America’s Long Struggle to Create a Central Bank

On this day, December 23, 1913, President Wilson entered the Oval Office. In a jubilant mood he went around the room to shake hands with key advisers and associates while giving a congratulatory nod to the influential Congressman from Virginia, Carter Glass.

Wilson proceeded to use the four golden pens on his desk to sign the Federal Reserve Act. Wilson and his group of partners in arms had achieved the landmark legislation of his domestic agenda: the creation of the Federal Reserve. This culminated from more than 120 years since Alexander Hamilton had attempted the grand experiment of a central bank that floundered through multiple presidential administrations. Arthur S. Link, a Wilson biographer, captured that this moment “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.’’

But what is the Federal Reserve? When was it created? Was Presidential Wilson the mastermind behind it or some other driving force?

Wilson’s domestic agenda centered on the New Freedom. One key pillar is banking reform. In the realm of economic policy, creating a central bank would be Wilson’s enduring legacy, following a century of struggle to create a permanent national bank by the nation’s founders. This battle of more than a century has sputtered and spin since Alexander Hamilton’s fight for a national bank under George Washington’s cabinet. Wilson did not command economic thought leadership that motivated him to advocate for a central bank.

The urgency was more in response to a confluence of factors, including the Panic of 1907 and public policy support from various parties from bankers to Congressional leaders. Wilson’s 1912 election ran his campaign on a progressive platform. He was also leveraging on his reformist agenda as a New Jersey governor. He pledged financial reform, but never explicitly mentioned establishing a central bank. Though he was a government cholar, Wilson didn’t have sufficient knowledge of banking. So he relied on two key advisers: Louis Brandeis, a Boston attorney serving as an outside adviser, and William McAdoo, Wilson’s Treasury Secretary.

While Louis Brandeis was Wilson’s most trusted voice from outside the White House bubble, like his predecessors, the president needed someone in his cabinet who could carry through monumental efforts like banking reform. He needed someone who had a business mindset but not beholden to bankers because that person would broker legislative proposals with repercussions for the broader economy. That is where William Gibbs McAdoo played an key role. Like Wilson, McAdoo had roots in the South. He began his law practice in Chattanooga, Tennessee and thereafter moved to New York to lead a railroad company. With an eye for politics, McAdoo became head of the Democratic National Committee in 1912, and gave support to candidate Wilson’s bid for the White House. As an independent lawyer-business leader who also had political ambitions, McAdoo would become Wilson’s U.S. Treasury Secretary and a close confidant. McAdoo was pivotal in the passage of the Federal Reserve Act and financing of World War I which Wilson reluctantly entered.

Congress, who represented various economic areas of the country, wanted regional banks to control the Federal Reserve System. That decentralized representation would be a counterbalance against Wall Street’s influence. Meanwhile, President Wilson wanted a centralized board to place a check on regional Federal Reserve banks, assuming those entities would be owned by private banks. William Jennings Bryan, a progressive voice in the Democratic party leadership, was committed to currency reform but opposed to a Wall Street take over. He was vocal during the 1912 Democratic convention in expressing support for Wilson. Because of his standing as a public leader with oratorical power, and a strong following in rural areas, Wilson appointed Bryan as his secretary of state. Bryan remarked, “The currency can be given all the elasticity it needs without increasing the privileges of the banks or the influence of Wall Street.” Wilson later would echo Bryan’s point, in saying “The greatest monopoly in this country is the money monopoly.”

The progressive wing was highly skeptical that the new system could be taken over by private banks, and Wall Street could undermine oversight on the banking system. Louis Brandeis in particular did not want bankers to be part of the Federal Reserve Board since as part of the banking system, they could not be trusted with objectivity and having public interest in financial stability and regulation

To reconcile the various perspectives on the central bank plan, President Wilson sought the advice of folks in Congress, relying on Representative Carter Glass of Virginia, who became chairman of the House Committee on Banking and Finance, and the committee’s adviser, H. Parker Willis, an economics professor from Washington and Lee. In order to get a viable version of the bill out of committee, Glass and Willis actively hashed out the pros and cons of the banking proposal.

During the negotiations, President Wilson consulted his trusted economic adviser, Brandeis, for direction. Congressman Bryan and Glass had valid concerns to which Brandeis came up with a middle ground. Brandeis told the president: “The conflict between the policies of the Administration and the desires of the financiers and of big business, is an irreconcilable one”. He warned that “Concessions to the big business interests must in the end prove futile.’’ To push forward, the proposal needs to satisfy both conservative and the progressive stakeholders. However, Brandeis voiced his concern that the proposed central banking system should not be owned by private banks but public. He argued that private interests would have undue influence over the system, and government oversight would be steered to benefit the industry while undermining public interest.

On June 17, President Wilson met with Congressman Glass, Secretary of the Treasury William G. McAdoo, and Senator Robert Owen of Oklahoma, chairman of the newly created Senate Banking and Currency Committee. The stakeholders landed a final proposal. There would be 12 regional banks around the country that are owned by private banks. In DC, a centralized Federal Reserve Board would be exclusively controlled by the government. For a sustainable currency, Federal Reserve Notes would be accepted as obligations of the United States. This avoids the pitfalls of the greenback currency that was issued on a temporary basis by Abraham Lincoln’s government to finance the Civil War. This compromise between the various views on central banking gave the proposal enough momentum to become a landmark legislation.

Bibliography

Heckscher, A. (1991). Woodrow Wilson: A Biography. Charles Scribner’s Sons.

Hofstadter, R. (1955). The Age of Reform. Vintage.

Link, A. S. (1956). Wilson: The New Freedom. Princeton University Press.

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D.T. Du

Economic historian with an interest in rhythms, rhymes, and repetitions from the past.

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