The establishment of the U.S. Federal Reserve was a direct response to recurring financial panics and bank runs, driven by the realization that a centralized institution was necessary to stabilize the economy.
The story of the Federal Reserve System of the United States starts at 5:12 a.m. on April
18, 1906.
At that moment, a massive earthquake hit San Francisco.
"They said it couldn't be done"
It destroys the city.
The U.S. economy falls into a huge recession.
Unemployment rockets up.
The stock market falls by 50 percent.
And by 1907, banks start shutting down.
This happens often during a financial crisis -- you’ve probably heard of a run on the
bank like in Mary Poppins or It’s A Wonderful Life.
"There's something wrong.
The bank won't give someone their money."
"Well, I'm going to get mine.
Come along young man."
"Don't look now, but there's something funny going on over there at the bank, George.
I've never really seen one, but that's got all the earmarks of being a run."
People panic, and then they start pulling money out of banks that might otherwise be
totally stable.
The thing is, when the banks fail, businesses can’t borrow anymore money, and they lay
people off.
Then there’s even more fear, and the cycle just keeps going.
And back in 1907, the U.S. government had no institution to deal with this panic.
There’s no way to even try and control it.
So the job of saving the U.S. economy falls to the most powerful banker -- one man, J.P.
Morgan.
At this point, Morgan is basically running the world economy from his private library
in a mansion on Madison Avenue.
He starts summoning the presidents of the biggest banks in America to try and figure
out how to deal with the crisis.
And he says, “Gentlemen.
We have to draw the line.
We have to stop this panic.”
One Saturday night, he calls some of the most powerful bankers in America into the library
and he tells them how he’s going to fix the panic.
He says, “We’re going to pledge to contribute $25 million to a pool of money that will be
used to save the banks.
And we're not leaving until all of you sign.”
He locks the doors and goes into his secretary’s office to play solitaire until the bankers
figured things out.
By five in the morning, they had all signed the list.
And that, essentially, was the end of the Panic of 1907.
But here’s the deal.
The panic of 1907 wasn’t the first America had barely survived.
There was the panic of 1819, the panic of 1837; the panic of 1893, the panic of 1896.
This was not a one-time thing, it was bound to happen again.
And Morgan was 70, working two hours a day.
He was just not the guy who was going to keep saving the entire financial system.
The government needed a plan to help them manage future panics better.
And one very powerful guy in particular decides he’s going to get it done: The head of the
Senate’s finance committee, Senator Nelson Aldrich of Rhode Island.
Aldrich looks at the US economy and says “we gotta do something about these panics.”
And it comes to him that “the US needs an organization that can loan money to banks.
That way people will know their banks won’t run out of money.
It would stop bank runs.
What we need is some sort of central bank.”
"Good God, man!
Did somebody say something about a central banks?!"
Back in the day, though, people really weren’t fans of the words “central” or “bank.”
So in 1910 he comes up with a plan.
He told some of the most powerful bankers in the country, “Dear Gentlemen, I want
you to gather at the Hoboken train station, but I want you to come in secret.
Come alone.
Use only your first names.
Don’t come in your top hat and your monocle.”
They came dressed as duck hunters because, even though he needs their expertise, it’s
not going to look good to have bankers designing a system to bail themselves out during future
panics.
They got on a southbound train, in Aldrich’s private rail car attached to the back.
The blinds were down.
And they start work immediately on a plan for a new central bank while on their way
to a private club on an island off the coast of Georgia.
An Island...called...Jekyll Island.
[ominous organ music]
They hole up in this beautiful empty resort for about a week over Thanksgiving.
Arguing, debating, going through one plan after another.
After a week the Jekyll Island gang leaves Georgia with a plan now officially known as
the Aldrich plan.
And on December 1913, President Woodrow Wilson signs the Federal Reserve Act.
"Well, it's a great plan Senator."
And the U.S.A. finally had a central bank.
Now whenever a bank starts to run low on money, the Fed can step in and loan them money.
It stops the whole cycle of bank runs.
And in the US we can thank an earthquake, a rich guy with a cold, a Senator’s secret
train, and a bunch of undercover bankers dressed as duck hunters.
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