In late November, 1913, on a private island off the coast of Georgia, a few of the most powerful men in the United States and the world gathered to craft up the plan for a new Central Bank in the United States. This Central Bank would come to be called the “Federal Reserve” and would go on to be the most important central bank in the world for over a century. The Fed, till this day, is the world’s most powerful central bank.

Context & Background

Banking Panics

The United States financial system had some sort of banking panic every decade or so throughout the 19th century. Some happened during the time the United States had a central bank, and some happened during the times we had a banking system free of a central bank. 

However, the characterization of there being a “free-banking” system in the United States after Andrew Jackson refused to renew the Second Bank of the US’s charter, is a fiction. Banks in the United States are highly regulated and always have been. Lack of a central bank does not imply free, laissez faire banking systems. Scholars of monetary history, like George Selgin, point out other areas of the world which had less regulated financial and banking systems than the US and saw many less bank runs and insolvencies than the US did during the same time period.

The U.S. itself has never come close to exemplifying genuinely free banking. On the contrary: banking here has always been heavily regulated in one way or another. Nor was the so-called “free banking” era an exception. And it has been largely thanks to stupid U.S. bank regulations that the U.S. banking system has witnessed far more bank runs and failures than the systems of most other industrialized nations. Elsewhere bank failures have been relatively infrequent, bank runs have been rare still, and banking crises have been rarer still.

I’ve already mentioned the case of Canada, which didn’t experience any full-fledged banking crises between 1870 and 1914, while the U.S. faced roughly one crisis every decade. The Scottish banking system was equally crisis free for most of the 19th century. And what was special about the Canadian and Scottish banking systems? Simply, that they were among the least regulated banking systems of their epochs. Although each stood on the firm foundation of English common law, the two systems benefited by being free of the many foolish legal restrictions that rendered so many other nations’ banking systems, and the U.S. system in particular, less stable.

Nor were the Scottish and Canadian cases unique. Other relatively free banking systems also had relatively good track-records. Those who really wish to understand the historical causes of banking instability should start by studying the ill-effects of misguided banking regulations, rather than by assuming that banking systems are inherently fragile

George Selgin in Warren Mosler and the Great American Banking Myth

However, these facts haven’t gotten away from a good story and scare tactic to use as  justification for the Federal Reserve System. The problems of stability and safety are blamed on a lack of a central regulatory authority to make everything better. Even though other systems were empirically more resilient and anti-fragile than the US and had demonstrably free-er banking, it wasn’t enough to overcome the fear mongering, emotional manipulation, and regulatory and institutional capture going on in the United States.

Era of Cartelization: Trusts, Monopoly, & Corporatism

The industrial revolution and the second industrial revolution can be seen as incredible explosions of human production. Not only in terms of generating more humans themselves, but also generating more things for each one of those humans to consume and use. Those at the tip of the spear of these explosions of wealth, in government and private enterprise, have become some of the wealthiest and powerful persons, families, and organizations in recorded history. 

Two of the top five recorded wealthiest people to ever walk the Earth were all born in one decade in the United States: the 1830s. And Six of the top ten wealthiest people ever to walk the Earth were all born in the United States between the decades of 1790 to 1860. Just a handful of decades in all of human history in one country produced a majority of the Earth’s wealthiest citizens. 

This shouldn’t be too surprising since the United States during this time was an explosive wealth generating machine. These men played a big part in building and operating the machine and a few capitalized in ways that are beyond the imagination of many people. And it became clear by the late 19th century that the large, US based corporations founded by these types of men had been and became increasingly more powerful than the state governments and the federal government.

In response, a progressive populism emerged across the different regions of the United States that felt the need to create a more muscular, industrial, and scientific government to take on the trusts, monopolists, and cartels that in many American’s minds effectively owned the political and economic reality of the United States, thwarting the people’s ideal of American democratic republicanism. 

The economics of monopoly and trusts is a tough subject, and the politics and laws behind them are even messier. It’s undeniable that the trusts, monopolists, robber barons, and others like them all over the world were crucial nodes in networks that created incredible amounts of wealth. It’s also true that an incredibly small number of individuals, families, organizations, and nations controlled most of the stock and the flows of this wealth and used this power to influence culture, science, religion, and government.

Ironically, by the 1910s there was broad consensus between Wall Street bankers, Treasury Secretaries, easy money Democrats in the South and West, and elite Northeast Republicans that the United States needed a more elastic currency to improve its financial system. The only thing that needed to be ironed out was how this central bank should be set up. 

Rise of Modern Propaganda

During this time we’re also starting to see some of the first expressions of modern propaganda which build off of the theories of the unconscious that were emerging in psychology while also leveraging old techniques and retrofitting them for the new mass media technologies that were spreading throughout the world.

Manipulating the fears and desires of a target population through mass media and then nudging the intended target population towards choosing a solution, service, or product designed by the manipulators themselves became large sources of power and profit by members of governments, and powerful shareholders within large multinational corporations.

Efforts were made to win over small bankers and businessmen throughout America’s heartland in the middle, the south, and the west of america who always looked on the North East financier and commercial class with suspicion. Bankers in the Midwest were told a twelve-bank Regional-Reserve-System would distribute banking power across the nation. To persuade Democrats, promotional literature emphasized the decentralization of banking. From East to West, leaders were assured power would no longer be concentrated on Wall St in New York City.

Technically this “regionalism” wasn’t a complete lie, like most good narratives. The Federal Reserve system is made of 12 regional entities, but the Federal Reserve System gave Northeast bankers and international financiers and the US government more discretion over the supply, distribution, and thus value of money and credit than they ever had before.

Small bankers, businessmen, and farmers thought the Federal Reserve Act would reduce the influence of the “Money Trusts” when in fact the entire architecture was sketched out by representatives of these “Money Trusts” in New York and in Europe.  

Monetary Policy in the US before the meeting at Jekyll Island

US monetary policy during the meeting was relatively non-existent compared to what we have today, with the FOMC now being able to intervene in any market with as many dollars as they need with a few strokes on a keyboard.

The banking systems and financial networks in the US and the other industrializing nations in Europe were still somewhat anchored to a relatively inelastic gold standard that they were all trying to slowly remove themselves from. The gold standard limited the banks, financiers, and the state’s ability to create money and issue credit.

Many bankers, progressives in government, and the south and west of the United States wanted a more elastic currency and credit system. These groups wanted to move away from, in their perception, an archaic and heartless gold standard and towards a money system that was based in “science, efficiency, and the will of the people”. 

The Meeting:

In November 1910, six men – Nelson Aldrich (Republican Senator), A. Piatt Andrew (Assistant Secretary of the Treasury), Henry Davison (Senior Partner at JP Morgan), Frank Vanderlip (President of the National City Bank of New York, now Citibank), Benjamin Strong (Vice-President of Bankers Trust), and Paul Warburg (a board member of Wells Fargo & Company) – met at the Jekyll Island Club, off the coast of Georgia, to draft a plan to re-architect the nation’s banking system. 

Aldrich chose the attendees for their expertise, but Aldrich knew their ties to Wall Street would arouse suspicion about their motives and threaten the bill’s political passage. To keep the meeting secret, Aldrich created the cover-story of a duck hunting trip and instructed each man to come one at a time to a train terminal in New Jersey, where they could board Aldrich’s private train car. 

The meeting and its purpose were closely guarded secrets for over two decades, and the men did not admit that the meeting occurred until the 1930s. But the plan drafted on Jekyll Island, by these six men, laid a foundation for what would eventually be the Federal Reserve System we know today with most of the technical and intellectual credit being given to Paul Warburg by modern scholars. 

In November, 1910, I was invited to join a small group of men who, at Senator Aldrich’s request, were to take part in a several days’ conference with him, to discuss the form that the new banking bill should take. … when the conference closed … the rough draft of what later became the Aldrich Bill had been agreed upon … The results of the conference were entirely confidential. Even the fact that there had been a meeting was not permitted to become public. … Though eighteen years have gone by, I do not feel free to give a description of this most interesting conference concerning which Senator Aldrich pledged all participants to secrecy. I understand, however, a history of Senator Aldrich’s life … will contain an authorized account of this episode.

Paul Warburg, Origins of the Federal Reserve System

Warburg and his family’s banking dynasty were highly respected in international finance for their intelligence and expertise in not only finance but many other subjects. Warburg made it no secret that he thought the US banking system was too rigid, suffered from too much fragmentation, and needed more centralization to catch up with more modern European central banks. 

Warburg’s ideas and recommendations would form the backbone of what would later be called the Federal Reserve Act. The Federal Reserve System would include a central bank that set monetary policy as well as an improved regional regulatory and payment system with 12 regional nodes. These nodes worked together to achieve more capital efficiently in the United States banking system, and also helped US banks become more involved in international commerce than American banks could previously. 

Prior to the Federal Reserve the US banking system was heavily regulated by the states in a very inefficient and patchwork manner with almost no ability to finance international transactions.

Ownership Structure & Appointments

Commercial banks like JP Morgan, Citi Group, Wells Fargo, and others throughout the country are members of the Federal Reserve System and hold stock in their respective Regional District’s Reserve Bank. However, owning Reserve Bank stock is different from owning stock in a private company. The twelve reserve banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The regional reserve banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund.

It sounds charitable that the shareholders don’t directly profit from their ownership in the Federal Reserve System, but they don’t need to, they make enough money being banks. The Federal Reserve Act is a Congressionally approved and taxpayer sponsored insurance plan for a cartel of banks who have outsized influence on money, credit, prices, and regulations. They have immense power and when businesses or markets go sour they can always call on the Federal Reserve to make things right for their assets and their balance sheets.

According to the Federal Reserve:

“The seven members of the Board of Governors are nominated by the President of the United States and confirmed by the U.S. Senate. By law, the appointments must yield a “fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country,” and no two Governors may come from the same Federal Reserve District.

The full term of a Governor is fourteen years; appointments are staggered so that one term expires on January 31 of each even-numbered year. A Governor who has served a full term may not be reappointed, but a Governor who was appointed to complete an unexpired term may be reappointed to a full fourteen-year term.

Once appointed, Governors may not be removed from office for their policy views. The lengthy terms and staggered appointments are intended to contribute to the insulation of the Board–and the Federal Reserve System as a whole–from day-to-day political pressures to which it might otherwise be subject. If all Governors serve full terms, a President would be able to appoint only two Governors during a four-year presidential term. Moreover, even a President reelected for a second term would not have appointed a majority of the Governors until late in the second term. In reality, many Governors do not complete their fourteen-year terms, and recent Presidents have averaged more than one appointment to the Board every two years.

As stipulated in the Banking Act of 1935, the Chairman and Vice Chairman of the Board are chosen by the President from among the sitting Governors and must be confirmed by the Senate. They serve terms of four years and may be reappointed as Chairman or Vice Chairman until their terms as Governors expire. The Chairman serves as public spokesperson and representative of the Board and manager of the Board’s staff and presides at Board meetings. Affirming the apolitical nature of the Board, recent Presidents representing both major political parties have selected the same person as Board Chairman.”

Federal Reserve Report Card

Judging from the stated goals and perspectives of the participants of the meeting at Jekyll Island, there seems to be one overriding goal with a number of reasons that justified the overriding goal. 

The overriding goal was creating monetary discretion in the United States. This is a nice way of saying what a cynic would call more monetary control. Relatively inelastic limitations similar to the gold standard are frustrating to people and institutions that want more control, or discretion over the supply and distribution of money in society. 

Although, the United States and other powers were on some type of Gold Standard for much of early Fed history, the standard was weakened at almost every opportunity until finally in 1971 President Richard Nixon officially de-pegged federal reserve notes from gold. The world has been a floating exchange rate system every since with an abundance of discretion for major central bankers around the world, not jus the Fed.

The assumption amongst the attendees at Jekyll Island and the managers of these institutions is that they had and have the expertise, wisdom, character, and tools to manage the supply of money in the economy at any given moment in time so as to reduce bank panics/volatility, protect savings, and keep productivity high through low employment. All of this was going to be achieved through more discretion over monetary policy.

In terms of achieving discretion, the meeting was a wild success. The current Federal Reserve system has incredible discretion over the supply of money in the US and global economy. There doesn’t appear to be many standards or limits besides tempering rampant CPI inflation, which itself has changed as a measure overtime. America’s first two central banks could only dream of the amount of power wielded by the Federal Reserve. 

But lets remember, the architects sold the discretion as a means to reducing financial and banking volatility, protecting savings, and keeping productivity high through low unemployment. How did they do in these dimensions?

Have we successfully defeated financial panics and protected the average worker’s savings? Not really from our perspective. Have we not seen devaluation of savings and financial panics since 1913?

Have we been productive over the last century? Sure, but have we had long bouts of unemployment, depression, and malaise during this time? Yes, and is low unemployment really the metric we should be using to measure productivity?

Conceivably you can hire people to do unproductive or even destructive work as part of their employment. And furthermore, growth and productivity rates in the United States aren’t as high as they were during the preceding decades when the United States didn’t have a central bank. 

Let’s also keep in mind, the US economic machine, despite all its flaws, from 1890 to 1910, was chugging along with an economic growth rate of above 4% per annum. However, a sharp reduction in the growth rate to around 2.8% occurred from 1910 to 1929. And it only got worse after 1929 and really didn’t improve until the entire global system was decimated by World War II. The 30s saw a decimation of GNP, industrial production, exports, and an explosion of unemployment.

Moving into the later part of the 20th century, manufacturing productivity growth continued at a somewhat slower rate than in earlier decades, and overall productivity was nowhere near even early 20th century growth rates which were already depressed compared to the growth rates seen consistently in the preceding 19th century. 

Just in the 21st century we’ve had the dot-com panic, the housing panic, and the COVID panic coupled with mediocre growth rates.

So what’s all this discretion for if many of the stated reasons behind the discretion haven’t been achieved in a century of its operation? Is a century enough time for a central bank to get it right? 

A cynical take might be that discretion over the supply of money is a good in of itself to the people that have that discretion regardless of whether or not they achieve the stated aims of that discretion. 

However, despite some of the problems we might have with the set up of the Fed and its general performance, there were two big benefits that don’t get discussed enough by critics of the Federal Reserve system that we have to acknowledge.

The Federal Reserve system optimized an immature and fragmented network of existing bank deposits sitting in state banks all over the US, allowing liquidity to flow smoothly throughout the country enabling greater capital efficiency. In addition, the Federal Reserve system enabled US banks to finance international trade which previously had to be outsourced to European banks.

In terms of making the payment and banking system more efficient and extending our banks’ international reach, the Federal Reserve System was a success. But in terms of protecting the value of savings, extinguishing financial panics, lowering unemployment, and boosting productivity it becomes much harder to make the case that the Federal Reserve was an improvement to the previous set up. And there is a strong case to be made that it was a regression.

Coda

It’s interesting that both Bitcoin and the Federal Reserve were both designed in relative secrecy, the difference being in the stated reasoning for the secrecy and intentions of the systems. 

The meeting at Jekyll Island was done in secret so that the population of the United States wouldn’t know that the plan for the new banking system was concocted by representatives of the most powerful financial organizations and families in the world. These men knew if it was known that they were the primary architects of the Federal Reserve System, it would have never come into being. 

In contrast, Satoshi designed a decentralized money system in secret to thwart around the angry eyes of central banks and governments. Fearing retribution for challenging the cartelization of the world’s money supply and payment networks, Satoshi kept himself anonymous and made decentralization the key design choice of the system.

Satoshi knew if himself/herself/theirself or any node became a central point of coordination, the Bitcoin project could and would be shut down quickly and ruthlessly. Satoshi ended up designing a system open to anyone to join, use, and contribute, and made it close to indestructible. Bitcoin has developed first and foremost as a people’s money, and institutions have only come much later in the Bitcoin story. 

We at Edge, prefer the system designed by Satoshi over the system designed by Paul Warburg and Co at Jekyll Island. We encourage you to flip your Warbucks for as many Satoshi’s as possible, all within the Edge wallet. 

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