution was ratified, providing a greater degree of political unity, a financial equivalent, a Bank of the United States, modeled after the Bank of England. Thomas Jefferson was mightily opposed, as were his many followers. Nonetheless, President Washington was persuaded, as was a majority of Congress, and in 1791, the Bank, headquartered in Philadelphia, opened for business.

was a strange beast, 20 percent owned by the government and 80 percent by private investors. It was authorized to hold the governments deposits but not, specifically, to be the nations monetary steward or to perform other functions of a central bank. Nonetheless, the Bank began to play this role. In particular, it strengthened the previously shoddy credit of the federal government. The twenty years of its initial charter were generally prosperous, and the number of private banks, which received charters from the states, swelled from five to more than one hundred.

by the rise of the anti-federalists, both in the White House, in the person of James Madison, and in Congress. Rechartering failed by one vote in each chamber. Thus, in 1811, America was returned to a condition of monetary innocence, or laissez-faire, money again being the business of individual banks in the states, each of which issued notes according to its respective powers. Inflation followed, and when the governments credit became overtaxed by the War of 1812, banks suspended operations, causing Madison to rethink matters. In 1816, Congress, now with Madisons endorsement, chartered the Second Bank of the United States.

The Second Bank, though endowed with more capital, was in most respects a replica of the first. It succeeded at restraining the state banks from issuing too many notes, thus keeping a lid on inflation. It worked to mute excesses in the business cycle. And the Banks notes were widely accepted as a common currency, no small thing for a nation pushing across an unsettled continent. But the Second Bank met a fate no better than the first. Although Congress approved its recharter, the margin was not sufficient to override the determined veto of Andrew Jackson. In 1836, the national bank was, for the second time, allowed to expire. Once again, the country experienced an inflation, this time followed by a severe depression. In 1841, Congress chartered a third bank. President John Tyler, a southerner preoccupied with states rights, vetoed it. And there, for some seven decades, matters rested.

Given the two Banks overall effective records (and allowing for some stumbles by each), the question must be asked: Why such a haste to abolish them? Despite their success, many Americans regarded the Banks with profound suspicion. Alexis de Tocqueville, the French political thinker who toured Jacksonian America, noticed in his travels through what was still a frontier society a pair of seemingly inconsistent facts. The notes of the Second Bank were valued equally on the edge of the wilderness as they were in Philadelphia, testifying to the peoples general regard for its credit; nonetheless, the Bank had become the by one great fear, which he identified as fear of a tyrannical government or, as he put it, of centralization. De Tocqueville was plainly bewildered. To himto most any Frenchmanthe Bank of France seemed a natural outgrowth of the national government, no less French than the Court of Versailles. But in America, such a bank did not seem natural. It reawakened Americans primal anxieties, the colonials fear that their hard-won liberties would be crushed by a far-off king.