Introduction
In "America's Bank," Roger Lowenstein takes us on a fascinating journey through the tumultuous history of the creation of the United States Federal Reserve. This book provides a detailed account of the political, economic, and social forces that shaped the establishment of America's central bank. Lowenstein's narrative is both engaging and informative, offering readers a deep dive into a pivotal moment in American financial history.
The story of the Federal Reserve's creation is not just a tale of economic policy-making. It's a drama filled with colorful characters, intense debates, and high-stakes negotiations that would ultimately reshape the American financial landscape. Lowenstein expertly weaves together the personal stories of key figures with broader historical context, bringing to life the challenges and controversies surrounding the birth of the Fed.
As we explore the key ideas presented in this book, we'll see how the struggle to create the Federal Reserve reflects many of the same tensions and debates that continue to shape American politics and economics today. From populist anger against Wall Street to concerns about government overreach, the echoes of the past resonate strongly in our current discussions about the role of central banking and financial regulation.
The Long Road to a Central Bank
Andrew Jackson's Populist Opposition
One of the most striking aspects of the Federal Reserve's history is how long it took for the United States to establish a central bank. While today we take the existence of the Fed for granted, for much of the country's early history, the very idea of a central bank was highly controversial.
Lowenstein explains that between the end of the War of Independence in 1783 and the early 1900s, there was strong opposition to any form of concentrated authority in the United States, including a central bank. This opposition stemmed from a deep-seated fear that such an institution would give the government too much control over citizens' lives.
The author highlights the role of Andrew Jackson, the seventh American president, in shaping this anti-central bank sentiment. Jackson saw centralized banking as an extension of the wealthy minority's power over the poorer majority. His populist views resonated with many Americans who viewed banking as an elitist, anti-democratic force.
In 1836, Jackson dealt a significant blow to the idea of a central bank by vetoing the charter renewal for the Second Bank of the United States. This action effectively killed the dream of a central bank for the rest of the 19th century. Lowenstein's account of this period helps us understand the deep-rooted skepticism towards centralized financial authority that persisted in American culture for generations.
The Consequences of Decentralized Banking
With no central bank to regulate the currency, the United States faced numerous economic challenges. Lowenstein describes how banks at the regional and state levels were forced to issue their own banknotes, leading to a chaotic and fragmented financial system.
The author points out that during the War of 1812 against Britain, the lack of a regulated central currency caused fiscal chaos. This situation began to shift attitudes among businesses, which started to favor centralized tariffs and regulation. This led to the establishment of the Second Bank of the United States in 1816, but as we've seen, even this institution was short-lived due to Jackson's opposition.
The Push for Reform
The Panic of 1907
Lowenstein identifies the Panic of 1907 as a crucial turning point in the push for a central bank. After a period of economic prosperity that many believed would last indefinitely, the United States experienced a severe market crisis that caused the economy to shrink by about 40 percent in just three weeks.
The author explains how the rise of trusts - companies that achieved monopoly positions in certain markets - contributed to this crisis. He uses the example of the United Copper Company to illustrate how overborrowing and mismanagement in an unregulated market could trigger a chain reaction of financial failures.
When the United Copper Company couldn't pay its debts, it sparked a public panic. People rushed to withdraw their savings from banks, but the banks themselves faced a liquidity problem due to their investments in unregulated financial companies. Without a central bank to provide necessary cash during this crisis, the US economy ground to a halt.
This event, Lowenstein argues, made American regional banks crave the security of a centralized institution that could help them avoid such crises in the future. It marked a significant shift in attitudes towards the idea of a central bank.
The Progressive Era and Political Reform
Lowenstein places the push for banking reform within the broader context of the Progressive Era, a period of significant social and political reform in the United States between the 1890s and 1920s. While movements for women's suffrage and racial equality were gaining momentum, banking reform became a key issue for the country's political leaders.
The author notes that across the political spectrum, there was growing consensus that reform was necessary, particularly regarding policies that would increase the government's oversight of the banking system. The Panic of 1907 had shattered the belief that markets were truly self-regulating and highlighted the need for some form of government intervention.
Lowenstein points to a series of articles in the Wall Street Journal in 1909 supporting banking reform as evidence of the changing attitudes during this period. The ground was being prepared for a serious attempt at creating a central bank.
The Secret Meeting at Jekyll Island
One of the most intriguing episodes in the creation of the Federal Reserve was a secret meeting held on Jekyll Island off the coast of Georgia in 1910. Lowenstein describes how a small group of bankers and politicians gathered to draft plans for a central bank.
Key figures at this meeting included Republican Senator Nelson Aldrich from Rhode Island and Paul Warburg, a German-American banker with expertise in the European banking system. Aldrich, once opposed to a central bank, had been convinced of its necessity after studying Europe's model, particularly the Bank of England.
Lowenstein highlights the contrasting backgrounds and views of the participants. Warburg favored strong government regulation, while Aldrich believed a small group of regional banks run by politicians and bankers should provide oversight. These differences reflected the broader debate about how much government intervention was appropriate in the banking system.
The author explains how the group sought to balance the interests of both bankers and politicians, no easy task given their conflicting priorities. Bankers felt threatened by government intervention, while politicians disagreed on the extent of regulation needed. Democrats, in particular, were wary of giving bankers too much influence in the regulatory process.
Despite these challenges, the Jekyll Island group managed to draw up a draft plan for an American central bank. This plan, known as the Aldrich Plan, would serve as a template for the eventual Federal Reserve Act.
The Aldrich Plan
Lowenstein outlines the three central goals of the Aldrich Plan:
Uniting state banks: The plan aimed to create a unified system that would establish connections among state banks and make interstate commerce run more smoothly. This was necessary because, up to that point, state banks had been printing their own currency, leading to unregulated interstate commerce and exchange rates.
Establishing a standard currency: This would lend legitimacy to the unified bank system by ensuring all banks would share the same currency with equal value across the United States.
Establishing paper money: The plan sought to make it easier for businesses to borrow cash, increasing liquidity and potentially softening the impact of financial crises.
The author explains how the Aldrich Plan was designed to appeal to both bankers and politicians. It increased the government's role in overseeing financial transactions, pleasing politicians who wanted more accountability. At the same time, it offered bankers greater opportunities for interstate commerce through an expanded network of banks.
While the Aldrich Plan wasn't adopted in its entirety, Lowenstein emphasizes its importance in raising critical issues that would shape the final Federal Reserve Act.
Woodrow Wilson and the Federal Reserve Act
The election of Woodrow Wilson as the twenty-eighth president of the United States in 1913 marked a crucial turning point in the push for a central bank. Lowenstein portrays Wilson as a unique figure who admired both a strong federal government and laissez-faire economics, making him a symbol of compromise between Republican and Democratic economic viewpoints.
Wilson saw banking reform as a way to curb the influence of monopolies while also providing easier access to credit. He envisioned a central bank that would act as a "lender of last resort," able to lower interest rates in times of need and provide banks with necessary reserves to keep the economy going.
Lowenstein details how Wilson's convictions helped push the Federal Reserve Act through Congress. The act, passed in 1913, emphasized two key points:
The federal currency was to be elastic, meaning its value would increase or decrease depending on demand.
Banks had to utilize financial reserves during times of crisis, rather than holding onto them and potentially worsening economic stress.
The author describes the passage of the act through the House of Representatives and the Senate, culminating in Wilson signing it into law on December 23, 1913. This marked the official birth of the Federal Reserve, though as Lowenstein points out, the work of establishing the new institution was far from over.
Implementing the Federal Reserve
Lowenstein explains that while the Federal Reserve Act was now law, implementing it was a complex process that required careful consideration of many factors. One key issue was determining where to set up reserve banks. Bankers identified 12 different cities, including New York, Atlanta, Chicago, Cleveland, and Dallas, to establish these regional banks, with the goal of distributing the central bank's power.
Another contentious issue was the level of involvement Wall Street should have on the board of the Federal Reserve. The author recounts the controversy surrounding the nomination of Paul Warburg as board chief, due to his connections with the financial company Kuhn and Loeb. Warburg eventually severed ties with the firm to appease his detractors and take on the role.
The Fed's First Test: World War I
Lowenstein describes how World War I provided the Federal Reserve with its first major opportunity to exercise its power, particularly in relation to domestic and international trade. During the war's early years, the Fed largely complied with the Department of Treasury's request to keep interest rates low, which encouraged borrowing and trade.
However, the author notes that the Fed also sought to expand its powers. Warburg and his board successfully petitioned Congress for the right to issue banknotes, allowing the central bank to double the amount of money in circulation within months.
The Fed's ability to lend money and regulate international trade during wartime marked a significant expansion of its power. Lowenstein highlights how this enabled the United States to assist the economies of Britain and France by exporting food and other supplies, earning the Fed international recognition.
The Fed's Ongoing Challenges
In the final sections of the book, Lowenstein draws parallels between the challenges faced by the Federal Reserve in its early years and the issues it continues to grapple with today. He points out that many of the same concerns that fueled debates about the Fed's creation a century ago are still relevant in current discussions about central banking and financial regulation.
The author notes that the suspicion with which banks are regarded today echoes the sentiments of the Progressive Era. Just as the Panic of 1907 confirmed fears about the misuse of banking power, the 2008 financial crisis reinforced public distrust of big banks and the financial sector.
Lowenstein draws a parallel between the speculative excesses that led to the Panic of 1907 and the factors that contributed to the 2008 crisis. In both cases, he argues, the pursuit of profits led to the creation of unsustainable bubbles - in 1907, it was in the stock market, while in 2008, it was in the housing market.
The author also highlights how social activism surrounding the Fed today mirrors past movements. He points to ongoing debates about corporate responsibility and fair prosecution of wrongdoing in the financial sector as evidence that many of the same issues that drove banking reform in the early 20th century are still relevant today.
Conclusion
In "America's Bank," Roger Lowenstein provides a comprehensive and engaging account of the long and difficult journey to establish the Federal Reserve. Through his narrative, we see how the creation of America's central bank was not just an economic decision, but a deeply political and social one as well.
The book illustrates how the Fed's creation was a response to real economic crises and a reflection of changing attitudes about the role of government in managing the economy. It also shows how the compromises and debates that shaped the Fed continue to influence its operations and public perceptions today.
Lowenstein's work reminds us that institutions like the Federal Reserve are not static entities, but evolving organisms shaped by ongoing debates and changing circumstances. The story of the Fed's creation offers valuable insights into the complex relationship between government, finance, and society in America.
As we continue to grapple with economic challenges and debates about financial regulation in the 21st century, "America's Bank" provides crucial historical context. It reminds us that many of the issues we face today have deep roots in our past, and that understanding this history is essential for navigating our economic future.
The Federal Reserve, born out of crisis and controversy, remains a pivotal institution in American economic life. Lowenstein's account of its birth and early years offers not just a fascinating historical narrative, but also a valuable lens through which to view our current economic debates and challenges.
In the end, "America's Bank" is more than just a history of the Federal Reserve. It's a story about America itself - about the nation's struggles with economic power, democratic ideals, and the proper role of government. As such, it offers invaluable insights for anyone seeking to understand the forces that have shaped, and continue to shape, America's economic landscape.