Key Messages
The History of the US Federal Reserve: Understand Today’s Market Struggles through the Lens of the Fed’s Founding Story
When it comes to understanding how the United States Federal Reserve functions and why it was created, you need the straight facts.
America’s Bank provides a clear and concise history of the Fed and its many challenges over the years.
In these sections you’ll learn how this centralized banking system helps control economic flows, how the plan to establish the Fed came to be, why Woodrow Wilson’s character enabled bankers and politicians to be part of this endeavor, and why there’s been such an enduring populist anger against Wall Street since its inception.
Tracking the long historical roots of this bank will help shed light on today’s financial markets and instill a greater understanding of why it is necessary.
Get all of your questions answered in one place with America’s Bank Book Summary.
From Population Fears to Presidential Vetoes: The History of US Federal Reserve Opposition
When Andrew Jackson became the 7th President of the United States in 1836, he opposed any plans for creating a central bank.
This was because he was suspicious of how such an institution would concentrate too much power into the hands of only wealthy individuals and minority groups.
His views reflected the popular sentiment at that time – that banks were undemocratic and unjust forces.
This ultimately proved to be fatal to the ambitions surrounding a US Federal Reserve as Jackson vetoed any attempts to renew the charter for the Second Bank of the United States.
Anti-federalist opinions had prevailed prior as well, as protests blocked its original charter in 1791 for a First Bank of the United States for 20 years.
Without a federal bank in place, citizen’s were left with regional and state banks issuing their own currencies during War of 1812 against Britain which caused chaos due to lack of regulation.
Businesses later called upon centralised tariffs and regulation while attempting to regain control over their markets, which led to establishment of Second Bank but it too soon perished when President Jackson put his foot down.
The Panic of 1907: How a Lack of Centralized Banking Contributed to a Financial Crisis
The Panic of 1893 and the market crisis of 1907 made it clear to the American public that their regional banks were unable to stabilize the economy when faced with outside threats.
These events eventually led to a push for a stronger central bank, as people grew tired of having to rely on individual financiers or banking moguls like J.P.
Morgan in times of panic and liquidity failure.
Trusts played an important role in this debacle – these companies achieved monopolies in certain unregulated markets, cornering their shares and allowing them to determine prices on their own accord.
The United Copper Company was especially destructive because they borrowed too heavily while underestimating how much money they needed to achieve a monopoly; plus, they didn’t have the money to pay off debts owed to creditors nor banks.
This widespread fear affected both private companies and public financial institutions alike, spurring people into action as they frantically withdrew their savings from already-stretched banks.
Without a centralized institution like a central bank, the US economy effectively came crashing down as it had no other alternative source of funds during such crises.
The Progressive Era Brought Much-Needed Regulation and Centralization to the Banking System
The Progressive Era marked a major political shift that would shape the banking and finance sector of the United States for decades to come.
This period, which lasted from the 1890s to the 1920s, was characterized by major social and political reforms such as women’s rights and black civil rights movements.
These drives for change also helped to push forward policies that sought to increase government oversight over banking operations, in order to protect consumers from market-based risks.
A consensus among white American male politicians had emerged during this time, recognizing that measures needed to be taken in order to prevent trusts and monopolies from forming.
In addition, it became clear that a central bank should be established in order to regulate the US banking system.
This movement gained more traction when The Panic of 1907 exposed some of the flaws with believing only in self-regulating economic markets without government intervention.
This crisis also revealed how businesses might take advantage of consumers without stricter regulations being imposed, such as on Wall Street where many individuals made risky investments without owning any actual assets.
The Birth of the Federal Reserve: How a Secret Island Summit Led to a Powerful Central Bank
An influential group of lawmakers and bankers met in secret to discuss the creation of an American central bank.
This historic meeting, which took place on an island off the coast of Georgia in 1910, was lead by Republican Senator Nelson Aldrich from Rhode Island.
Aldrich had changed his mind about a central bank after experiencing the Panic of 1907.
He became convinced that such a system would provide great stability to the economy after seeing how much success Europe’s bank had with this model, specifically noting England’s 1694 establishment of their own central bank.
His interest was supported by Paul Warburg, a German-American banker who shared his own expertise and devotion surrounding European banking systems.
However, Warburg and Aldwin faced differences when discussing the best regularity policies for America’s new central bank.
Warburg wanted strong government influence while Aldrich proposed leaving oversight up to a small group of regional banker and politicians but failed to get approval from backers on either extreme — Republicans wanted little governmental participation while Democrats desired more regulation of banks with mistrust still lingering over Andrew Jackson’s tyranny against banking institutions during his time in office.
Jekyll Island Meeting Yields the Aldrich Plan to Unify Banks and Establish Currency, Paper Money
The Aldrich Plan was the prototype for what eventually became the Federal Reserve Act in 1914.
The Plan had three main objectives which would be essential to the Federal Reserve System as it exists today.
First, by uniting all of the previously independent state banks into a unified system, it enabled smoother interstate commerce and uniform exchange rates between states.
Second, it sought to establish a commonly accepted standard currency, lending legitimacy and significance to the newly formed banking network by ensuring that the same currency would be used throughout the U.S., giving each dollar bill equal value wherever it was accepted.
Woodrow Wilson’s Passion for Financial Reform Leads to the Creation of the US Federal Reserve Act
Woodrow Wilson’s presidency was highly symbolic of a compromise between the political ideologies of Republicans and Democrats.
As such, it was his unique point of view that helped pave the way for the adoption of the Federal Reserve Act in 1913.
Wilson believed in both a strong federal government as well as aspects of laissez-faire economics, providing an ideological location to bridge both views together.
He viewed banking reform as a way to lessen corporate influence while also providing credit access to businesses and individuals alike.
Furthermore, he looked at a federal central bank as a means to provide better access to credit by acting as the “lender of last resort” during times of need.
This clever compromise between ideas allowed him to not only get the Federal Reserve Act passed but also emphasized two further points: making US currency more elastic based on demand and requiring banks have reserves on hand during an economic crisis.
With these key factors in place, President Wilson was able to get the act through Congress and sign it into law on December 23, 1913.
His position of compromise provided the necessary groundwork for its passage and ultimately steers today’s banking system even up until today.
The Establishment of the Federal Reserve Signalled the Expansion of its Powers and Gave the United States International Recognition
The Federal Reserve has always been known as a powerful institution in the US, but its true capabilities were revealed during World War I.
With the help of low interest rates and the ability to lend money, the Federal Reserve was able to provide assistance to the economies of Britain and France by exporting food and other supplies.
This helped both countries recover economically by stimulating demand for American goods and stabilizing their financial systems.
Paul Warburg, who was Chief of the Board of Directors of the Fed, also played an important role in this effort.
Despite a potential conflict of interest from his affiliation with financial company Kuhn & Loeb, Warburg was able to sever ties with the firm in order to appease his detractors.
With its ability to exercise influence over domestic and international trade activities, Congress allowed the Fed to issue banknotes which doubled the amount of money in circulation within a few short months.
This significant expansion in power enabled America’s central bank to show it could be a vital part in supporting Allies’ recovery during wartime—an achievement that earned it international recognition.
How History Is Repeating Itself in the Banking Industry: Examining the Legacy of The Federal Reserve Act and its Impact on Current Social Activism
It may feel like history is repeating itself when it comes to the Federal Reserve and the concerns about its power.
Today, just as in the past, people are questioning the actions taken by banks and whether governments have sufficient control over them.
The Panic of 1907 highlighted how a lack of government oversight could be disastrous for everyone, showing that even an institution such as the Fed can put profit-seeking ahead of its primary goal of stabilizing financial systems.
More recently, during the 2008 financial crisis, people were buying homes they couldn’t afford due to an inflated housing market bubble which ultimately burst, leading to great economic hardship both for individuals and businesses.
These issues have sparked a great amount of social activism aimed at reforming banking regulations, similar to what was seen in America during the early 1900s with bank reformers pushing for passage of the Federal Reserve Act.
The Citizen’s United case from 2010 provided corporations with legal rights equal to individuals without any added duties or accountability – something which still continues to draw protest from political organizations today who call for more corporate responsibility and fair prosecution for wrongdoings in the financial sector.
So at its core, today’s questions about the Fed are essentially still those asked by previous generations – it’s just a different generation asking them.
Wrap Up
America’s Bank: A History of the Federal Reserve System is an insightful and informative book that should be read by anyone looking to better understand the United States’ banking system.
The book tells the story of how, in 1913, the US established its first central bank known as the Federal Reserve.
It details how, since then, it has fought to maintain goals of alleviating financial crises while also managing competing interests.
In addition to providing historical context, America’s Bank offers practical advice that readers can take away with them.
It reminds readers that whenever they hear calls for change within an institution or organization, they should do more research on it by looking into its history.
Doing so will bring greater understanding about why certain changes may or may not be necessary.
