Reserve. Had Theodore Roosevelt won
the Republican primary (or not bolted
the Republican convention and split the
party), the governance structure of the Fed
would have looked very different.
Founding the Federal Reserve,
Again and Again and Again
The First Feder al Reserve Board, with William McAdoo serving as chairman.
understand the modern Federal Reserve
System, the story tells us almost nothing.
The primary problem with this retelling is
that it links, almost ineluctably, the Panic
of 1907 and the Federal Reserve Act of 1913
with a pit stop in this mysterious island
meeting of a cabal of New York bankers.
If we are to understand the Fed and where
its unique governance came from, these
uncritical links are a mistake. The six
years in between the Panic of 1907 and the
Federal Reserve Act of 1913 were decisive
for the fate of the Federal Reserve System,
including as they did two presidential and
three congressional elections. When the
electoral dust settled, power had shifted
from Republicans — at the time, the bankers’ primary supporters in Congress — to
Democrats (the House changed in 1910,
the Senate in 1912).
At the center of this political moment
was the presidential election of 1912. Few
presidential elections in US history match
it for its drama. Gone were the staid front
porch campaigns between two senior partisans. Instead, the election pitted two
US Presidents, Theodore Roosevelt and
William Howard Taft, against Woodrow
Wilson, a college president turned New
Jersey governor who had entered politics
just two years before. On the edge but not
the fringe was the most popular socialist
in American history, Eugene Debs, who
captured 5% of the vote.
Historians have debated how much
policy daylight stood between the three
main candidates, although there was little
doubt that Debs represented something
very different from the others. The perception at the time, and continuing today,
was that the aspirations of each candidate
represented distinct approaches to the role
of government in society. In the words of
one historian, the 1912 election “verged on
political philosophy.”
That political philosophical moment in
American history intervened between the
Panic of 1907 and the Federal Reserve
Act in ways that were essential in shaping
the system’s curious governance structure,
with power ambiguously allocated between
12 regional central banks and one governmental bureaucracy in Washington, DC.
Indeed, two of the three key words in the
Fed’s name — Federal and System — came
in the post-1912 election. Federal, because
of the allocation of power in a quasifederalist system of regional Reserve Banks
and the DC-based Federal Reserve Board.
System, to reflect the separate, but coordinated features of the system.
What this refined history of the Fed’s
origins tells us is how much contingency
matters in the history of the Federal
14 FINANCIAL HISTORY | Fall 2016 | www.MoAF.org
Contingency, though, is an ever-present
phenomenon in the history of the Federal
Reserve. And while the story of the Fed’s
legislative creation is full of drama and
intrigue — as Roger Lowenstein has recently
shown in his history of the first founding,
to great effect — using that drama as a guide
to modern debates about central banking is
similar to reading the Magna Carta to shed
light on the meaning of the Equal Protection Clause in 2016. It’s not an entirely useless exercise. But it’s pretty close.
Consider two examples of how the Fed
changed, and changed dramatically, in
ways that a founders-only vision of Fed
history will ignore. First is the very basis of
understanding money that Fed founders
envisioned. In 1913, the intellectual edifice
of the Federal Reserve System relied on
two pillars: the gold standard and what
would later come to be called the “real bills
doctrine.” In the first, money would be
convertible (subject to certain restrictions)
to gold; in the second, the Federal Reserve
Banks would only lend money to banks
when they presented collateral that represented transactions already complete.
At the time of the passage of the Federal
Reserve Act in 1913, both concepts were
seen as essential to the Federal Reserve
Act’s legitimacy. The claim that the new
“Federal Reserve Notes” that the Fed
would issue represent “fiat money” were
fighting words. The colorful Congressman
Carter Glass’s defense on the House floor
against the charge is quotable at length:
Fiat money! Why, sir, never since the
world began was there such a perversion of terms; and a month ago I
stood before a brilliant audience of
700 bankers and businessmen in New
York City, and there challenged the
president of the National City Bank
to name a single lexicographer on the
face of the earth to whom he might
appeal to justify his characterization of
these notes. I twitted him with the fact
that not one percent of the intelligent
bankers of America could be induced