Happy Birthday, Federal Reserve!
100 years ago Woodrow Wilson signed the Federal Reserve Act, the culmination of a legislative effort that began seven years earlier. In 1906 the San Francisco earthquake had far-reaching effects. Insurance payments from London insurers were massive, and money was in short supply. Interest rates soared, and a monetary panic ensued. Stock markets collapsed. The panic didn’t end until J.P. Morgan famously locked 40 top banking officials in his library on a Saturday night and didn’t let them out until they reached an agreement to shore up shore up the banking system the following morning.
The Panic of 1907 led to a huge recession, and the Chairman of the Senate Finance Committee thought it was a bad idea for the US banking system to depend on the financial acumen and personal resources of one man—who reportedly worked two hours a day and often could not be reached as he travelled in Europe. Nelson Aldrich lead a commission that studied banking systems around the world, and concluded that the US needed a central bank, something it had not had since 1836.
In order to avoid concentrating too much power, Congress adopted a plan that created 12 regional banks, governed by public officials, bankers, and business leaders. This hybrid system became the lender of last resort, that could lend freely to member institutions. It didn’t end the occurrence of financial panics, but it did give policy makers a better tool to deal with them. Before long, the Dollar supplanted the Pound as the world’s reserve currency.
So Happy Birthday, Fed. And many happy returns.\!
Douglas R. Tengdin, CFA
Chief Investment Officer