TODAY in HISTORY: How The Fed Got It’s Start

by William “Doc” Halliday

What’s in your wallet?  No, I am not attempting to duplicate a persistent commercial.  I am referring to the cash you have, dollars.  Look closely, and you will see that the currency you have is actually Federal Reserve Notes.  If you happen to have any Federal Reserve Bank Notes please call me.  I will be happy to purchase them for twice their face value.

Since 1971, only the Federal Reserve Notes have been produced.  Federal Reserve Bank Notes are backed by just one of the twelve Federal Reserve Banks, whereas Federal Reserve Notes are backed by all of the twelve Regional Federal Reserve Banks collectively.

What is this paper that we refer to as dollars and use as a medium of exchange?  The dollars you have and use is a fiat currency.  This means that it is not backed by anything physical such as gold or silver.

The first financial transactions were actually bartering.  I would trade you 2 arrows for an apple or whatever.  Later gold was used as a medium of exchange.  When gold was stored in warehouses, the receipts for the gold would be traded.  This started the first paper currency – backed by gold.

In 1913, prices were much lower than today in many instances.  Here are some examples of 1913 prices.

Bread – 56 cents/lb.

Milk – $0.089/quart

Cheese – 22 cents/lb.

Butter – 41 cents (just under)/lb.

Coffee – 29 cents/lb.

Ham – 25 cents/lb.

Eggs – 37 cents/dozen

Sugar – 58 cents/lb.

Gasoline – gallon

Car (Ford Model T) – $550.

House – $3,395.

In the autumn of 1910 a small group of men traveled from the business centers in the Northeast to the remote town of Brunswick, Georgia.  From there they took a boat to Jekyll Island where they stayed at the private resort of J. P. Morgan.  Over the next nine days these six men, known as the First Name Club, crafted first the outline, and then the specifics of what was to become the Federal Reserve System.

On Dec. 22, 1913, 103 years ago today, the Federal Reserve Act was passed by the House of Representatives.  It was passed by the Senate and signed into law by then President Woodrow Wilson the next day.

One of these men, Nelson Aldrich, the United States Senator from Rhode Island, was the most influential legislator of that time concerning financial matters.  Three months later he introduced legislation to create the National Reserve Association.  The legislation went nowhere.

Carter Glass, a newspaper publisher from Virginia who would later become the Treasury Secretary, introduced legislation in the House that was similar to Aldrich’s in its goal, but with differences.  He wanted 20 central banks without central control.

President Woodrow Wilson wanted political control of the central bank to be kept in Washington, D. C. Almost everyone seemed to agree that the country needed a central bank.  In a Senate committee the vote came down to a single tie-breaking vote.  In a final concession to those who opposed a central bank, the Federal Reserve System was set to expire and dissolve in 1928.

One hundred and three years ago, on Dec. 22, 1913, the Federal Reserve Act was passed by the House of Representatives.  It was passed by the Senate and signed into law by then President Woodrow Wilson the next day.

That Act created and established the Federal Reserve System, which is the central banking system of this country.  That Act also provided the legal authority to issue the Federal Reserve Notes and Federal Reserve Bank Notes which are now commonly referred to as dollars.  Both Federal Reserve Notes and Federal Reserve Bank Notes are legal tender of the United States.

In its final form, the Federal Reserve Act represented a compromise among three political groups. Most Republicans and Wall Street bankers favored the Aldrich Plan that came out of Jekyll Island. Progressive Democrats demanded a reserve system and currency supplies owned and controlled by the Government in order to counter the Wall Street bankers and destroy the existing concentration of credit resources on Wall Street. Conservative Democrats proposed a decentralized reserve system, owned and controlled privately but free of Wall Street domination. No group got exactly what it wanted.

The Federal Reserve System did not dissolve in 1928.  Today when the federal government wants more money, it borrows it – by having the Federal Reserve sell Treasury Notes.  When the Federal Reserve expands the money supply through its open market operations (e.g., by purchasing government bonds), it credits the accounts that commercial banks hold at the central bank.  Commercial banks may draw on these accounts to withdraw physical money from the central bank.

William “Doc” Halliday, historian and writer, can be contacted at W_halliday@yahoo.com

William "Doc" Halliday

Historian, Political Commentator

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