The View From 1776

-------------------
The Federal Reserve System’s creation in 1913 and its changing role reflect the major shifts in the nation’s political thinking in the first half of the 20th century.  The Federal Reserve was intended to decentralize and facilitate credit availability for businesses in different regions of the nation, but it became in the 1930s an instrument to consolidate Federal control over the nation’s banking system and thereby to control the economy.

President Woodrow Wilson’s New Nationalism of 1913 was a program to break up concentrations of economic power in order to level the playing field for small businesses and individuals.  In a speech in 1911, Wilson had said, “The plain fact is that control of wealth is dangerously concentrated.... The great monopoly in this country is the money monopoly.... The growth of the nation, and all our activities, are in the hands of a few men...”

Congress’s Pujo Committee, from 1911 until 1913, had documented the complaints of farmers and small businessmen in the hinterlands: control of the nation’s banking credit and its major industries was heavily concentrated in Wall Street, in the hands of banks controlled by J. P. Morgan and the Rockefellers.  One of President Wilson’s first priorities was to provide for decentralization of credit availability and for the issuance of a national paper currency to replace reliance on bank notes issued by individual banks.

The result was the Federal Reserve System, established in the Owens-Glass Act of 1913.  Twelve regional Federal Reserve Banks in the major economic centers of the nation were to be owned by their member national banks located in each region.  Nonetheless, it was a Federal system that replaced the central bank functions exercised unofficially by J. P. Morgan & Co.

Regional Federal Reserve banks could adjust credit availability to suit regional conditions, and they could issue the new Federal Reserve bank notes, backed by commercial paper and a 40% gold reserve.

President Franklin Roosevelt’s New Deal of 1933 was a horse of a different color.  It was a program to take over management of the national economy in order to make the Federal government the regulator of people’s food, clothing, education, health care, and jobs.  Its central tenet was that the individualism of the Bill of Rights and the capitalist system of private property ownership had failed and had to be replaced by state-planning of the sort that Mussolini had introduced in Italy with his Fascist state corporatism in the 1920s.

Blow-by-blow details can be found in Dr. Walker F. Todd’s “From Constitutional Republic to Corporate State: The Federal Reserve Board, 1931-1934,” published as Monograph Number 51 by the Committee for Monetary Research and Education (CMRE).  To obtain copies, call CMRE President Elizabeth Currier at 704-598-3717.

Dr. Todd writes, “Mussolini believed that the otherwise intractable and irreconcilable conflict between management or capital or labor could be resolved, or at least controlled, if they could be brought together in a “corporation” under state control.  Fascism was seen as a way of binding together the disparate elements of society and thus strengthening the whole, but it violated an ancient, Aristotelian precept of justice under the Rule of Law, by tolerating an involuntary conscription or elimination of those inclined to dissent from this political economy model.”

This is a concise description of New Deal intentions in agriculture, industry, and banking. 

Farm production and prices were regulated by the various new Federal bureaus.  A farmer who produced more than his Federal allotments was imprisoned, even though the extra production was only for his own family.

The National Industrial Recovery Administration pulled business executives and labor leaders together under Federal supervision to establish industry “codes” that fixed prices, production levels, and wage rates.  A tailor who charged less than the prescribed price to press a pair of pants was thrown into jail.

Beginning in 1931 under President Hoover, the Federal Reserve System’s powers were collectivized in the Federal Reserve Board at the expense of regional Federal Reserve banks’ powers.  The board became a tool to implement Presidential economic policies.

At Hoover’s urging, the Board organized the National Credit Corporation, a bail-out agency for troubled banks (establishing the “too big to fail” precedent that led the Federal government later to bail out Chrysler, Lockheed, and other companies, as well as conditioning the public for Federal industrial polices to favor designated industries over others).

Federal Reserve head Eugene Meyer urged re-establishing the War Finance Corporation (WFC) that had centralized control of the nation’s industries in World War I.  Not altogether coincidentally Meyer later bought control of the Washington Post and transformed it into a vigorous supporter of liberalism.

The fruit of Meyer’s effort was the Reconstruction Finance Corporation (RFC), which under Roosevelt was to become the chief financier of the many Federal agencies to control industrial and agricultural activity.  The Federal Reserve Governor was made chairman of the RFC.

The Reserve Board’s general counsel in 1932 urged nationalizing the chartering, regulation, and supervision of all banks.  Shortly after Roosevelt’s inauguration in 1933, the Board prepared the framework for the “bank holiday” closing all banks, in contravention of state and other laws.  Senator Carter Glass informed President Roosevelt that this action was illegal, even under the World War I legislation it claimed as authority.  Roosevelt responded that, legal or not, he was going to close the banks.

New York’s liberal Republican Congressman Hamilton Fish called Roosevelt’s action “an American dictatorship based on the consent of the governed without any violation of individual liberty or human rights.”

The Board then prepared legal work for Roosevelt’s executive order forbidding “hoarding” gold or gold certificates.  This was preliminary to deliberate action to inflate the currency.  A presidential executive order reduced the gold content of the dollar approximately 50%.  Coupling this with action to make illegal the honoring of contracts requiring payment in gold meant that lenders overnight lost half the value of their loans outstanding. 

At the same time the Fed was instructed to begin “open market” operations to purchase securities directly from the Treasury, in effect, to manufacture money with bookkeeping entries. 

With the arrival of Mariner Eccles as Fed Governor in 1934, the emphasis of Fed activities shifted more in the direction of Keynesian economic theories.  Keynes theorized that the cause of the Depression was the “liquidity trap” resulting from people saving too much money.  The way around this problem was government fiscal policy: spend as much as possible for any purpose whatever and inflate the currency in the process, thereby stimulating consumer demand.  It didn’t get us out of the Depression, but it remains the liberal theory of economics to this day.

The Banking Act of 1935 centralized interest-rate-making powers in the Federal Reserve Board and tightened its grip on regulation of eligible collateral for discount loans to banks.  It is noteworthy that the Board staff member who drafted legislation for this power-grab was Harvard economics professor and Keynesian supporter Lauchlin Currie.  After World War II, Currie was identified by Elizabeth Bently and Whittaker Chambers as a Soviet agent.  Rather than face trial here, he sought refuge in Columbia, beyond U.S. repatriational jurisdiction.

Visit MoveOff Network Members