America's Bank: The Epic Struggle to Create the Federal Reserve

I have always liked Mr Lowenstein and respect both his journalistic instincts and his ability to tell a story in a way that is relevant to his reader. In this case, I believe he has again done a remarkable job of relating a truly fascinating episode of American history. I have two criticisms.First, there were times where the number of players and the various organizations jockeying for position become confusing. This is perhaps more a function of the facts than the explanation, but at some points it seemed a little too convoluted to follow the moving parts.Second, and in my mind more importantly, the explanation of banking, finance and money were lacking. One of the reasons I wanted to read this book was to better understand how the world of finance functioned in a time that had not yet developed sophisticated views on credit, currency, and so on. The world we live in today is so different than a century ago, it is hard for us to comprehend how these concepts were viewed. I was eager to understand more how a bank could create its own cash/currency using its assets, how money supply could fluctuate, how new banks could be formed... (i found the explanation about changes in money supply due to harvest a bit simplistic). Lowenstein does attempt to explain the banking world of early 20th century, but it was too rudimental and left me asking more questions than it answered. That is not to say this book should have turned into a finance textbook or a "what is money" theoretical treatise. I just felt there was a missed opportunity here to really chew on some fundamental concepts which would have been very enlightening, and the story would have given a good pretext to walk thru how our thinking has evolved. I ended the book feeling I understood a lot more about the political and historical context of the Fed, but not necessarily the really deep issues that necessitated its creation. Yes, it was about pooling reserves to help stem bank runs. But it was far more than that - it was the beginning of a complete revolution in the way we think about currency, credit and finance. Maybe it would have been too complex for the average reader, but anyone who picks up a book like this is not an average reader. So a bit of a missed opportunity.Overall, despite my slight disappointment on this point, I found the book to be extremely engaging and thought provoking. As Mr Lowenstein shows, many times history is a function of the whims, desires and motivations of individuals in a position of power, and the decisions they make have lasting effects. The reason the Fed looks as it does today (eg, regional banks) is a direct result of the political expediency of that time. I salute Mr Lowenstein for his diligent research, and for his effort in telling this fascinating story.

Nice reading.enjoyeditalot.thanks.

“If men were angels, no government would be necessary,” James Madison famously wrote. The same could be said of bankers. If bankers were angels, there would be no need of a central bank. Creation of the nation’s central bank—the Federal Reserve—is the subject of Robert Lowenstein’s informative and highly readable book, but the underlying theme is of trust, as in, who do you trust? Since the beginning of the American republic, Americans trusted neither governments nor banks, particularly central governments and central banks, such as ruled the British Empire from London and governed the affairs of the American colonies—until ties were severed by the American Revolution. After the Revolution, the original 13 states struggled politically and financially until the enactment of the Federal government in 1789 and the establishment of the nation’s first central bank in 1791, the Bank of the United States. Both worked exceedingly well, so much so that Thomas Jefferson feared a new monarchy in the making and ran for president determined to reduce the power of the federal government and do away with the bank altogether. In spite of Jefferson’s antipathy, the central bank proved necessary as a lender of last resort and survived for another 36 years—until the presidency of Andrew Jackson. By then, the bank had become the object of intense hatred by Jackson as well as by working Americans. De Tocqueville, touring America at the time, was plainly bewildered. To him, as to most Frenchmen, the Bank of France seemed a natural outgrowth of the French national government. But in the U.S. the central bank reawakened Americans’ primal anxieties, the colonials’ fear that their hard-won liberties would be crushed by a far-off monarch and his scheming money men. Jackson destroyed the bank and was hailed as a hero for the next 80 years, despite a series of financial panics, bank runs, money shortages, and full-blown depressions that might have been averted or lessened had there been a lender of last resort—a central bank.In 1907, after a particularly nasty panic that was arrested only by the deep pockets of J.P. Morgan (acting as a lender of last resort) opinion began to change. Two politicians and four Wall Street bankers decided it was time to do something about it. Secretly, they boarded a train for a rural island off the coast of Georgia, to a private resort known as the Jykell Island Club. The politicians were Nelson Aldrich (a U.S. Senator), and A. Piatt Andrew (the Assistant Secretary of the Treasury). The Bankers were Henry Davidson (J.P. Morgan and Company), Paul M. Warburg (Kuhn, Loeb and Company), Benjamin Strong (Bankers Trust of New York), and Frank A. Vanderlip (National City Bank). Why a secret meeting? Because Senator Aldrich—the head of a joint Congressional committee studying the bank issue—needed help. If it were known that he was calling on Wall Street bankers to help him prepare his report and bill, it would’ve been fatal. After all, everyone knew bankers couldn't be trusted. Yet these particular bankers were well educated, convinced change was necessary, and possessed the very insider information Senator Aldrich needed to write an effective bill. What they worked out closely approximated what would become the Federal Reserve Bank. A spate of obstacles lay in the bill’s passage, including famed populist William Jennings Bryant (a noted bank basher and Jacksonian Democrat), a nation of Americans still radically opposed to a central bank, bankers in general, newspapers and politicians—in effect, nearly everyone. But things were changing. Progressivism was on the rise—antitrust laws were in force, women were campaigning for the vote, and a bill for the direct election of senators was before Congress. While opposition to a central bank remained strong, everyone knew something needed to be done to prevent another run on banks.Enter Woodrow Wilson. Wilson was a Democrat and a good friend of William Jennings Bryan. Unbeknownst to Bryan, Wilson favored a central bank. Despite being a member of the party of Jefferson and Jackson, Wilson thought highly of Alexander Hamilton, the founder of the Bank of the United States. He labeled Hamilton as “one of the greatest figures in our history.” And Jefferson? “A great man, but not a great American.” At the time Wilson wrote these words, he was the president of Princeton University. By the time Congress was looking into the possibilities of a central bank, Wilson was governor of New Jersey. In 1912, he ran for president. With the much-needed support of Williams Jennings Bryan (coupled with division within the Republican Party), he was elected president. He appointed Bryan Secretary of State and gradually brought him around to supporting a central bank. Congress, meanwhile, was having trouble hatching out a bank bill that would pass both houses. They were about to adjourn for the summer when Wilson intervened. Exercising his power as president, he ordered Congress to stay in session until they had a bill ready for his signature. All that long, hot summer and into the fall Congress wrestled over the bill, considering input from a variety of sources, including President Wilson. On December 23, Congress presented a bill for the president’s signature, which he signed into law.According to Vanderlip, the Federal Reserve Bill, despite undergoing a variety of back-and-forth changes, still looked very much like the original bill that had been drafted on Jykell Island. The Federal Reserve would be comprised of a central bank in New York and 12 branches spread across the country. There would be a seven-member Federal Reserve Board appointed by the President and approved by the Senate. The Board would oversee the district banks, generally regulate the banking system and set national monetary policy. Each of the 12 branches would have its own board of directors. There would be a single national currency, backed by one of the 12 branch banks and would be redeemable in gold. Indeed, for the first time, the United States government would begin printing paper money, which before had been the domain of state banks.There is much more to Mr. Lowenstein’s book, especially about the wild and woolly state of banking and paper money in all its forms, prior to the creation of Federal Reserve System. Prior to the Fed, any strain placed on the American banking system—if it can be called that—might cause the financial collapse of hundreds of banks overnight and the nation tumbling into yet another recession. Indeed, prior to the Fed, the American economy had nothing behind it to prevent a recession, which is tantamount to a wire walker working without a net. Mr. Lowenstein’s book reads like a novel, and like a novel, has its share of heroes and villains. Five stars.

This is a much more substantive book than either "The Creature from Jekyll Island" or "Lords of Finance: The Bankers Who Broke the World" which won the Pulitzer Prize for History in 2010.However, I was very disappointed that it failed to mention the 1918 Amendment to the 1913 Federal Reserve Act. The 1918 Amendment was at least as important as the creation of the Federal Reserve since it was the genesis of the Federal Reserve's "Open Market Operations," and essentially converted the Federal Reserve from a banker of last resort to a policy-making body. And, how the Federal Reserve became a policy making body with the power to create money, yet not subject to the same checks and balances of power that apply to our three branches of government, is perhaps of far greater significance than the creation of the Federal Reserve as merely a lender of last resort.To put this into perspective, readers should consider the following that, in my view, should have been included in the Epilogue to Roger Lowenstein's otherwise excellent book. WWI broke out shortly after the Federal Reserve was created, and after the war the government found itself in debt. Although modest relative to the mountains of debt that have been accumulated since that time, the government was anxious to keep the interest rate on that debt as low as possible. Therefore, in 1918 it modified the Federal Reserve Act of 1913 to allow banks to also pledge government securities as collateral for the loans that they sought from the Federal Reserve. In addition, the banks would be permitted to borrow from the Federal Reserve at a lower rate if they pledged such government securities as collateral rather than commercial paper.Since banks back then were still in the business of making loans, and they could generate larger profits from these loans if amounts available for lending could be borrowed from the Federal Reserve at a lower interest rate, demand by banks for government securities quickly soared. Almost as quickly, the Federal Reserve learned that the terms at which government securities were made available to banks could influence their lending behavior by even more than fluctuations in the demand for loans by private sector borrowers based upon natural market forces. In other words, a relatively small group of individuals could now exercise tremendous control over the economy simply by manipulating the supply and demand for government securities rather than acting merely as a “lender of last resort” responding to fluctuations in private sector demand for loans and deposits. This was the genesis for what are now known as “Open Market Operations,” which we take for granted as being an important and necessary monetary policy tool available to the Federal Reserve.Putting this newly acquired power to work, primarily under the influence of a single member, namely Benjamin Strong, the head of the New York Regional Federal Reserve Bank, the Federal Reserve coordinated its activities with central banks in England, France, and Germany to restore the gold purchasing power of the British Pound to its pre-World War I level. This was achieved by causing interest rates in the United States to remain artificially low, so that cash available from other parts of the world would flow to England rather than the US in order to earn higher interest rates, thus bidding up the value of the British Pound in the process. These policy decisions obviously had little to do with the natural forces of market supply and demand, but it was hoped that this return to the status quo would somehow stabilize the world financial system. The low interest rates and easy money policies being pursued in the US did, in fact, lead to a robust period of economic growth known as “the Roaring Twenties.” But, the price to be paid for resisting natural market forces was excessive debt and a stock market bubble.In response, rather than allowing the economy and financial markets to achieve a true state of equilibrium, additional market-distorting government and central bank interventions were introduced instead. These shifting, sometimes contradictory policy decisions and interventions created confusion and uncertainty, which wreaked further havoc on the economy and markets for over a decade. In effect, the growth and stability of our economy became increasingly subject to the policy decisions of the federal government and the Federal Reserve, rather than the direct market forces of supply and demand operating within the private sector. However, a more “stable disequilibrium” was eventually achieved, subject to the “mere” expense of growing mountains of debt, and increased reliance upon the centralized policy decisions taken by an increasingly powerful federal government and “Federal” Reserve."

I wanted to learn how we got our Federal Reserve System. This is a good layman's book to explain that. Today's economy is heavily influenced by the Fed and their Zero-Interest-Rate policy that is creating the biggest asset bubble of all time. It will shortly cause the biggest crash of all time. These elitists on the Fed have no idea what they are doing. They are supposed to do several things. Primarily they are to create liquidity. They let Lehman Bros fail and started the Great Recession. They are supposed to stabilize the value of a dollar. It takes $25 to buy what $1 bought when the Fed started. FDR started the FDIC because the Fed geniuses couldn't figure out how to stop runs on banks. They have exploded their balance sheet and encouraged the holding of $20 trillion in US government debt by the Fed, the US banks and individuals, and foreign banks and individuals. When the federal government has to pay interest (say 3-4%) on $20 trillion in debt, the economy will collapse. Thank you Woodrow Wilson.

For a book that has been widely and favorably reviewed elsewhere, I found Roger Lowenstein's American's Bank: The Epic Struggle to Create the Federal Reserve, a bit of a letdown. For someone who writes about finance and economics professionally, Lowenstein seemed to focus much more on the personalities of the principal actors, Sen. Nelson Aldrich of Rhode Island; Paul Warburg, a member of the Warburg banking family from Hamburg, Germany; financier J.P. Morgan; Representative Carter Glass of Virginia; presidents Theodore Roosevelt, William Howard Taft, and Woodrow Wilson, and a laundry list of bankers, politicians, and various others who each had a hand in the creation of what is now the Federal Reserve. As Lowenstein makes clear, this was a hard-fought battle pitting the emerging need for a national banking system against Americans' long antipathy towards bankers, specifically the powerful New York banks and the men that ran them.The book is a quick read, perhaps too quick given the subject matter, and the importance of the Federal Reserve in the national economy. Lowenstein makes some cryptic comparisons between the Panic of 1907 when systemic lack of liquidity cause numerous otherwise solvent banks to fail because they lacked cash on hand to respond to demands for immediate payment by panicky depositors who were responding to cascading business failures caused by lack of liquidity and freezing of credit.The central perspective of Lowenstein's narrative is the serpentine path that would-be financial reformers found themselves taking once they realized that continuing with the existing system of fiercely independent banks, each husbanding its own resources, could no longer be sustained. The story of the political maneuvering that went on, especially between 1908 and 1913 is interesting, but Lowenstein's narrative is overly detailed, and is laden with a great many factoids that frequently get in the way of a fuller understanding of what was going on. National legislation of this kind is always messy, with numerous groups attempting to weigh in on what the eventual outcome will look like; and who will be the eventual winners and losers.It is enough to say that a good deal of Lowenstein's story gets lost in the weeds, which is unfortunate, because it is a good tale to tell that is otherwise well told. Rather than detailing the personal histories and family backgrounds of the various participants, I would much prefer that Lowenstein had taken the trouble to give a more detailed account on the macroeconomic level that readers of his former employer, the Wall Street Journal, would have come to expect from someone who writes for that publication on a daily basis. By way of example, the epilogue, some 15 pages in length, gives a thumbnail sketch of the Fed's post-1913 history that most certainly could have used further discussion, and analysis, and a look-back to see where the drafters could've done a better job. We know that in 1933, the Fed sat on its hands and essentially refused to become the lender of last resort when thousands of banks all over the country failed, thereby worsening the depression by a high order of magnitude. We also know that in 2008, the Fed did quite the opposite and fended off what could've become a catastrophic depression, much to the chagrin and anger of the hard money crowd.Even at this late date, the bankers whose recklessness touched off the 2008 debacle have yet to be called to account, and responsibility for this lapse in no small measure can be laid at the door of the Federal Reserve.