Tuesday, May 10, 2016

America's Bank: The Epic Struggle to Create the Federal Reserve, by Roger Lowenstein

This week I'm talking about a book that deals with the creation of the Federal Reserve Bank, an institution that wields a great deal of influence in the United States, ranging from setting interest rates to issuing the money people carry in their pockets, but a lot of Americans probably don't give it terribly much thought. At least on a day to day basis. The Federal Reserve, being today a vastly powerful organization in its own right, has been the focus of numerous conspiracy theories since before its creation in 1913 and remains a popular target of cranks, goldbugs, and various other nuts. (Lowenstein actually uses some of those terms within the text so I feel rather comfortable using them here.) For whatever reason I have a strange fascination with the machinery of high finance, albeit limited by my layman's understanding of how it all works, so this was a topic I was interested in reading.

The book follows the need in America for a centralized, national bank starting in the late nineteenth century to help modernize America's financial systems. Unlike other major economies such as Britain, France, and Germany, America's banking systems were fairly primitive by comparison and lacked a central authority to manage cash reserves, oversee the manufacture and distribution of banknotes, and set short-term interest rates. Although Salmon P. Chase's National Bank system had been an improvement over the ''wildcat banking'' following Andrew Jackson's closure of the Second National Bank in 1836, it was still a rather ad hoc structure and prone to financial panics which happened with distressing regularity in the late 1800's.

Despite the need for a centralized bank, increasingly supported by the banking establishments on Wall Street, there was still strong American opposition to the idea. The Jacksonian tradition in America had a strong distrust of centralized authority in specific and banks in general, so any combination of the two faced particular opposition. However, the near-implosion of the American economy in 1907, saved only through efforts by J.P. Morgan that can only be described as herculean and terrifying in their scope, emphasized the need for a centralized authority. If for nothing else than to help move cash reserves to where they were needed seasonally in accordance with the more agrarian segments of America's economy.

Considering the amount of opposition faced to creating anything that could even be construed as a central bank, it's amazing the Federal Reserve was created at all. Between the fear of government regulation of business, centralization of banking power, and the more oddball theories, it truly was a struggle to get the Federal Reserve created at all. The fact that the structure of the bank was created in absolute secrecy certainly did not allay the fears of the American public. However as Lowenstein puts it, there were two main benefits to the effort. First, there were a series of congressional inquiries in the wake of 1907 which emphasized how weak the existing financial system was and the need for a reserve bank to maintain liquidity in crisis. Secondly, the drafters of the eventual Federal Reserve system made sure to cultivate bipartisan support for banking reform, which proved instrumental when Democrats took over both houses of Congress and the White House in the bitter election of 1912. Despite the Democratic Party's lingering Jacksonian aversion to centralized authority, with the help of Woodrow Wilson and key party members, the Federal Reserve Act managed to get passed in 1913.

Overall I thought this book was pretty interesting. It kind of gets bogged down in the election of 1912, going over the political bargaining and fractionalism, most famously between Roosevelt and Taft. Although I think it might be because, being a Roosevelt fan myself, I've read so much about 1912 it's all very familiar to me at this point. The book kind of ends at 1913 with the signing of the act and with a very, very brief epilogue about how the Federal Reserve has grown beyond its mandate since then. I kind of wish there was more information about the Federal Reserve and how it's changed, but I guess that just simply wasn't within the purview of this book. It's fairly dry subject matter but if you're interested in finance it's a very interesting read.

- Kalpar

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