to agree with his definition of these notes, and asked him to name a single financial writer of the metropolitan press of his own town, to whom he might confidently appeal to justify his absurd charge.
Even before the Fed opened its doors, though, these twin pillars began to collapse. The assassination of Archduke Franz Ferdinand sparked the powder keg of European war in August of 1914. And with it, the gold standard ceased to exist.
What of the real bills doctrine? In time, central bankers and others came to see its intellectual futility. The very fungibility of money made policing the boundary between“ real” bills and speculative transactions difficult. The Fed soon abandoned it.
The road away from gold standards and gold exchange systems didn’ t formally end until 1973, but the legislative creation in 1913 had already lost its intellectual apparatus within months and years. Putting too much weight on the Fed’ s legislative founding misses the history as it unfolded.
There’ s a second essential example. If the energy on the functional Federal Reserve at the 1913 founding was spent thinking through gold and bills of trade, the structural question was on the federalist system described above. Woodrow Wilson, like his intellectual idol James Madison, was a constitutional experimenter. He saw in the Federal Reserve System something that no one else had requested: the chance to allocate power according to a logic of checks and balances. Much of the story of the 1913 Act is about how those checks and balances came together, how the Republican-preferred“ National Reserve Association” became the Democratic“ Federal Reserve System.”
But there’ s a problem. That 1913 structure no longer exists. The Roosevelt administration and the quiescent 74th Congress abolished it in 1935. In that congressional session, FDR pushed through what was called then and since“ the second New Deal,” a legislative burst late in FDR’ s first term that included at once the passage of the Social Security Act, the National Labor Relations Act and the Public Utility Holding Company Act, among others.
One of the less-debated pieces of legislation at the time was the Banking Act of 1935, a legislative redesign of the Federal Reserve Act almost from the ground up.
The 1913 Act created a Federal Reserve Board of uncertain authority; the 1935 Act abolished that structure and created the modern“ Board of Governors of the Federal Reserve System,” giving it unquestioned formal authority over the Federal Reserve Banks with respect to banking supervision and regulation.( Even today, when insiders and outsiders refer to the Federal Reserve Board, they indulge in a
Marriner Eccles, a millionaire from Utah, refused appointment to lead the Federal Reserve Board without getting a chance to rebuild the system from the ground up.
bit of widely accepted but still erroneous historical revisionism.)
The Act also recreated the Federal Open Market Committee( FOMC), the powerful committee in charge of using seigniorage to manipulate the availability of credit throughout the economy. It did so to significantly curtail the influence of the Reserve Banks. It is not an exaggeration to say that the Bank Act of 1935 changed the Federal Reserve Act so profoundly such that the original legislation is better thought of as the Fed’ s Articles of Confederation, not its Constitution.
The Banking Act thus put an end to the experiment with decentralized central banking that is the centerpiece of the debates over the 1913 legislation. But in the Second New Deal, reforming the Fed wasn’ t even a major legislative priority. It happened instead because a millionaire Utahan named Marriner Eccles refused appointment to lead the Federal Reserve Board without getting a chance to rebuild
Thomas D. McAvoy / The LIFE Picture Collection the system from the ground up. It may be the only time in history that a piece of legislation revamping a federal bureaucracy was essentially an employment contract.
The death of the gold standard and the real bills doctrine on the one hand, and the passage of the Banking Act of 1935 on the other, are but two example of these refounding moments. They happened again and again and again, throughout the Fed’ s history, and they continue to occur today.
The Fed in 2016 is already dramatically different than the Fed in 2007, in ways that attention to a piece of 1913 legislation simply cannot detect. But in most writers’ visions of institutional history, the Fed needs an origin story just like any superhero. In the beginning, there was a moment of intense change. What happened thereafter may be where the action is, but it’ s not where we’ ll learn about the accumulation of power. For the Federal Reserve, this vision of institutional history is simply an imprecise and misleading historical methodology.
The better metaphor may well be from evolutionary biology. Institutions aren’ t founded once and then left to change on a simple trajectory. Theirs is a punctuated equilibrium, with change happening quickly and then not at all, founded and re-founded and re-founded again. When we dig deep into the debates around the creation of the Federal Reserve System, we don’ t actually learn much about the Federal Reserve System. Those debates in 1913 aren’ t about the founding of the Federal Reserve System. They are a history of the writing of the Federal Reserve Act of 1913 and shouldn’ t be given much more privilege in telling us the history of the institution than the other founding moments.
Peter Conti-Brown is an assistant professor at The Wharton School of the University of Pennsylvania. A financial historian and a legal scholar, Conti-Brown studies the institutional development of central banking. He is currently writing a comprehensive history of the Federal Reserve, forthcoming from the Harvard University Press. This essay is adapted from his book The Power and Independence of the Federal Reserve( Princeton University Press 2016) and“ The Federal Reserve’ s Big Bang and the Challenge of Institutional History,” The New Rambler Review, October 10, 2016.
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