America's Bank - Roger Lowenstein (Penguin Press, 2015)

A history of the conditions, events, and political maneuvering that led to the creation of the United States' third attempt at a central bank, the Federal Reserve System.  The book serves to remind those who argue against having the central bank how the world actually was in its absence.  [332.110973]

Depending on how they are counted, the Federal Reserve is the third or fourth attempt at establishing a central bank in the United States.  Central governments need a fiscal agent: a financial entity where public money can be held and that faces the rest of the economy for the collection of taxes, fees, and customs and for the disbursement of funds.  The Bank of North America,  a private bank chartered by the Confederation Congress in 1781, served that role during the earliest days of the Republic.  When it was re-chartered as a Pennsylvania bank, it could no longer serve the necessary role.

The Bank of the United States, as designed by Alexander Hamilton, was then chartered for twenty years to take up the role of the central bank.  It served as the fiscal agent of the government, but did not provide a uniform currency.  When the Bank's charter was due for renewal, the Jeffersonians were in power.  They opposed the centralization of credit power the Bank represented and allowed the charter to lapse in 1811.  The War of 1812, however, demonstrated the handicap the Nation operated under with a fragmented financial structure.  By 1816, a second Bank of the United States was chartered to operate for 20 years.  Once more, populist political forces, under Andrew Jackson, allowed the charter to lapse.

After the demise of the Second Bank of the United States, an extended period of financial disarray and volatility marked the United States' economy.  There was no uniform currency until the American Civil War made it desirable.  Every bank issued its own notes.  There was no central source of credit; the growth of the new economy was funded through London.  Individual banks were fragile; there was no system for pooling reserves to meet banking crises.  The only defense system was a pyramid of deposits in correspondent banks that could not survive severe credit events and there were many severe "panics" through the period.  The Panic of 1907 highlighted how much the system depended upon a few individuals and how precarious such a situation could be.

Republican Senator Nelson Aldrich had been an advocate for minor changes in the National Banking Act (1864) as constituting all that was needed to repair the system.  Through the efforts of Paul Warburg, however, he began to see the need for a European style central bank.  In the new approach, a system of pooled reserves would be available among a large group of banks to stave off bank runs or other temporary stresses that could lead to larger panics if not checked.  Aldrich, unfortunately, represented the "old Guard" and, as such, his efforts to bring it about were suspect.  The split in the Republicans and the election of Woodrow Wilson brought a fresh complication.

Through all of this, the term "central bank" was a forbidden concept, particularly among the Democrats and the Populists.  (Bryan was still a major leader of the Democrats and Wilson would have to keep him on side.)  A central bank was feared to be a tool for powerful Eastern interests to control the economy.  And, among the Eastern bankers, generally Republicans, there was little enthusiasm for a government-managed bank that might encroach on their practices.  

In the end, the issue came down to who was the proper manager of "money" under its possible definitions. Bankers felt that money was a creation of the financial system and that the central bank should be private.  There was a further split regarding the basis of bank credit which created money; the "real bills" doctrine came into play.  For some, bank credit should be based on discounting of commercial paper and notes related to actual trade.  Clearly, consumer credit was beyond consideration.  The other view was closer to the "Greenback" view, that is, that money was created by government fiat, although the gold standard was assumed to prevail.

The final legislative action was led by Carter Glass in the House and Robert Owen in the Senate.  The legislative struggle is covered extensively.  At points, one might even fatigue of the legislative dance, except that one is reminded of how difficult any major legislation can be.

The value, for me, in this text is that it stresses how ingrained the resistance to a central bank was in the United States despite the evidence that the financial system was weak and brittle without one.  One need only look, however, at the blogs and opinion pieces that still decry the Federal Reserve's existence to realize how easily important lessons are forgotten when the conditions that taught those lessons are addressed.

This book is generally recommended.