Following the Panic of 1907 — known as “the Bankers’ Panic” — caused in large measure by massive money creation for stock market speculation and the failure of an attempt to corner copper by the president of the Knickerbocker Bank and Trust, strong pressure was put on Congress to pass emergency legislation. The Aldrich-Vreeland Act of 1908 allowed for a temporary reorganization of the financial system. Groups of banks were organized into national currency associations and permitted to issue banknotes on an emergency basis.
What is significant about the Aldrich-Vreeland Act is that the emergency issues of banknotes were backed in part by private sector commercial paper instead of government debt. This was the first instance in the United States under federal law of legal permission being given for an asset-backed banknote currency. This was a major advance, even though the gold reserve currency remained inelastic.
The Aldrich-Vreeland Act continued to operate right up to when the Federal Reserve System was instituted and began operations in November 1914. This was in response to the demands placed on the financial system by the outbreak of the First World War in Europe.
The “Creature from Jekyll Island”?
In November 1910 Aldrich called the near-mythical secret meeting at Jekyll Island, Georgia, to work out a permanent plan to reform the financial system in the wake of the Panic of 1907. This meeting has entered populist and socialist lore as the beginning of the alleged plot to foist a central bank, the Federal Reserve System, on the United States, and deprive Americans of their sovereignty through manipulation of the currency.
|Jekyll Island resort, site of well-publicized secret meeting.|
The problem with the myth is that the proposal that came out of the Jekyll Island meeting did not, in fact, lead to the formation of the Federal Reserve System. The Aldrich plan was essentially a whitewash of the existing system, with the addition of a single central “reserve association” under the control of the same people who had caused the Panic of 1907. As Moulton explained, “[T]he Federal Reserve Act is not a mere plagiarism of the Aldrich plan. In certain fundamental respects the new law is markedly different from and markedly superior to the Aldrich plan.”
|Banks created money for the Second Liberty Loan Drive.|
The Federal Reserve System was established primarily to 1) provide a stable and elastic asset-backed paper reserve currency to supplement the inelastic gold reserve currency to enable commercial banks to meet the needs of industry, commerce, and agriculture, 2) de-concentrate control over money and credit, 3) regulate the banking system and financial markets to prevent monopoly control over the system itself, and 4) provide depository services for the federal government. That is, the Federal Reserve System was to serve as a bank of issue for the nation’s commercial banks (the private sector) and as a bank of deposit for the federal government (the public sector).
Ironically, despite the careful design of the Federal Reserve Act, the capitalist élite rapidly regained the power they had lost. This happened when Congress decided to finance the U.S. entry into the First World War by monetizing government debt through the central bank by means of a loophole in the Federal Reserve Act instead of raising taxes.
Consequently, instead of controlling money and credit directly, it was only necessary for the financial elite to control government access to money and credit. This put effective power right back where it had been before, with the capitalist elite holding the purse strings by controlling money and credit flowing to the government, instead of the people controlling them through taxes voted by Congress.#30#