Mises
Let me issue and control a nation’s money and I care not who writes the laws.—Rothschild
The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson…—FDR
The American people are suckers for the word “reform.” You just put that into any corrupt piece of legislation, call it “reform” and people say “Oh, I’m all for ‘reform,’” and so they vote for it or accept it.”—G. Edward Griffin
Though there had been steady steps toward centralization of the monetary and financial system in the United States—especially since banking and the federal government were connected by the National Banking System during and after the Civil War (ca. 1863-1913)—the financial-banking elite, especially in New York, still had several complaints prior to the creation of the Fed.
New York Banks, Wall Street, and “Monopoly”
The movement toward central banking, the Federal Reserve System, in America was a keystone of the Progressive movement. Like all other regulations and reforms of the Progressive era—as perfectly encapsulated by G. Edward Griffin’s quote above—the movement toward the Fed was ironically presented publicly as fighting banking “monopoly,” “stabilizing” the system, curbing inflationism, and disciplining banks and financial elites. In fact, it would involve the establishing of a monopoly in the name of fighting monopoly. Consequently, this would furnish government a handy tool for greater inflationism and would allow the banks in the system to engage in unsound monetary practices with the promise of government bailouts. Remarks Rothbard in A History of Money and Banking,
Fortunately for the cartelists, a solution to this vexing problem lay at hand. Monopoly could be put over in the name of opposition to monopoly! In that way, using the rhetoric beloved by Americans, the form of the political economy could be maintained, while the content could be totally reversed.
Banker Complaints
Prior to the establishment of the Federal Reserve, however, the movement toward centralization of the monetary and financial system was incomplete from the bankers’ perspective. The financial interests were still missing a few key factors and still observed major “flaws.” In summary, their main complaint was “inelasticity,” that is, banks within the national banking system were not able to expand money and credit to the extent that they wanted. These financial elites disliked the lack of complete centralization provided through the halfway step of the National Banking System, the lack of cartelization, competitive pressures from non-national banks, and the threat to New York banks’ financial supremacy. Regarding the New York financial interests, Ron Paul and Lehrman, in their Case for Gold (1982), avow,
…the large banks, particularly on Wall Street, saw financial control slipping away from them. The state banks and other non-national banks began to grow instead and outstrip the nationals.
Similarly, Gabriel Kolko in The Triumph of Conservatism (1977), argues,
The crucial fact of the financial structure at the beginning of this century was the relative decrease in New York’s financial significance and the rise of many alternate sources of substantial financial power.
For example, throughout the 1870s and 1880s, most of the banks were national banks, with financial standards determined by Washington, but by 1896, non-national banks—state banks, savings banks, and private banks—made up 61 percent of the total number of banks, providing competitive pressure. By 1913, 71 percent of banks were non-national banks, again putting competitive pressure on Wall Street banks. This was unacceptable to the national banks, especially the New York financial-banking elite. Kolko writes that, “This diffusion and decentralization in the banking structure seriously undercut New York’s financial supremacy.” Regarding the fundamental changes brought about by Federal Reserve System, Kolko further explains,
The economy by 1910 had moved well beyond the control of any city, any group of men, or any alliance then existing in the economy. The control of modern capitalism was to become a matter for the combined resources of the national state, a political rather than an economic matter.
The Panic of 1907, in which major banks were allowed by the government to suspend specie payments and continue operations—being legally released from contractual obligations—led to calls for “reform,” naively agitating for central banking. Unfortunately, these so-called “reforms” would facilitate the most powerful banks engaging in similar inflationary practices, but on a greater scale, insulated from the consequences by the government. Rothbard explains,
Very quickly after the panic, banker and business opinion consolidated on behalf of a central bank, an institution that could regulate the economy and serve as a lender of last resort to bail banks out of trouble.
The banks plus the government partnered to create these boom-bust crises through their inflationary policies through the National Banking System. Then, when the inevitable consequences of these policies were realized, banks and governments would further “reform” the system toward a central bank, legally uniting them, and protecting them from competition and consequences. Problems caused by monetary policies of the government, allied with banks, were to be solved, Americans were told, by the government creating a “bank of banks” that could regulate the entire monetary system.
Central Banking & World War I
World War I provided a new opportunity to utilize the newly-created powers of central banking through the Federal Reserve System, even prior to official US entry into the war. The Federal Reserve—doubling the money supply during WWI (1914-1919) and creating a boom-bust cycle in the depression of 1920-1921—gladly financed US involvement and entry into World War I. This likely would not have been supported by the American people through taxation, but taxation through inflation—perpetrated by a central bank—conceals the costs of government activities. World War I would simultaneously strengthen the power and centralization of the Fed and the federal government power in general. Wars and central bank inflationism are mutually reinforcing. As summarized by Willis, Theory and Practice of Central Banking, and cited in Rothbard’s Progressive Era,
It was the entry of the United States into the World War that finally cast a decisive vote in favor of a still further degree of high centralization; and that practically guaranteed some measure of fulfillment for the ambitions that had centered around the Federal Reserve Bank of New York…
While the Fed enabled US entry into World War I, and World War I enabled major centralization of American society, the Fed also was the means through which wealth from the war was transferred to US bankers. Wall Street banks and Morgan greatly benefited from the war, acting as financier and mart for war materials for the Allies. John Moody, in his The Masters of Capital (1919), also cited in The Creature from Jekyll Island, explains,
Thus the war had given Wall Street an entirely new role. Hitherto it has been exclusively the headquarters of finance; now it became the greatest industrial mart the world had ever known. In addition to selling stocks and bonds, financing railroads, and performing the other tasks of a great banking center, Wall Street began to deal in shells, cannon, submarines, blankets, clothing, shoes, canned meats, wheat, and the thousands of other articles needed for the prosecution of a great war.
When it seemed that the Axis powers might succeed in the war as it ground toward a stalemate—with exhausted powers on all sides—these financial interests agitated for American entry into the war to extricate them from a major financial loss and open new vistas of profit. The losers likely would not repay loans. Wilson also believed this financial control over the other Allies by American financial interests as essential to influencing France and England into Wilson’s view of a post-war peace and world order. He told Colonel House,
England and France have not the same views with regard to peace as we have by any means. When the war is over, we can force them to our way of thinking, because by that time they will among other things be financially in our hands.
Conclusions
This history concerning the origins of the Fed and WWI can teach us a few lessons. First, it was not monopoly and lack of competition that brought about the “reform” of the Federal Reserve System, but too much competition from non-national banks. Cartelization and monopoly were put in place in the name of fighting monopoly. Second, bankers and governments, who had caused the inflationary and business cycles offered the Fed as the solution, which only further nationalized and exacerbated the problem. Third, central bank monetary policy—through the inflationary expansion of money and credit—enables and conceals the costs of government projects, especially war. Fourth, wartime conditions—enabled by central banking—allowed for government centralization under the emergency of a war. Fifth, WWI provided an ample opportunity for bankers to offer loans and opened up new business opportunities and “vistas of profit.” Sixth and lastly, when it looked like there would not be a definite Allied victory, the bankers agitated for the US to enter the war to bail them out so that Allied loans would be repaid.
Originally Posted at https://mises.org/
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