Lowenstein, America’s Bank

Whenever Roger Lowenstein writes a book it’s a newsworthy event in the financial media. He already has five under his belt—The End of Wall Street, While America Aged, Origins of the Crash, Buffett, and perhaps his best-known, When Genius Failed. His latest book, America’s Bank: The Epic Struggle to Create the Federal Reserve (Penguin, 2015), is yet another tour de force. As over sixty pages of endnotes indicates, he did extensive research, but he writes gracefully, as if telling a familiar story.

In its broadest outlines, the founding of the Federal Reserve Bank is a familiar story, at least to anyone who has a passing interest in U.S. financial history. But Lowenstein shows just how critical, difficult, and in the end miraculous it was.

The American financial system in the late nineteenth and early twentieth centuries was rudderless and fragile, with frequent crises and panics. Paul Warburg, who would be one of the early promoters of the Federal Reserve, likened the currency system “to that of Europe ‘at the time of the Medicis’” (p. 56) and said that “it suffered in comparison with that of the ancient Babylonians.” (p. 74)

Although monetary reform was essential if the country’s rickety banking system was to survive, there was little consensus about the form it should take. How much power should the government, Wall Street, East Coast banks, Midwest banks have? How centralized should the system be? America had already experimented with two national banks and, even though these banks were successful on balance, it didn’t want a third.

The birth of the Federal Reserve was long and arduous. Initially, the very idea of substantive banking reform seemed stillborn. Two Republican administrations (Theodore Roosevelt, William Howard Taft) came and went. One of the key advocates and framers of banking reform, Senator Nelson Aldrich, himself a slow convert to the idea of a Federal Reserve, saw his political clout erode amid scandal. Congress was splintered. The media balked. The Washington Post, responding to the Glass bill, “warily predicted that the power to be lodged in the new Federal Reserve Board could be ‘greater in some respects than the power now wielded by the President of the United States.’” (p. 214)

The Glass-Owen bill was a compromise, addressing the concerns of the time. “No onlooker in 1913 could have predicted that one day the Fed’s most well-advertised duty would be setting interest rates. The bill’s primary purpose was to mobilize reserves, the better to avert a crisis, and to modernize the banking system. … However, an intriguing clause stated that interest rates should be adjusted ‘with a view to accommodating the commerce of the country and promoting a stable price level.’ Buried in that phrase was the suggestion of what became, through a subsequent act of Congress, the Fed’s dual mandate.” (p. 218)

Woodrow Wilson, who eventually signed the Federal Reserve Act into law, had to fend off threats from bankers and deal with a revolt in the House Banking Committee. “The latter in particular upset him. Intraparty strife was the virus that had undone Taft, and Wilson was determined not to give factionalism any quarter.” (p. 224) In the end Glass-Owen passed the House 285-85, with all but three Democrats voting in favor. The Senate, after lengthy wrangling, passed its own bill 54-34, with six Republicans joining a united Democratic front. The gap between the House and Senate bills was “unusually large,” but the conferees managed to produce a conference report that was overwhelmingly accepted by both the House and the Senate. “In twelve short months, Wilson had wrung from a party steeped in devotion to Andrew Jackson, and to the crudest anti-banking stereotypes, the filaments of a central bank.” (p. 252)

Lowenstein explores the hopes and dreams of the men who were instrumental in the creation of the Fed, and he shows how the sausage was made. America’s Bank is an engrossing story.