The Federal Reserve: A Prophet Arises From Louisiana

Freed from its responsibility to maintain the dollar’s fixed value in specie, the central bank has veered far from its legislated purpose.

Library of Congress via Wikimedia Commons
Congressman James Walter Elder of Louisiana, at right. Library of Congress via Wikimedia Commons

With the world beguiled by the predicament of the Federal Reserve — whether to raise interest rates to fight inflation or lower them to ease the banking crisis — this is a moment to reprise why Congress created the central bank in the first place. Monetary sage Edwin Vieira, Jr., reminds us that the Fed was formed at the acme of the Progressive Era to rationalize finance and prevent banking crises. Just like the one we have today.

It was the Panic of 1907 — prompted by bank runs — that got the wheels spinning. The crisis, which sparked a global recession, was traced to “the handicap of an unscientific currency system,” as it was put by a founder of the Fed, Senator Glass. Never mind that under the gold standard, America had a stable currency that allowed it to reach industrial dominance while holding inflation to an average of 0.1 percent a year.

Congress, advised by a monetary commission, in 1913 created the Fed to provide, as Mr. Vieira puts it, “so-called scientific management of currency and credit.” During the debate, the Sun wrote that it was “difficult to discuss with any degree of patience this preposterous offspring of ignorance and unreason.” It described the proposed central bank as “an official board to exercise absolute control” of finance and as “covered all over with the slime of Bryanism.”


That was a reference to William Jennings Bryan, who, in the epic election of 1896, ran for free silver, which meant inflation, and lost to Wm. McKinley, who stood for honest money. The Great Depression would soon put the lie to the Fed’s ability to ward off economic disaster. “Scientific management didn’t work,” is how Mr. Vieira sums it up. He sees in the creation of the Fed the same statist impulses animating the New Deal. 

The result, Mr. Vieira says, was to “cartelize” banking with the Fed “at the top of the pyramid.”  Twenty years later FDR and his New Deal brain trust formed the National Recovery Administration, an attempt to manage American capitalism using the progressive euphemisms of systematizing and rationalizing. Yet when the NRA was struck down by a unanimous Supreme Court, the Fed, an anomaly, was left alone.

Congress had tried to prevent the resulting disaster by insisting, before it passed the Federal Reserve Act, that nothing in the law would authorize abrogating convertibility of the dollar under the Gold Standard Act of 1900. Congress also imposed on the Fed a 40 percent gold reserve requirement for paper money the central bank issued. “We have provided against inflation in almost every conceivable way,” Glass growled. 


These pledges would ring hollow. FDR devalued the dollar in 1933, and Congress forbade Americans from owning gold. After World War II, the Bretton Woods Agreements established a new value of the dollar. It required our government to redeem at a 35th of an ounce of gold dollars presented to it by foreign governments. That fell apart in the late 1960s and 1970s, and we were precipitated into a 50-year experiment with fiat money.

The result has been not only inflation but quantitative easing and artificially low interest rates, culminating in today’s banking crisis. The central bank, freed from its responsibility to maintain the dollar’s fixed value in specie, has veered far from its legislated purpose. As have the other Bretton Woods institutions; even now, an effort is underway to shift the World Bank to a new mission, regulating the weather around the planet.

Which brings us back to the Fed, as it faces the dilemma of how to extricate America from the very crisis that the central bank has induced. It turns out that during the debate over creating the Fed, a congressman from Louisiana, James Walter Elder, uttered words that may yet make him a prophet: “If this bill becomes a law some day the American people will have a memorable fight to unshackle themselves from this government bank.”

The New York Sun

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