The
Always
Evolving
Federal
Reserve
By Peter Conti-Brown
Everyone loves a good origins story.
Marvel Comics, for example, has minted
money telling us again (and again) how
Peter Parker came to be Spiderman or
Charles Xavier came to lead the X-Men.
The same is true for institutions too.
The most obvious is American enthusiasm
for its founders. Lin-Manuel Miranda, the
genius behind the runaway success “Hamilton: An American Musical,” shows us just
how much public enthusiasm can gather
around these narratives. But our continuing debates about gun rights, the Senate
filibuster and whether Canadian-born Ted
Cruz can one day become President are all
examples of how much a founder’s vision
of history still guides our current thinking. Just as we trace a superhero’s history
through that fateful spider bite, we often
look to those founding moments to guide
our sense of the present.
Whatever the virtues of using founders’ history to define our debates about
the meaning of the US Constitution — or
superheroes, for that matter — the temptation to use that lens to evaluate institutions like the Federal Reserve should be
resisted. The problem is that the “founding
moments” — here, most importantly, the
Federal Reserve Act of 1913 — refer to an
age long past, with only faint echoes reverberating through history.
Focusing on a founder’s vision of the
Federal Reserve in 1913 is as likely to mislead as to inform an effort to understand
the Fed and its extraordinary powers in
the present. Instead, it is better to look
at the Fed’s near constant institutional
change over the last century. Not a founding moment, but a series of founding
moments, each one of which builds (or
takes away) from the way we understand
the institution. It is an evolutionary process, not one built by intelligent design.
The Conventional Story:
In the Beginning
The first problem with founder history in
the Federal Reserve context is how vulnerable even the founding is to mythology.
The conventional retelling of the Fed’s
founding starts in the right place: the Panic
of 1907, one of the most destructive in the
nation’s history. In that retelling, the panic
was an accelerating financial bloodletting
that the US government could do nothing
to staunch. It was only the intervention of
that towering figure of Anglo-American
finance in the late 19th and early 20th centuries, J. Pierpont Morgan, who subdued
the panic. Morgan, it was reported by his
associates at the time, was “the man of the
hour,” whose pronouncements — bland
and obvious in retrospect, such as “[i]f
people will keep their money in the banks
everything will be all right” — assumed
talismanic significance. A sleepless night
of Morgan’s banking associates, locked by
Morgan in his smoky library, led to the
salvation of the US financial system.
As the story goes, after the financial
panic, private bankers and government
officials decided that an all-eyes-turn-toMorgan approach to financial panics could
not continue to be the basis of US banking
policy. After a secret meeting of bankers and their political sponsors in the US
Congress at the Jekyll Island Club, located
on an island of the same name off the coast
of Georgia, the Federal Reserve scheme
was hatched. (Given that this secret Jekyll
Island meeting came complete with disguises and codenames and Omertà-like
oaths of secrecy, and only became public 20
years after the fact, it has been great grist for
the conspiracists’ mills in the years since.)
President Woodrow Wilson signed the bill
into law as the Federal Reserve Act of 1913.
This is, again, the conventional retelling. And again, many elements are true:
there really was an extraordinary global
financial panic of 1907, J.P. Morgan did
have a role (although that role has been
much exaggerated) in arresting the spread
of contagion, a secret meeting of bankers
and politicians did take place on Jekyll
Island and the Federal Reserve Act of 1913
did eventually follow.
But from the perspective of trying to
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