The US started life as a Constitutional Republic. Its power came from the people, not the government or a monarchy, as it did in Europe. The constitution promoted a decentralised power structure, rather than a centralised one.
But that changed in the Gilded Age.
As Murray Rothbard writes in A History of Money and Banking in the United States:
‘By the turn of the century the political economy of the United States was dominated by two generally clashing financial aggregations: the previously dominant Morgan Group, which had begun in investment banking and expanded into commercial banking, railroads and mergers of manufacturing firms; and the Rockefeller forces, which began in oil refining and then moved into commercial banking, finally forming an alliance with the Kuhn, Loeb Company in investment banking and the Harriman interests in railroads.’
With the banking interests and alliances of the country now roughly established, the move to centralise banking could begin.
The common perception is that the origins of the US Federal Reserve began with the Panic of 1907. At the height of the panic, J P Morgan had to provide liquidity to the market to alleviate the stress. This wouldn’t do for an emerging power such as the US. And so, it is widely believed, planning for a central bank began.
But according to Rothbard, the first step towards a modern central bank took place in 1897, at the Indianapolis Monetary Convention. While on the surface this was a Midwestern convention of ‘businessman’, it was really under the control of the leading banking interests.
‘Let the masses be hoodwinked into regarding the Indianapolis Monetary Convention as a spontaneous grassroots outpouring of small Midwestern businessman. To the cognoscenti, any organisation featuring Henry Payne, Alexander Orr, and especially George Foster Peabody meant one thing: J.P Morgan.’
The convention urged President William McKinley to continue the gold standard, and create a new system of elastic bank credit. (In other words, have a lender of last resort when money became tight.)
A second convention took place a year later, bringing together 496 delegates from 31 states.
The second convention again called for a ‘central bank that would enjoy a monopoly of the issue of bank notes.’
So as you can see, the seed was planted more than 15 years before the Fed become a reality. (The Federal Reserve came into existence in 1913.)
The intervening years involved recruiting all hands on deck to ensure the necessary support for the creation of the Federal Reserve. The academics, intellectuals, and technical experts provided cover for the bankers.
The aim was to ensure that the idea of a central bank was broadly supported, and that it didn’t just come from the bankers who so desperately wanted it.
On this front, the Panic of 1907 was a Godsend. As Rothbard writes:
‘Very quickly after the panic, banker and business opinion consolidated on behalf of a central bank, an institution that could regulate the economy and serve as a lender of last resort to bail banks out of trouble. The reformers now faced a twofold task: hammering out details of a new central bank, and more important, mobilising public opinion on its behalf. The first step in such mobilisation was to win the support of the nation’s academics and experts. The task was made easier by the growing alliance and symbiosis between academia and the power elite.’
After a few more years, a number of conferences, commissions, and countless research papers, the financial elites were ready to draft a central bank bill.
In November 1910, six men boarded a private railroad car in secret in New Jersey, and set off for the Georgia coast. Their destination was the exclusive retreat, the Jekyll Island Club, co-owned by J P Morgan. It was here they would work to forge a plan for the nation’s central bank.
The six men were:
- Nelson W Aldrich: Senator and head of the Senate Finance Committee, head of the National Monetary Commission and, oh, father-in-law of John D Rockefeller.
- Henry P Davison: J P Morgan Company senior partner.
- Paul Warburg: Brother of Max Warburg, head of the Warburg banking consortium of Germany and Netherlands. He was also a partner of Wall Street Investment Bank, Kuhn, Loeb and Company, a representative of the Rothschild banking dynasty in England and France.
- Frank A Vanderlip: President of the National City Bank of New York, the most powerful bank of the time, and representative of William Rockefeller (John’s brother) and Kuhn, Loeb and Company.
- Charles Norton: President of J P Morgan’s First National Bank of New York.
- Abraham Piatt Andrew: Assistant Secretary of the US Treasury.
There is conjecture as to whether Benjamin Strong was also in attendance. Strong was head of J P Morgan’s Bankers Trust Company at the time, and would later go on to head the New York Federal Reserve. Whether he was in attendance or not, he was clearly in the banker’s inner circle.
The Aldrich Bill and Creation of the Central Bank…
The bankers got to work on drafting a plan for a central bank. They were careful not to name it as such, and so came up with the idea of calling it a ‘Federal Reserve’.
To further assuage fears that their plan would result in the centralisation of banking power, they devised a Federal Reserve ‘system’ consisting of 12 banks to give the impression of a decentralised system. Moreover, Washington would house the Board of Governors to give the impression of government oversight.
Anything to hide the fact this was a bill designed by bankers for the benefit of bankers.
Meanwhile, the New York Fed had nearly all the power.
The plan that emerged from Jekyll Island became known as the Aldrich Bill.
Alfred Crozier knew exactly what the bill was all about. He created the famous drawing (below) in 1912, depicting the ‘National Reserve Association’ having its tentacles across all forms of government and industry. He was spot on.
Source: US Money versus Corporation Currency
While it still took a few more years of politicking after the Jekyll Island meeting, and tinkering of the original plan, the Federal Reserve Act, which created the Federal Reserve system, came into being on 23 December 1913.
The bankers had consolidated their power and created a way for taxpayers to bail them out if they got into trouble. They could now create credit with only minor regard for the consequences.
They knew, if worse came to worse, that the Fed would be there to give them access to cash if they needed it. There would be no repeat of 1907, when they had to bail themselves out.
And so, within 15 years of the Fed’s creation, they ran up the biggest credit and stock market boom in history. While the big banks — the architects and beneficiaries of the Fed — were largely unscathed from the Great Depression, the little person was absolutely crushed.
As Nomi Prins wrote in All the Presidents’ Bankers:
‘In general, it [the Fed] showed little empathy for the general credit condition of the country, focusing instead on how the big banks were faring’.
The creation of the Fed was the first major step in the move away from traditional US isolationism. The bankers were the driving force of this shift. Having a global market to lend to was so much more enticing than being restricted to your own country.
The Federal Reserve Act gave the Fed some powers to approve foreign banking. But the Edge Act of 1919 expanded on this. It authorised US corporations to deal in any foreign banking as long as it was authorised by the Federal Reserve and the Treasury Secretary. Thus banking and political power became interwoven.
As Prins writes:
‘The Edge Act allowed for a substantial expansion of American corporate and banking power abroad. The legislation would catalyse a dispersion of US banks into Europe, and around the world, for the next century.’
In short, the centralisation of banking power, via the creation of the Fed, unleashed the US banking system on the world.
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