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Federal Reserve Act

19 January, 2016 - 11:14

The head of the bipartisan National Monetary Commission was financial expert and Senate Republican Party (United States)|Republican leader Nelson Aldrich. Aldrich set up two commissions—one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central banking systems and report on them 1. Aldrich went to Europe opposed to centralized banking, but after viewing Germany's monetary system he came away believing that a centralized bank was better than the government-issued bond system that he had previously supported.

In early November 1910, Aldrich met with five well known members of the New York banking community to devise a central banking bill. Paul Warburg, an attendee of the meeting and longtime advocate of central banking in the U.S., later wrote that Aldrich was "bewildered at all that he had absorbed abroad and he was faced with the difficult task of writing a highly technical bill while being harassed by the daily grind of his parliamentary duties" 2. After ten days of deliberation, the bill, which would later be referred to as the "Aldrich Plan", was agreed upon. It had several key components, including a central bank with a Washington-based headquarters and fifteen branches located throughout the U.S. in geographically strategic locations, and a uniform elastic currency based on gold and commercial paper. Aldrich believed a central banking system with no political involvement was best, but was convinced by Warburg that a plan with no public control was not politically feasible 3. The compromise involved representation of the public sector on the Board of Directors 4.

Aldrich's bill met much opposition from politicians. Critics charged Aldrich of being biased due to his close ties to wealthy bankers such as J. P. Morgan and John D. Rockefeller, Jr., Aldrich's son-in-law. Most Republicans favored the Aldrich Plan 5, but it lacked enough support in Congress to pass because rural and western states viewed it as favoring the "eastern establishment" 6. In contrast, progressive Democrats favored a reserve system owned and operated by the government; they believed that public ownership of the central bank would end Wall Street's control of the American currency supply 7. Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control 8.

The original Aldrich Plan was dealt a fatal blow in 1912, when Democrats won the White House and Congress 9. Nonetheless, President Woodrow Wilson believed that the Aldrich plan would suffice with a few modifications. The plan became the basis for the Federal Reserve Act, which was proposed by Senator Robert Owen in May 1913. The primary difference between the two bills was the transfer of control of the Board of Directors (called the Federal Open Market Committee in the Federal Reserve Act) to the government 10, 11. The bill passed Congress on December 23, 1913 12, 13, on a mostly partisan basis, with most Democrats voting "yea" and most Republicans voting "nay" 14.

Figure 3.12 Newspaper clipping, December 24, 1913