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.
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| Nelson Aldrich |
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.
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| 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.[1]
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.”[2]
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| 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.
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