Financial History Issue 119 (Fall 2016) - Page 16

Reserve. Had Theodore Roosevelt won the Republican primary (or not bolted the Republican convention and split the party), the governance structure of the Fed would have looked very different. Founding the Federal Reserve, Again and Again and Again The First Feder al Reserve Board, with William McAdoo serving as chairman. understand the modern Federal Reserve System, the story tells us almost nothing. The primary problem with this retelling is that it links, almost ineluctably, the Panic of 1907 and the Federal Reserve Act of 1913 with a pit stop in this mysterious island meeting of a cabal of New York bankers. If we are to understand the Fed and where its unique governance came from, these uncritical links are a mistake. The six years in between the Panic of 1907 and the Federal Reserve Act of 1913 were decisive for the fate of the Federal Reserve System, including as they did two presidential and three congressional elections. When the electoral dust settled, power had shifted from Republicans — at the time, the bankers’ primary supporters in Congress — to Democrats (the House changed in 1910, the Senate in 1912). At the center of this political moment was the presidential election of 1912. Few presidential elections in US history match it for its drama. Gone were the staid front porch campaigns between two senior partisans. Instead, the election pitted two US Presidents, Theodore Roosevelt and William Howard Taft, against Woodrow Wilson, a college president turned New Jersey governor who had entered politics just two years before. On the edge but not the fringe was the most popular socialist in American history, Eugene Debs, who captured 5% of the vote. Historians have debated how much policy daylight stood between the three main candidates, although there was little doubt that Debs represented something very different from the others. The perception at the time, and continuing today, was that the aspirations of each candidate represented distinct approaches to the role of government in society. In the words of one historian, the 1912 election “verged on political philosophy.” That political philosophical moment in American history intervened between the Panic of 1907 and the Federal Reserve Act in ways that were essential in shaping the system’s curious governance structure, with power ambiguously allocated between 12 regional central banks and one governmental bureaucracy in Washington, DC. Indeed, two of the three key words in the Fed’s name — Federal and System — came in the post-1912 election. Federal, because of the allocation of power in a quasifederalist system of regional Reserve Banks and the DC-based Federal Reserve Board. System, to reflect the separate, but coordinated features of the system. What this refined history of the Fed’s origins tells us is how much contingency matters in the history of the Federal 14    FINANCIAL HISTORY  |  Fall 2016  | www.MoAF.org Contingency, though, is an ever-present phenomenon in the history of the Federal Reserve. And while the story of the Fed’s legislative creation is full of drama and intrigue — as Roger Lowenstein has recently shown in his history of the first founding, to great effect — using that drama as a guide to modern debates about central banking is similar to reading the Magna Carta to shed light on the meaning of the Equal Protection Clause in 2016. It’s not an entirely useless exercise. But it’s pretty close. Consider two examples of how the Fed changed, and changed dramatically, in ways that a founders-only vision of Fed history will ignore. First is the very basis of understanding money that Fed founders envisioned. In 1913, the intellectual edifice of the Federal Reserve System relied on two pillars: the gold standard and what would later come to be called the “real bills doctrine.” In the first, money would be convertible (subject to certain restrictions) to gold; in the second, the Federal Reserve Banks would only lend money to banks when they presented collateral that represented transactions already complete. At the time of the passage of the Federal Reserve Act in 1913, both concepts were seen as essential to the Federal Reserve Act’s legitimacy. The claim that the new “Federal Reserve Notes” that the Fed would issue represent “fiat money” were fighting words. The colorful Congressman Carter Glass’s defense on the House floor against the charge is quotable at length: Fiat money! Why, sir, never since the world began was there such a perversion of terms; and a month ago I stood before a brilliant audience of 700 bankers and businessmen in New York City, and there challenged the president of the National City Bank to name a single lexicographer on the face of the earth to whom he might appeal to justify his characterization of these notes. I twitted him with the fact that not one percent of the intelligent bankers of America could be induced