Financial History Issue 119 (Fall 2016) - Page 15

The Always Evolving Federal Reserve By Peter Conti-Brown Everyone loves a good origins story. Marvel Comics, for example, has minted money telling us again (and again) how Peter Parker came to be Spiderman or Charles Xavier came to lead the X-Men. The same is true for institutions too. The most obvious is American enthusiasm for its founders. Lin-Manuel Miranda, the genius behind the runaway success “Hamilton: An American Musical,” shows us just how much public enthusiasm can gather around these narratives. But our continuing debates about gun rights, the Senate filibuster and whether Canadian-born Ted Cruz can one day become President are all examples of how much a founder’s vision of history still guides our current thinking. Just as we trace a superhero’s history through that fateful spider bite, we often look to those founding moments to guide our sense of the present. Whatever the virtues of using founders’ history to define our debates about the meaning of the US Constitution — or superheroes, for that matter — the temptation to use that lens to evaluate institutions like the Federal Reserve should be resisted. The problem is that the “founding moments” — here, most importantly, the Federal Reserve Act of 1913 — refer to an age long past, with only faint echoes reverberating through history. Focusing on a founder’s vision of the Federal Reserve in 1913 is as likely to mislead as to inform an effort to understand the Fed and its extraordinary powers in the present. Instead, it is better to look at the Fed’s near constant institutional change over the last century. Not a founding moment, but a series of founding moments, each one of which builds (or takes away) from the way we understand the institution. It is an evolutionary process, not one built by intelligent design. The Conventional Story: In the Beginning The first problem with founder history in the Federal Reserve context is how vulnerable even the founding is to mythology. The conventional retelling of the Fed’s founding starts in the right place: the Panic of 1907, one of the most destructive in the nation’s history. In that retelling, the panic was an accelerating financial bloodletting that the US government could do nothing to staunch. It was only the intervention of that towering figure of Anglo-American finance in the late 19th and early 20th centuries, J. Pierpont Morgan, who subdued the panic. Morgan, it was reported by his associates at the time, was “the man of the hour,” whose pronouncements — bland and obvious in retrospect, such as “[i]f people will keep their money in the banks everything will be all right” — assumed talismanic significance. A sleepless night of Morgan’s banking associates, locked by Morgan in his smoky library, led to the salvation of the US financial system. As the story goes, after the financial panic, private bankers and government officials decided that an all-eyes-turn-toMorgan approach to financial panics could not continue to be the basis of US banking policy. After a secret meeting of bankers and their political sponsors in the US Congress at the Jekyll Island Club, located on an island of the same name off the coast of Georgia, the Federal Reserve scheme was hatched. (Given that this secret Jekyll Island meeting came complete with disguises and codenames and Omertà-like oaths of secrecy, and only became public 20 years after the fact, it has been great grist for the conspiracists’ mills in the years since.) President Woodrow Wilson signed the bill into law as the Federal Reserve Act of 1913. This is, again, the conventional retelling. And again, many elements are true: there really was an extraordinary global financial panic of 1907, J.P. Morgan did have a role (although that role has been much exaggerated) in arresting the spread of contagion, a secret meeting of bankers and politicians did take place on Jekyll Island and the Federal Reserve Act of 1913 did eventually follow. But from the perspective of trying to  |  Fall 2016  |  FINANCIAL HISTORY  13