Historical Beginnings of the Federal Reserve

[CrackSmokeRepublican]

Historical Beginnings of the Federal Reserve

At 6:00 P.M. on December 23, 1913, President
Woodrow Wilson entered his office. He was smiling as he

looked around the circle of friends and associates who had
assembled there. Spotting Carter Glass, the slightly built but
exceedingly influential congressman from Virginia, at the far
end of the room, the President beckoned him to join Senator
Robert Owen of Oklahoma at his side. After shaking Glass's
hand warmly, the President sat down at his desk and, using four
gold pens, signed into law the Federal Reserve Act. As Arthur
S. Link, Wilson's principal biographer, has written, "Thus ended
the long struggle for the greatest single piece of constructive
legislation of the Wilson era and one of the most important
domestic Acts in the nation's history."1

With this law, Congress established a central banking
system which would enable the world's most powerful industrial
nation to manage its money and credit far more effectively than
ever before. As essential as our central banking system appears
to be in the complex economy of the 1970s, the political and
legislative struggle to create the Federal Reserve System was
long and often extremely bitter, and the final product was the
result of a carefully crafted yet somewhat tenuous political
compromise.

Indeed, until nearly the beginning of the twentieth
century the United States had been a nation dominated by its
frontier and its enormous expanse of rich and fertile land. Born
in the dawn of the modern age, the United States in its first
decades was a land of small farms and nearby towns with few
cities of any consequence, and the young nation seemed far
more interested in becoming a successful experiment in
democracy rather than an economic power. As a result, the
institutions necessary to a commercial society-large cities, a
 common medium of exchange, and a mechanism to regulate that
medium-were greeted with indifference if not outright hostility.
Yet, America's very success as an experiment in

democracy, and its tremendous agricultural production,
provided the base for an urban and, ultimately, an industrial
society. "The United States was born in the country and has
moved to the city," Professor Richard Hofstadter wrote.2 Yet,
some of the young nation's most eloquent leaders were strong

champions of the agrarian way of life who disdained urban life,
and the continuing conflict between rural values and urban
reality has been one of the most important themes of American
history.

.......


10
arrangements were private and quite beyond the control or
regulation of national policy.
BANKING PROBLEMS PERSIST
In the absence of a central banking structure, America's
financial picture was increasingly characterized by inelastic

currency and immobile reserves. The national bank note
currency, secured by government bonds, grew or contracted in
response to the realities of the bond market rather than in
response to the requirements of American business. The amount
of currency in circulation, therefore, depended upon the value
of bonds which the national banks held rather than upon the
needs of the economy. Such inelasticity in the currency tended
to aggravate matters rather than alleviate them, causing the
economy to gyrate wildly and somewhat uncertainly between
booms and busts.

Moreover, under the national banking system the bank
reserves were spread around the country, but they tended to be
immobile where they sat. There were three types of national
banks: country banks, reserve city banks, and central reserve
city banks. Country banks (and these were all national banks
located in places other than the fifty cities which were reserve
and central reserve cities) had to keep part of their reserves in
the form of vault cash, and the rest in the form of a deposit with
 a national bank in a reserve or central reserve city. Reserve city
banks (and these were all national banks located in 47 specific
and generally important cities) had to keep part of their reserves
in the form of vault cash, and the rest in the form of a deposit
with a national bank in a central reserve city bank. Central
reserve city banks (and these were all national banks within only
three cities: New York, Chicago, and St. Louis) had to keep all
of their reserves in the form of vault cash.
All this meant that fifty different cities in the nation
served as reserve depositories. Even though the total of re-

serves in the national banking system was very large, the
economic value of this reserve was largely mitigated because it
was so spread out; it was as if the American army were
scattered all over the country, with each soldier assigned to
protect his own specific area of several square miles. Such an
army would clearly be infinitely less powerful than one whose
forces were all gathered in a few strategic locations. The
reserves of money could not be shifted easily to areas of the
country needing them.

Also, the fact that reserve city banks held reserves for
the country banks, and that their own reserves were held by
central reserve cities, meant that the central reserve city banks,
and particularly those in New York, were unusually sensitive to
the demands for currency from the country banks. When the
country banks needed currency, particularly during the crop
selling season, those banks would get their currency by drawing
down their reserve accounts with their reserve city banks.
Those banks, now with less vault cash, were compelled to draw
down their own reserve accounts with their central reserve city
banks. It was much like a whip, where a little force at one end
produced a tremendous force at the other; demands for
currency from the country banks often put inordinate pressure
upon the central reserve city banks.

 As America's industrial economy became larger and
more complex in the waning years of the nineteenth century and
the early years of the twentieth, these weaknesses in the
national banking system -- inelastic currency and immobile
reserves -- became increasingly more critical. It had become
clear that the national banking system did not provide the
regulating mechanism for money and banking that the two
Banks of the United States had provided early in the nation's
history. And as the American economy became larger, more
urban, and more complex, the inelastic currency and the
immobile reserves contributed to the cyclical pattern of booms
and busts. These wide gyrations were becoming more and more
intolerable.

Financial panics occurred with some frequency, and they
often triggered an economic depression. In 1893 a massive
depression rocked the American economy as it had never been
rocked before. Even though prosperity returned before the end
of the decade -- and largely for reasons which this nation could
not control -- the 1893 depression left a legacy of economic
uncertainty.

http://www.scribd.com/doc/3887113/Histo ... al-Reserve