The hush-hush found­ing of the Fed

The in­sti­tu­tion Amer­i­cans love to hate was born in se­cret.

Los Angeles Times - - OPINION - By Roger Lowen­stein Roger Lowen­stein is the author of the newly pub­lished “Amer­ica’s Bank: The Epic Strug­gle to Cre­ate the Fed­eral Re­serve.”

Ac­cord­ing to opin­ion sur­veys, no in­sti­tu­tion save the In­ter­nal Rev­enue Ser­vice is held in lower re­gard than the Fed­eral Re­serve. It’s also a font of con­spir­acy the­o­ries stoked by rad­i­cal lib­er­tar­i­ans, who in­sist the Fed is de­bauch­ing the cur­rency and will ul­ti­mately bank­rupt the coun­try.

The Fed’s un­pop­u­lar­ity would make sense if it had, say, failed to in­ter­vene and save the sys­tem dur­ing the 2008 financial cri­sis. But, in fact, the Fed did res­cue the econ­omy.

Its rep­u­ta­tion would like­wise make sense if it were jack­ing up in­ter­est rates, foist­ing hard­ship on or­di­nary Amer­i­cans. But the Fed has main­tained a low rate pol­icy, stim­u­lat­ing the econ­omy while keep­ing the dol­lar strong and in­fla­tion low.

Nonethe­less, dis­sat­is­fac­tion is alive in Congress, where var­i­ous bills would strip the Fed’s au­ton­omy and sub­ject sen­si­tive mone­tary de­ci­sions to the scru­tiny of elected politi­cians. Some bills would go even fur­ther and ex­plore a re­turn to the gold stan­dard.

For cen­tral bank watch­ers, this dy­namic — ef­fec­tive pol­icy re­warded with pop­ulist scorn — is noth­ing new. In Amer­ica, it has al­ways been thus.

At Alexan­der Hamil­ton’s urg­ing, Congress first char­tered a na­tional bank — the urFed — in 1791. How­ever, Thomas Jefferson, who fa­mously mis­trusted banks (he thought agri­cul­ture more vir­tu­ous), and who was fear­ful of a strong cen­tral gov­ern­ment, op­posed this de­vel­op­ment. Af­ter 20 years, the Jef­fer­so­ni­ans won and Congress let the char­ter ex­pire.

This de­ci­sion led to dis­as­ter: ru­inous in­fla­tion. So Congress char­tered a Sec­ond Bank of the United States, which be­gan in 1817, pro­vid­ing the grow­ing coun­try with a bet­ter, more uni­form cur­rency and im­proved its pub­lic fi­nances. But suc­cess couldn’t save it. An­drew Jack­son de­spised the Sec­ond Bank as a tool of East Coast elites, and it too was abol­ished.

For most of the 19th cen­tury, the U.S., un­like most na­tions in Europe, did not have a lender of last re­sort. Fre­quent pan­ics and credit short­ages were the re­sult. Yet some of the very peo­ple who could have ben­e­fited most from a cen­tral bank, such as farm­ers who were starved for credit, pre­ferred the sta­tus quo. Like Jack­son and Jefferson be­fore them, they were fear­ful that a gov­ern­ment bank would tyr­an­nize the peo­ple, per­haps in ca­hoots with Wall Street.

Af­ter a financial panic in 1907 vir­tu­ally shut down the bank­ing sys­tem, re­form­ers be­gan to press once more for a cen­tral bank. But pop­u­lar mis­trust re­mained so pro­nounced that they were afraid to go pub­lic.

This is the point — 105 years ago — when the story seems to have been hi­jacked by a fu­ture Hol­ly­wood scriptwriter.

On a Novem­ber evening in 1910, a pow­er­ful sen­a­tor, Rhode Is­land Repub­li­can Nel­son W. Aldrich, boarded his pri­vate rail car near New York. A light snow was fall­ing, mut­ing the hushed, con­spir­a­to­rial tones of his guests, which is ex­actly how Aldrich wanted it.

The re­form-minded banker Paul War­burg, one of his guests, was tot­ing a hunt­ing ri­fle, but he had no in­ter­est in hunt­ing. The party also in­cluded a mem­ber of the pow­er­ful Mor­gan bank, as well as an as­sis­tant U.S. Trea­sury sec­re­tary, and Frank Van­der­lip, head of the coun­try’s largest bank, Na­tional City.

“On what sort of er­rand are we go­ing?” Van­der­lip in­quired.

“It may be a wild-goose chase; it may the big­gest thing you and I ever did,” War­burg replied.

Mas­querad­ing as duck hun­ters, they dis­em­barked in Brunswick, Ga., and trav­eled by launch to Jekyll Is­land, home of an ex­clu­sive club sur­rounded by pine and pal­metto groves. Over the course of a week, Aldrich and his bankers mapped out a draft of what was to be­come the Fed­eral Re­serve Act, chang­ing the U.S. econ­omy for­ever.

Congress was never told that Aldrich’s bill had been drafted by Wall Street moguls. His bill did not pass, but it was the ba­sis of a suc­ces­sor bill, the Fed­eral Re­serve Act, which Woodrow Wil­son signed in 1913. Years later, when the Jekyll trip was re­vealed to the pub­lic, ex­trem­ists seized on this stranger-than-fic­tion episode to bol­ster their claim that the Fed was a bankers’ plot against the Amer­i­can peo­ple. For con­spir­acy the­o­rists, the bankers’ con­clave on Jekyll be­came a metaphor for the Fed it­self. The ob­vi­ous irony is that, fear­ing Amer­i­cans’ ir­ra­tional sus­pi­cion of cen­tral bank­ing, Aldrich and his crew re­sorted to a plot that, ul­ti­mately, deep­ened the coun­try’s para­noia.

De­spite their clan­des­tine tac­tics, the financiers’ mo­tives were ac­tu­ally pa­tri­otic. Aldrich had vis­ited Europe and stud­ied its cen­tral banks. He wanted ex­pert help to draft an Amer­i­can equiv­a­lent. And in be­tween sump­tu­ous meals fea­tur­ing wild turkey and freshly scal­loped oys­ters, his group of wealthy bankers earnestly wres­tled with is­sues that still pro­voke us to­day: How should power over the econ­omy be ap­por­tioned be­tween Wash­ing­ton and lo­cal­i­ties? How should the cen­tral bank set in­ter­est rates and the money sup­ply?

The Fed­eral Re­serve to­day is not per­fect. But it is more trans­par­ent than ever, thanks to re­forms in­sti­tuted by the pre­vi­ous chair­man, Ben S. Ber­nanke, and it is no less nec­es­sary than was a cen­tral bank in 1791. Amer­i­cans’ para­noia is un­jus­ti­fied, just as it has al­ways been.

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