The Establishment and Evolution of the Federal Reserve Board: 1913-23

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The Establishment and Evolution of the Federal Reserve Board: 1913-23

When, on December 23, 1913, Woodrow Wilson signed the act establishing the Federal Reserve System, he felt grateful, he said, for having had a part in "completing a work...of lasting benefit to the business of the country." The nation had been without an organization performing central banking functions since the charter of the Second Bank of the United States had expired in 1836. Financial stresses caused by the Civil War and a series of devastating liquidity crises and bank failures, especially the Panic of 1907, had focused public awareness on the need for banking and monetary reform. The Congress passed the Aldrich-Vreeland Act of 1908, which provided for the issuance of currency in an emergency. The act also created the bipartisan National Monetary Commission, headed by Senator Nelson Aldrich, to study banking and currency reform and to develop some recommendations. After making a detailed study of banking in Europe and North America, the commission in 1912 published its findings in 38 massive volumes. Aldrich formalized the commission's recommendations in a bill, generally known as the Aldrich Plan, calling for one central bank and 15 branches.

Although members of the Congress agreed on the need for reform and on its general goals, they differed strongly on its shape. The Aldrich Plan stirred up a deep-seated distrust of the centralization of power and of the banking establishment. Alternative plans, which attempted different balances between public and private interests and between central and regional control, were proposed. The members finally overcame their partisan differences and adopted the plan forged by President Wilson, Congressman Carter Glass, and Senator Robert Owen, which became the Federal Reserve Act--an act "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."

While the process of investigation, discussion, and compromise leading to the act had ended with President Wilson's signature, another long process was beginning: that of organizing and establishing in practice the central banking system of the United States and of developing new policies and tools to meet the changing needs and circumstances of the economy. At the time of the signing, Paul Warburg, one of the members of the first Board, said prophetically that "the Federal Reserve Act as passed should not be considered as a finality, and ... actual experience in its operation would prove the need of important modifications or amplifications."(1)

The process of modifying and amplifying the act over the next 10 years was far from smooth. H. Parker Willis, the first Secretary of the Board, in a rhetorical flourish implied that it could even be considered a war: "[The struggle that produced the Federal Reserve Act] is not merely a chapter in financial history; it is also an account of the first battle in a campaign for safe and scientific banking that has only just opened."(2) Willis's metaphor was apt. During its first decade, the System struggled to gain acceptance while facing the stresses caused by World War I and its aftermath. (1)Paul M. Warburg, The Federal Reserve System: Its Origin and Growth, vol. 1 (Macmillan, 1930), p. 141. (2) Henry Parker Willis, The Federal Reserve System: Legislation, Organization and Operation (Ronald Press, 1923), pp. 20-21.

The System was to consist of the Federal Reserve Board in Washington; Federal Reserve Banks, each in its own district and known by the name of the city in which it was located; and member banks, that is, all national banks and those state-chartered banks willing and qualified to join. Initially, all the parts of the interdependent System struggled for acceptance. While separating those parts is often difficult, this article focuses on the struggles of the Board, which was to be, according to President Wilson, the "capstone" of the new Federal Reserve System. …