1913 was a busy year for legislation. But Washington’s main debate concerned the Glass-Owen bill.
The Glass-Owen bill granted bankers the ability to access currency when they needed it. It also allowed them to expand their branches overseas.
That legislation would define financial power in the United States. By extension, it would define U.S. private banking power worldwide.
For Woodrow Wilson, it could represent an early and strong political victory.
Signing the Federal Reserve Act
Wilson had assumed the Presidency in the spring. In June 1913, he addressed the issue of banking and currency reform before a joint session of Congress.
He stressed that control of the banking system “must be vested in the Government itself.” This, he said, was “so that the banks may be the instruments, not the masters, of business and of individual enterprise and initiative.”
But he shied away from specifics about how the board should be comprised.
In private, Wilson intended to allow bankers on the Board of the New York Federal Reserve.
The New York Fed would become one of a dozen reserve banks in the Federal Reserve System. In fact, it would be the most powerful.
This was by virtue of its location in the heart of the banking community and the size of its assets.
It was a compromise. It gave the bankers the power they wanted but preserved the president’s power to appoint the main board in Washington, D.C.
By doing so, Wilson got the Republican votes needed to pass the bill.
After six more months of haggling over minor details, Wilson signed the Federal Reserve Act into law on December 23, 1913.
The act established the Federal Reserve System and its powerful Wall Street-centric arm, the New York Fed. The latter was the part that complied with the bankers’ demands.
The name of the Federal Reserve System sounded “public” and “of the government.”
And indeed, the act delineated the Fed’s ability to balance credit, monitor inflation, and help cultivate employment.
And yet its members were the private banks that wanted it to exist.
The act was largely devised with bankers’ input. But it was presented to the American public as in their best interests.
Like the European powers, the United States would now have a centralized entitythat operated on the principle of “discount” rates.
That meant large national banks would receive loans stemming from reserve funds for a certain interest charge. Those loans would supposedly be used to lend onward to businesses and citizens as needed.
The Federal Reserve System was similar to a European central bank from a monetary policy perspective. It was able to set rates, but some of its members were more powerful than others.
In theory, all 12 member banks decided matters with equal influence. But in practice, the most powerful components of the system characterized the power-sharing arrangement of the president and the bankers.
The president would select the Board of Governors. The Board of the New York Fed would be closest to the Wall Street bankers.
And the bankers would hold the most sway over the Federal Reserve System because they controlled the largest portion of reserves.
The Bankers’ Bank
Officially the Federal Reserve was created in response to the Panic of 1907 and earlier ones.
But behind the scenes, it served the dual role of perpetuating the power of the president and that of the bankers. As such, it served the alliance of the two.
The Fed’s decisions were technically “independent,” but the body would serve the bankers first. It would do this by keeping them flush with money and by acting as their lender of last resort.
National banks were automatically members of the system. As are more than one-third of all U.S. banks, including the biggest ones, today.
The role of running the New York Fed fell to Benjamin Strong. He was head of the J. P. Morgan Bankers Trust.
As the American writer and journalist Ron Chernow wrote:
The New York Fed and the [Morgan] bank would share a sense of purpose such that the House of Morgan would be known on Wall Street as the Fed bank.
J.P. Morgan, the banking titan himself, had championed the Federal Reserve Act behind the scenes. He died in March 1913. But even though Morgan was dead, his spirit, will, and legacy would live on.
The Fed would not prove able to stop subsequent crashes or crises. But it would always provide financing to the big banks and their closest friends in times of need.
The Federal Reserve Act removed the prohibition keeping U.S. banks from opening overseas branches. This satisfied bankers’ international aspirations.
It also allowed U.S. banks to use the Fed to rediscount bills to raise money for financing foreign transactions. This removed the old reliance on London discount firms to provide this capital.
For New York, this was a major step toward being able to rival London for global financial superiority.
In public, Wilson and others spun this as an “equalizing” measure that
made credit available to banks of all sizes. Despite this, the Fed’s initial charter didn’t even cover smaller savings banks.
State banks also were disadvantaged by a requirement to maintain reserves of 32%. The big national banks only had to hold 18%.
As Fed historian William Greider observed:
The Fed may have actually preserved the financial power of those very bankers who the public thought were at last being brought under control.
Indeed, the mathematics of Fed operation were designed to serve the big bankers the most, and always would.
[Adapted from All the Presidents’ Bankers: The Hidden Alliances That Drive American Power, copyright © 2014 by Nomi Prins. Reprinted with permission from Bold Type Books, formerly Nation Books.]