WEBVTT 00:00:00.000 --> 00:00:04.240 In November of 1910, some of the wealthiest and 00:00:04.240 --> 00:00:07.259 most powerful men in America boarded a train 00:00:07.259 --> 00:00:09.240 in the dead of night. Oh, yeah. The whole thing 00:00:09.240 --> 00:00:11.119 is incredibly dramatic. Right. I mean, they were 00:00:11.119 --> 00:00:13.960 literally using fake names. The shades on their 00:00:13.960 --> 00:00:15.800 private rail car were completely drawn shut, 00:00:15.800 --> 00:00:18.280 and they were heading to this highly exclusive 00:00:18.280 --> 00:00:20.920 secret club on Jekyll Island off the coast of 00:00:20.920 --> 00:00:25.420 Georgia. And their mission was to, well, completely 00:00:25.420 --> 00:00:28.989 rewrite the United States financial system. entirely 00:00:28.989 --> 00:00:30.929 from the shatters. It really does sound like, 00:00:30.929 --> 00:00:32.750 I don't know, the opening scene of a heist movie 00:00:32.750 --> 00:00:35.149 or something. Oh boy. But this is the actual 00:00:35.149 --> 00:00:38.130 documented origin story of the institution that 00:00:38.130 --> 00:00:40.090 controls the money in your pocket right now. 00:00:41.210 --> 00:00:43.869 Welcome to the deep dive. We are so thrilled 00:00:43.869 --> 00:00:46.119 you're here with us. Yeah. We know you, the learner, 00:00:46.359 --> 00:00:48.899 are always looking to get past those surface 00:00:48.899 --> 00:00:51.100 -level summaries to really understand the invisible 00:00:51.100 --> 00:00:53.659 machinery around the world. Absolutely. And today 00:00:53.659 --> 00:00:56.460 we've got an incredibly detailed Wikipedia article 00:00:56.460 --> 00:00:59.280 covering the history, the mechanics, and the 00:00:59.280 --> 00:01:01.719 pretty intense controversies of the Federal Reserve 00:01:01.719 --> 00:01:05.299 Act of 1913. Our goal today is to really decode 00:01:05.299 --> 00:01:08.659 the DNA of the US financial system. We want to 00:01:08.659 --> 00:01:11.500 help you look past the dense legislative language 00:01:11.500 --> 00:01:16.739 and understand how a mix of extreme secrecy bitter 00:01:16.739 --> 00:01:19.859 political compromises and just sheer economic 00:01:19.859 --> 00:01:22.739 terror birthed the modern Federal Reserve. OK, 00:01:22.760 --> 00:01:25.239 let's unpack this, because to understand why 00:01:25.239 --> 00:01:27.560 a group of millionaires felt the need to sneak 00:01:27.560 --> 00:01:30.239 out of New York under assumed names, you really 00:01:30.239 --> 00:01:33.180 have to realize that for roughly 80 years, the 00:01:33.180 --> 00:01:35.099 United States basically operated without a central 00:01:35.099 --> 00:01:38.329 bank. Yeah, 80 years. Like an 80 -year financial 00:01:38.329 --> 00:01:41.430 wild west. It really was. And to grasp the sheer 00:01:41.430 --> 00:01:43.930 instability of that era, we have to trace the 00:01:43.930 --> 00:01:46.049 source material back to the original clash over 00:01:46.049 --> 00:01:49.069 American money, which is Alexander Hamilton versus 00:01:49.069 --> 00:01:51.430 Thomas Jefferson. Oh, a classic showdown. Right. 00:01:51.510 --> 00:01:53.650 So after the Revolutionary War, the US was saddled 00:01:53.650 --> 00:01:56.930 with massive debt and this highly fragmented 00:01:56.930 --> 00:02:00.609 local banking system. And Hamilton wanted a strong 00:02:00.609 --> 00:02:03.430 centralized bank modeled on European institutions. 00:02:03.590 --> 00:02:04.689 Because you thought it would bring stability, 00:02:04.870 --> 00:02:07.379 right? Exactly. He believed you needed centralized 00:02:07.379 --> 00:02:09.659 power to bring order to the monetary system, 00:02:10.080 --> 00:02:12.819 manage government revenues, and basically provide 00:02:12.819 --> 00:02:15.099 reliable credit for a growing commercial nation. 00:02:15.400 --> 00:02:17.800 But then Jefferson looked at that and saw, like, 00:02:18.099 --> 00:02:20.599 an existential threat to democracy. Oh, completely. 00:02:20.659 --> 00:02:23.199 He was terrified of it. He and the Southern members 00:02:23.199 --> 00:02:26.219 of Congress were super worried that a central 00:02:26.219 --> 00:02:28.719 bank would just serve the wealthy commercial 00:02:28.719 --> 00:02:31.259 interests of the North at the direct expense 00:02:31.259 --> 00:02:33.719 of Southern agriculture. I mean, they relied 00:02:33.719 --> 00:02:36.400 on local banks, and they viewed a centralized 00:02:36.400 --> 00:02:39.860 financial authority as just another version of 00:02:39.860 --> 00:02:41.840 the British monarchy. They had literally just 00:02:41.840 --> 00:02:44.219 fought a war to escape. And that fundamental 00:02:44.219 --> 00:02:46.419 tension, centralized commercial power versus 00:02:46.419 --> 00:02:49.580 decentralized local power, that is the blueprint 00:02:49.580 --> 00:02:52.340 for the entire history of American banking. Wow, 00:02:52.539 --> 00:02:54.719 yeah. So Congress did actually establish the 00:02:54.719 --> 00:02:57.419 first bank of the United States in 1791, giving 00:02:57.419 --> 00:03:00.300 it a 20 -year charter. But that Jeffersonian 00:03:00.300 --> 00:03:03.060 anxiety just never went away. They kept arguing 00:03:03.060 --> 00:03:04.879 it concentrated way too much power in the hands 00:03:04.879 --> 00:03:07.300 of the elite. Right. So when that charter came 00:03:07.300 --> 00:03:10.340 up for renewal in 1811, it failed. By a single 00:03:10.340 --> 00:03:12.789 vote. Right? Yeah. One vote in the House and 00:03:12.789 --> 00:03:14.990 one in the Senate. That's wild. It's crazy how 00:03:14.990 --> 00:03:18.030 close it was. And then after the financial chaos 00:03:18.030 --> 00:03:20.509 of the War of 1812, they try again with the Second 00:03:20.509 --> 00:03:22.490 Bank of the United States. But that one doesn't 00:03:22.490 --> 00:03:25.210 last either. No, because that institution gets 00:03:25.210 --> 00:03:28.330 blamed for overextending credit and causing the 00:03:28.330 --> 00:03:32.189 panic of 1819. Fast forward a bit and President 00:03:32.189 --> 00:03:34.930 Andrew Jackson rise into office, making it his 00:03:34.930 --> 00:03:37.990 like his personal crusade to destroy the bank. 00:03:38.050 --> 00:03:39.770 Because he argued it functioned as a monopoly 00:03:39.770 --> 00:03:42.979 for the Exactly. So its charter expires in 1836, 00:03:43.400 --> 00:03:46.180 and by 1841 it's just completely liquidated. 00:03:46.400 --> 00:03:48.479 Which leaves the nation without a central steering 00:03:48.479 --> 00:03:52.259 wheel for eight whole decades. Yeah. I mean, 00:03:52.360 --> 00:03:55.039 the economy was growing at an unprecedented explosive 00:03:55.039 --> 00:03:57.520 rate during the Industrial Revolution, but the 00:03:57.520 --> 00:03:59.539 financial architecture was basically stuck in 00:03:59.539 --> 00:04:02.340 the 18th century. And that void leads directly 00:04:02.340 --> 00:04:04.580 to the catalyst for the Federal Reserve Act, 00:04:04.719 --> 00:04:07.710 which is the panic of 1907. So let's talk about 00:04:07.710 --> 00:04:09.930 what a panic actually looked like on the ground 00:04:09.930 --> 00:04:13.270 for regular people. At the time, the entire United 00:04:13.270 --> 00:04:16.709 States only had about $3 .8 billion in coins 00:04:16.709 --> 00:04:19.670 and banknotes in total circulation. Which is 00:04:19.670 --> 00:04:21.810 really not a lot when you think about it. No, 00:04:21.810 --> 00:04:24.589 not at all. So if the economy gets spooked, say, 00:04:25.589 --> 00:04:28.029 a major copper trust collapses, which is actually 00:04:28.029 --> 00:04:31.230 what triggered 1907 people rushed to their local 00:04:31.230 --> 00:04:33.649 banks to pull out their cash. Right, a classic 00:04:33.649 --> 00:04:36.329 bank run. But the banks don't keep all that cash 00:04:36.329 --> 00:04:38.930 in the vault. They've lent it out. So when the 00:04:38.930 --> 00:04:41.029 banks run out of physical cash, they have nowhere 00:04:41.029 --> 00:04:44.009 to turn. There is literally no central reserve 00:04:44.009 --> 00:04:45.689 to borrow from. They just close their doors. 00:04:45.750 --> 00:04:48.089 Yeah, they close up and businesses go bankrupt 00:04:48.089 --> 00:04:50.509 overnight. It really makes me think of an engine 00:04:50.509 --> 00:04:52.949 running without oil. Oh, that's a good way to 00:04:52.949 --> 00:04:54.529 look at it. Like, you can drive for a little 00:04:54.529 --> 00:04:56.910 while, sure, and maybe even go pretty fast. Yeah. 00:04:57.129 --> 00:04:59.569 But the second you hit a bad bump, the internal 00:04:59.569 --> 00:05:02.490 friction is just too much. The parts grind together, 00:05:02.490 --> 00:05:05.209 and the whole thing just violently seizes up. 00:05:05.350 --> 00:05:07.990 That is precisely what happened. The engine seized 00:05:07.990 --> 00:05:11.410 so badly in 1907 that JPMorgan, like the man 00:05:11.410 --> 00:05:14.410 himself, had to physically lock prominent New 00:05:14.410 --> 00:05:17.209 York bankers in his private library. Wait, he 00:05:17.209 --> 00:05:19.569 literally locked them in a room. He literally 00:05:19.569 --> 00:05:22.290 locked the doors and forced them to pool their 00:05:22.290 --> 00:05:24.829 own personal money to bail out the system. That 00:05:24.829 --> 00:05:28.029 is insane. It terrified the country's leadership. 00:05:28.189 --> 00:05:30.610 I mean, a modern industrial powerhouse could 00:05:30.610 --> 00:05:34.110 not rely on one very rich man locking people 00:05:34.110 --> 00:05:37.050 in a room to save the economy. Right. So Congress 00:05:37.050 --> 00:05:40.329 passes the Aldrich -Freeland Act in 1908, which 00:05:40.329 --> 00:05:42.939 creates the National Monetary Commission to you 00:05:42.939 --> 00:05:45.339 know, finally find a structural solution. Which 00:05:45.339 --> 00:05:47.959 brings us back to that dark train car. Yeah. 00:05:48.300 --> 00:05:51.199 Senator Nelson W. Aldrich, a conservative Republican 00:05:51.199 --> 00:05:53.939 who chaired the commission, knows he needs a 00:05:53.939 --> 00:05:57.779 plan. So he gathers the absolute titans of finance. 00:05:58.600 --> 00:06:00.699 Frank A. Vanderlip, president of National City 00:06:00.699 --> 00:06:04.639 Bank. Paul Warburg. Henry P. Davison, who was 00:06:04.639 --> 00:06:07.000 a JP Morgan partner. The heavy hitter. Exactly. 00:06:07.480 --> 00:06:09.959 And they sneak away to Jekyll Island to write 00:06:09.959 --> 00:06:12.300 what becomes known as the Aldrich Plan, which 00:06:12.300 --> 00:06:15.139 proposed a National Reserve Association run primarily 00:06:15.139 --> 00:06:17.399 by banking directors. And you mentioned earlier 00:06:17.399 --> 00:06:19.339 that they went in secret under fake names. Yeah, 00:06:19.379 --> 00:06:21.680 why all the cloak and dagger? They did that because 00:06:21.680 --> 00:06:24.379 they knew exactly how toxic the public's view 00:06:24.379 --> 00:06:27.519 of bankers was at the time. If the American people 00:06:27.519 --> 00:06:29.819 saw the architects of Wall Street writing the 00:06:29.819 --> 00:06:33.180 new banking laws, the bill would be dead on arrival. 00:06:33.699 --> 00:06:36.220 OK, wait, let me pause you there. If the top 00:06:36.220 --> 00:06:40.160 bankers had a functional plan to stop the panics, 00:06:40.819 --> 00:06:44.180 to pour oil back into the engine so businesses 00:06:44.180 --> 00:06:46.639 wouldn't collapse, why didn't Congress just pass 00:06:46.639 --> 00:06:49.540 it immediately? Well, didn't the rural and western 00:06:49.540 --> 00:06:52.500 states want protection from another crash? What's 00:06:52.500 --> 00:06:54.800 fascinating here is that for the average American, 00:06:55.180 --> 00:06:58.160 The cure proposed by the Aldrich plan was actually 00:06:58.160 --> 00:07:00.959 far scarier than the disease of the panics. Really? 00:07:01.160 --> 00:07:03.639 Oh, yeah. The public was terrified of what was 00:07:03.639 --> 00:07:07.040 known as the Money Trust. From 1912 into 1913, 00:07:07.379 --> 00:07:09.439 a congressional group called the Pujo Committee 00:07:09.439 --> 00:07:12.319 held these explosive hearings investigating Wall 00:07:12.319 --> 00:07:14.740 Street. OK. And they mathematically exposed something 00:07:14.740 --> 00:07:17.319 called interlocking directorate. OK, let's define 00:07:17.319 --> 00:07:18.959 that because it's a crucial piece of the puzzle. 00:07:19.129 --> 00:07:21.490 Imagine looking at the board of directors for 00:07:21.490 --> 00:07:24.430 the biggest railroad, the biggest steel company, 00:07:24.709 --> 00:07:27.430 and the biggest bank. Interlocking directorates 00:07:27.430 --> 00:07:31.209 meant the exact same small group of wealthy financiers 00:07:31.209 --> 00:07:33.290 were sitting on all of those boards simultaneously. 00:07:33.709 --> 00:07:35.870 Wow. So they were basically coordinating the 00:07:35.870 --> 00:07:38.589 entire American economy over cigars. Exactly. 00:07:38.910 --> 00:07:42.089 The Pujo Committee proved that this handful of 00:07:42.089 --> 00:07:44.389 men controlled billions of dollars of the nation's 00:07:44.389 --> 00:07:46.600 wealth. So when the public looked at the Aldridge 00:07:46.600 --> 00:07:49.639 plan, they realized it gave almost no oversight 00:07:49.639 --> 00:07:52.279 power to the government. Oh, I see. It was basically 00:07:52.279 --> 00:07:55.240 handing the permanent legal keys to the financial 00:07:55.240 --> 00:07:57.740 system over to the exact same cartel that had 00:07:57.740 --> 00:07:59.240 caused the panics in the first place. Okay, so 00:07:59.240 --> 00:08:02.540 the Aldridge plan is completely toxic. Half the 00:08:02.540 --> 00:08:05.579 country inherently distrusts Wall Street. And 00:08:05.579 --> 00:08:07.620 then the political landscape shifts dramatically 00:08:07.620 --> 00:08:10.519 in the 1912 election. Right. The Democrats win 00:08:10.519 --> 00:08:13.000 the White House with Woodrow Wilson and they 00:08:13.000 --> 00:08:15.860 take both chambers of Congress and their official 00:08:15.860 --> 00:08:18.899 party platform explicitly opposes the Aldrich 00:08:18.899 --> 00:08:21.879 plan. But Wilson is left staring at a ticking 00:08:21.879 --> 00:08:23.879 time bomb. I mean, the engine is still out of 00:08:23.879 --> 00:08:26.339 oil. He has to pass a central banking bill, but 00:08:26.339 --> 00:08:29.800 he has to somehow reconcile to. wildly opposing 00:08:29.800 --> 00:08:33.360 forces. It was an incredible political tightrope. 00:08:33.879 --> 00:08:35.980 On one side, you have conservative Republicans 00:08:35.980 --> 00:08:38.960 and bankers demanding a centralized, efficient 00:08:38.960 --> 00:08:41.539 system to stop the panics. Right. But on the 00:08:41.539 --> 00:08:44.159 other side, progressive firebrands like William 00:08:44.159 --> 00:08:47.000 Jennings Bryan demand that any new system must 00:08:47.000 --> 00:08:49.679 be fiercely decentralized and entirely controlled 00:08:49.679 --> 00:08:52.440 by the government. completely free of Wall Street's 00:08:52.440 --> 00:08:54.940 influence. So Wilson brings in advisors like 00:08:54.940 --> 00:08:56.480 Louise Brandeis to sort of thread this needle. 00:08:56.899 --> 00:08:58.620 Yeah. And Wilson declares the new system has 00:08:58.620 --> 00:09:01.759 to be public, not private, and that banks must 00:09:01.759 --> 00:09:04.679 be the instruments, not the masters of business. 00:09:05.120 --> 00:09:06.659 But how do you actually build that? You build 00:09:06.659 --> 00:09:08.440 it through the Glass -Owen Compromise. Yeah. 00:09:08.500 --> 00:09:10.960 It was crafted by Congressman Carter Glass and 00:09:10.960 --> 00:09:13.840 Senator Robert L. Owen. Rather than one massive 00:09:13.840 --> 00:09:16.679 central bank in New York, they created a franchise 00:09:16.679 --> 00:09:19.610 model. A franchise, like a fast food chain. Think 00:09:19.610 --> 00:09:22.070 of it exactly like a national restaurant chain. 00:09:22.649 --> 00:09:25.230 To decentralize power away from Wall Street, 00:09:25.649 --> 00:09:28.149 they established regional federal reserve banks 00:09:28.149 --> 00:09:30.809 scattered across the country, eventually settling 00:09:30.809 --> 00:09:33.950 on 12th. Okay. These regional banks are like 00:09:33.950 --> 00:09:37.350 the local franchisees. A regional bank in Kansas 00:09:37.350 --> 00:09:39.850 City understands the seasonal credit needs of 00:09:39.850 --> 00:09:42.789 wheat farmers far better than a banker in Manhattan 00:09:42.789 --> 00:09:46.139 ever could. That makes sense. But a franchise 00:09:46.139 --> 00:09:48.580 still needs a corporate headquarters to set the 00:09:48.580 --> 00:09:52.139 ultimate rules. Exactly. So to maintain public 00:09:52.139 --> 00:09:55.320 and government control, these 12 regional banks 00:09:55.320 --> 00:09:57.820 would be overseen by a Federal Reserve Board 00:09:57.820 --> 00:10:01.480 of Governors based in Washington, DC. And crucially, 00:10:01.820 --> 00:10:03.639 those governors would be appointed by the President 00:10:03.639 --> 00:10:06.179 of the United States and confirmed by the Senate. 00:10:06.429 --> 00:10:08.850 Here's where it gets really interesting though. 00:10:09.350 --> 00:10:11.210 When you dig into the mechanics of the source 00:10:11.210 --> 00:10:14.409 text, it notes that the law required all nationally 00:10:14.409 --> 00:10:17.110 chartered banks to join the system. And to join, 00:10:17.450 --> 00:10:20.169 they had to purchase specific non -transferable 00:10:20.169 --> 00:10:21.990 stock in their regional Federal Reserve bank. 00:10:22.070 --> 00:10:25.169 That's right. They even got a 6 % annual dividend 00:10:25.169 --> 00:10:29.070 on that stock. So wait, if private banks literally 00:10:29.070 --> 00:10:32.090 own the stock of the regional branches, how on 00:10:32.090 --> 00:10:34.559 earth Did Wilson convince the progressives this 00:10:34.559 --> 00:10:38.240 was a public institution? Well, that is the genius 00:10:38.240 --> 00:10:40.980 and honestly the ongoing friction of the compromise. 00:10:41.759 --> 00:10:43.740 You give the private bankers a financial stake 00:10:43.740 --> 00:10:45.960 and seats on the regional board so they buy into 00:10:45.960 --> 00:10:48.559 the system and provide the capital. OK. But Wilson 00:10:48.559 --> 00:10:51.240 won over the progressives by changing the nature 00:10:51.240 --> 00:10:54.919 of the paper money itself. Before this, a bank 00:10:54.919 --> 00:10:56.820 note was often just a promise from a private 00:10:56.820 --> 00:11:00.090 bank. Wilson ensured that the new Federal Reserve 00:11:00.090 --> 00:11:02.590 notes would be direct obligations of the United 00:11:02.590 --> 00:11:04.769 States government. Which creates the elastic 00:11:04.769 --> 00:11:07.570 currency the text talks about. Precisely. If 00:11:07.570 --> 00:11:10.549 a local bank needs cash during a panic, they 00:11:10.549 --> 00:11:12.789 can take your solid business loans, hand them 00:11:12.789 --> 00:11:15.009 over to the regional Federal Reserve bank, and 00:11:15.009 --> 00:11:17.350 get brand new U .S. government -backed currency 00:11:17.350 --> 00:11:20.110 in return. Wow. The government controls the printing 00:11:20.110 --> 00:11:22.110 press at the top, allowing the currency supply 00:11:22.110 --> 00:11:24.370 to stretch or be elastic when the economy needs 00:11:24.370 --> 00:11:26.470 it, while the private banks handle the plumbing 00:11:26.470 --> 00:11:28.820 at the bottom. It's a master class in political 00:11:28.820 --> 00:11:31.639 survival. It really was. Even during the final 00:11:31.639 --> 00:11:35.059 Senate debates, a banker named Frank A. Vanderlip, 00:11:35.220 --> 00:11:37.139 who was actually one of the original Jekyll Island 00:11:37.139 --> 00:11:40.919 attendees, he pushed a competing amendment. Trying 00:11:40.919 --> 00:11:43.639 to strip away government control and give the 00:11:43.639 --> 00:11:45.659 private banks more power. They fought it right 00:11:45.659 --> 00:11:48.279 up to the end Yeah, Wilson had to furiously rally 00:11:48.279 --> 00:11:50.980 his party to defeat it but finally the Senate 00:11:50.980 --> 00:11:54.919 passes the Federal Reserve Act 54 to 34 and Wilson 00:11:54.919 --> 00:11:59.100 signs it into law on December 23rd 1913. And 00:11:59.100 --> 00:12:01.360 the timing is just staggering because they had 00:12:01.360 --> 00:12:03.740 zero time to test the system before the world 00:12:03.740 --> 00:12:07.139 completely fractured. The ink is barely dry and 00:12:07.139 --> 00:12:09.779 World War One breaks out. The U .S. enters the 00:12:09.779 --> 00:12:12.720 war in April 1917 and the financial demands are 00:12:12.720 --> 00:12:15.379 just incomprehensible. The government needed 00:12:15.379 --> 00:12:18.399 to find two billion dollars just to cover the 00:12:18.399 --> 00:12:20.419 first year of the war effort. So the Federal 00:12:20.419 --> 00:12:22.320 Reserve Act was immediately put to the massive 00:12:22.320 --> 00:12:24.639 test and they realized they had to patch the 00:12:24.639 --> 00:12:27.960 system right away. In June 1917, Congress passed 00:12:27.960 --> 00:12:30.820 massive amendments to the act to allow the Fed 00:12:30.820 --> 00:12:33.860 to expand the money supply drastically. And to 00:12:33.860 --> 00:12:36.480 understand how they did this, we have to talk 00:12:36.480 --> 00:12:38.820 about the gold standard. Right, because before 00:12:38.820 --> 00:12:41.039 the war, there was a strict tether. For every 00:12:41.039 --> 00:12:43.259 paper dollar the Federal Reserve issued, they 00:12:43.259 --> 00:12:45.720 were legally required to hold a certain high 00:12:45.720 --> 00:12:48.200 percentage of physical gold in a vault to back 00:12:48.200 --> 00:12:51.169 it up. And that strict ratio naturally limited 00:12:51.169 --> 00:12:54.110 how much money could exist. Exactly. But to fund 00:12:54.110 --> 00:12:57.149 a global war, you need massive amounts of cash 00:12:57.149 --> 00:12:59.149 flowing through the economy to buy bonds and 00:12:59.149 --> 00:13:01.490 manufacture weapons. You can't be held back by 00:13:01.490 --> 00:13:04.210 how much gold you have. So the 1917 amendments 00:13:04.210 --> 00:13:06.889 basically changed the rules of that tether. They 00:13:06.889 --> 00:13:09.889 de facto allowed less gold backing for each paper 00:13:09.889 --> 00:13:12.509 note. By lowering the required ratio of gold 00:13:12.509 --> 00:13:15.110 to paper, they decoupled the currency just enough 00:13:15.110 --> 00:13:17.940 to flood the system with cash. I mean, the amount 00:13:17.940 --> 00:13:19.840 of currency in circulation more than doubled 00:13:19.840 --> 00:13:24.460 from $465 million to over $1 .2 billion in just 00:13:24.460 --> 00:13:26.700 six months. Which naturally triggered massive 00:13:26.700 --> 00:13:29.480 price inflation. But it allowed the U .S. to 00:13:29.480 --> 00:13:32.460 finance the war the system held. It did. But 00:13:32.460 --> 00:13:34.980 the source material highlights another crucial 00:13:34.980 --> 00:13:37.480 amendment 10 years later that easily flies under 00:13:37.480 --> 00:13:41.230 the radar. And that's the 1927 McFadden Act, 00:13:41.590 --> 00:13:43.789 which included a charter extension. Oh, right. 00:13:43.990 --> 00:13:45.389 Because when the Federal Reserve Act was written 00:13:45.389 --> 00:13:49.850 in 1913, it only granted the Fed a 20 -year operating 00:13:49.850 --> 00:13:52.110 charter mirroring the first and second banks 00:13:52.110 --> 00:13:54.389 of the United States. Exactly. If it passed in 00:13:54.389 --> 00:13:57.649 1913 with a 20 -year lifespan, the charter was 00:13:57.649 --> 00:14:00.470 set to expire in 1933. Now, put yourself in the 00:14:00.470 --> 00:14:04.139 mindset of 1933. The United States is in the 00:14:04.139 --> 00:14:07.399 absolute lowest, most desperate depths of the 00:14:07.399 --> 00:14:09.740 Great Depression. Thousands of banks have collapsed. 00:14:09.820 --> 00:14:12.320 Yeah, unemployment is skyrocketing. And the public's 00:14:12.320 --> 00:14:14.399 hatred of the banking community is at an all 00:14:14.399 --> 00:14:16.940 -time high. If the Federal Reserve had been forced 00:14:16.940 --> 00:14:19.179 to face a charter renewal vote in Congress in 00:14:19.179 --> 00:14:22.759 1933, amid the New Deal and Franklin D. Roosevelt's 00:14:22.759 --> 00:14:25.759 administration, it is highly likely the institution 00:14:25.759 --> 00:14:28.570 would have been dismantled entirely. Wow. But 00:14:28.570 --> 00:14:32.350 that 1927 amendment quietly made the Fed's charter 00:14:32.350 --> 00:14:35.570 permanent. Yeah. It was like a legislative lifesaver 00:14:35.570 --> 00:14:38.389 that prevented the entire system from expiring 00:14:38.389 --> 00:14:40.610 right when the economy was at its most vulnerable. 00:14:41.009 --> 00:14:43.830 And because it survived, it had to adapt to the 00:14:43.830 --> 00:14:48.289 failures of the Depression. So in 1933, new banking 00:14:48.289 --> 00:14:50.830 acts created the Federal Open Market Committee, 00:14:50.990 --> 00:14:54.409 or the FOMC. OK, the FOMC. Right. Because before 00:14:54.409 --> 00:14:57.509 this, the 12 regional banks were somewhat uncoordinated. 00:14:57.889 --> 00:15:00.450 One regional bank might be trying to expand credit 00:15:00.450 --> 00:15:02.830 while another was contracting it. They were working 00:15:02.830 --> 00:15:05.509 at cross purposes. That sounds messy. It was. 00:15:05.909 --> 00:15:09.049 The FOMC centralized the steering wheel by directing 00:15:09.049 --> 00:15:11.690 what's called open market operations. OK, let's 00:15:11.690 --> 00:15:13.549 make sure we define that, because open market 00:15:13.549 --> 00:15:15.269 operations is one of those... you hear on the 00:15:15.269 --> 00:15:18.169 news literally all the time. What is the actual 00:15:18.169 --> 00:15:21.169 mechanism? It is the primary way the Fed expands 00:15:21.169 --> 00:15:23.590 or shrinks the money supply today. If the Fed 00:15:23.590 --> 00:15:25.690 wants to put oil into the engine, if they want 00:15:25.690 --> 00:15:29.230 to inject cash into the economy, the FOMC buys 00:15:29.230 --> 00:15:31.730 U .S. government bonds from private banks. And 00:15:31.730 --> 00:15:34.509 they pay for them by essentially crediting those 00:15:34.509 --> 00:15:37.409 banks with newly created money. The banks now 00:15:37.409 --> 00:15:40.889 have cash to lend to businesses. If the Fed wants 00:15:40.889 --> 00:15:43.710 to pull money out to slow down inflation, they 00:15:43.710 --> 00:15:45.950 just do the reverse. They sell government bonds 00:15:45.950 --> 00:15:48.309 to the banks, pulling that cash out of circulation. 00:15:48.110 --> 00:15:51.289 and locking it away. So they are physically adjusting 00:15:51.289 --> 00:15:53.870 the volume of money in real time. Exactly. And 00:15:53.870 --> 00:15:56.269 that power leads directly to the monumental shift 00:15:56.269 --> 00:16:01.269 in 1977. Congress passes an amendment 12 USC 00:16:01.269 --> 00:16:05.309 section 225A which legally establishes what we 00:16:05.309 --> 00:16:08.389 now call the dual mandate. This is a huge turning 00:16:08.389 --> 00:16:11.049 point. Yeah, the Fed is no longer just a shock 00:16:11.049 --> 00:16:14.009 absorber for bank panics. They are legally required 00:16:14.009 --> 00:16:16.590 to promote maximum employment and stable prices. 00:16:16.850 --> 00:16:19.129 And those two goals are constantly at war with 00:16:19.129 --> 00:16:22.389 one another. How so? Well, to get maximum employment, 00:16:22.570 --> 00:16:24.350 you generally want to keep interest rates low 00:16:24.350 --> 00:16:26.590 and pump money into the system so businesses 00:16:26.590 --> 00:16:28.870 can borrow cheaply, expand and hire workers. 00:16:29.070 --> 00:16:31.639 Right. Everyone has a job. But if you pump too 00:16:31.639 --> 00:16:33.740 much money into the system, that cash chases 00:16:33.740 --> 00:16:36.139 the same amount of goods, and prices skyrocket. 00:16:36.340 --> 00:16:38.960 You get inflation. To stabilize prices, you have 00:16:38.960 --> 00:16:41.059 to pull money out and raise interest rates, which 00:16:41.059 --> 00:16:43.360 cools down business expansion and can lead to 00:16:43.360 --> 00:16:46.840 layoffs. Wow. So the Fed basically has to drive 00:16:46.840 --> 00:16:49.679 the economy with one foot pressing the gas and 00:16:49.679 --> 00:16:51.799 the other hovering over the brake. Pretty much. 00:16:51.899 --> 00:16:53.960 If we look at the Federal Reserve Act, like a 00:16:53.960 --> 00:16:57.259 complex piece of software, the 1913 version was 00:16:57.259 --> 00:16:59.320 just the beta release. Oh, definitely. It was 00:16:59.320 --> 00:17:01.899 buggy. It was a massive compromise. World War 00:17:01.899 --> 00:17:04.400 One forced the first major patch to handle the 00:17:04.400 --> 00:17:08.339 gold standard. And that 1977 Amendment basically 00:17:08.339 --> 00:17:11.160 installed a whole new operating system by fundamentally 00:17:11.160 --> 00:17:13.500 changing the ultimate purpose of the institution. 00:17:13.740 --> 00:17:16.380 If we connect this to the bigger picture, the 00:17:16.380 --> 00:17:19.599 Fed morphed entirely. It started as a simple 00:17:19.599 --> 00:17:22.380 emergency check clearinghouse to stop local bank 00:17:22.380 --> 00:17:25.759 runs, and it evolved into the active daily manager 00:17:25.759 --> 00:17:28.980 of the entire global macroeconomy. And when you 00:17:28.980 --> 00:17:31.400 manage the entire macroeconomy, every single 00:17:31.400 --> 00:17:33.559 decision you make is going to be intensely scrutinized. 00:17:33.579 --> 00:17:35.680 Oh, without a doubt. Which brings us to the endless 00:17:35.680 --> 00:17:37.640 debates and criticisms surrounding the Federal 00:17:37.640 --> 00:17:39.789 Reserve. And this is where we really have to 00:17:39.789 --> 00:17:42.170 look at the source material objectively, because 00:17:42.170 --> 00:17:45.170 to this day, this exact mechanism sparks intense 00:17:45.170 --> 00:17:47.609 debate across the political spectrum. Right. 00:17:47.950 --> 00:17:50.529 And just to be super clear here, we are completely 00:17:50.529 --> 00:17:52.589 neutral on this. We're just holding up a mirror 00:17:52.589 --> 00:17:55.250 to these historical and modern arguments so you 00:17:55.250 --> 00:17:57.490 can understand the landscape of the debate. Absolutely. 00:17:57.930 --> 00:18:00.410 So one of the most foundational criticisms is 00:18:00.410 --> 00:18:03.059 the constitutional argument. Article 1, Section 00:18:03.059 --> 00:18:06.160 8, Clause 5 of the U .S. Constitution explicitly 00:18:06.160 --> 00:18:08.940 states that Congress has the power to coin money 00:18:08.940 --> 00:18:11.960 and regulate its value. Right. It's right there 00:18:11.960 --> 00:18:14.900 in the text. Exactly. So for over a century, 00:18:15.180 --> 00:18:17.140 critics have argued that Congress delegating 00:18:17.140 --> 00:18:19.460 this immense power to an independent central 00:18:19.460 --> 00:18:22.960 bank with a board of unelected governors is, 00:18:22.960 --> 00:18:26.410 well, fundamentally unconstitutional. There is 00:18:26.410 --> 00:18:29.950 also a deep -seated protectionist critique that 00:18:29.950 --> 00:18:31.609 really echoes all the way back to the Puccio 00:18:31.609 --> 00:18:34.549 Committee. Critics argue that despite the government 00:18:34.549 --> 00:18:37.329 oversight, the Fed still functions as a private 00:18:37.329 --> 00:18:39.750 banking cartel. Yeah, you hear that phrase a 00:18:39.750 --> 00:18:42.779 lot. Because the banking sector is so intimately 00:18:42.779 --> 00:18:45.559 involved in the regional reserve branches, there 00:18:45.559 --> 00:18:48.140 is a persistent fear that the Fed's policies 00:18:48.140 --> 00:18:51.099 naturally serve the interests of powerful Wall 00:18:51.099 --> 00:18:54.319 Street financiers at the direct expense of small 00:18:54.319 --> 00:18:58.019 producers, local businesses and everyday consumers 00:18:58.019 --> 00:19:00.420 whose purchasing power is eroded by inflation. 00:19:00.940 --> 00:19:03.140 And then there is the historical blame. Oh, yeah. 00:19:03.309 --> 00:19:05.609 When you are the manager of the macro economy, 00:19:05.890 --> 00:19:07.529 people are naturally going to ask if you were 00:19:07.529 --> 00:19:09.490 the one who drove the car into the ditch. Right. 00:19:10.130 --> 00:19:12.849 There is serious ongoing debate among economists 00:19:12.849 --> 00:19:14.970 about whether the Federal Reserve's contraction 00:19:14.970 --> 00:19:17.670 of the money supply actually triggered or severely 00:19:17.670 --> 00:19:20.490 worsened the Great Depression in the 1930s. And 00:19:20.490 --> 00:19:23.029 more recently, too. Yeah. Similarly, critics 00:19:23.029 --> 00:19:25.529 ask if the Fed's policy of keeping interest rates 00:19:25.529 --> 00:19:28.049 artificially low fueled the housing bubble that 00:19:28.049 --> 00:19:30.829 caused the late 2000s recession. The debate really 00:19:30.829 --> 00:19:33.329 centers on whether an institution designed to 00:19:33.329 --> 00:19:36.470 prevent financial panics sometimes, inadvertently, 00:19:36.809 --> 00:19:39.190 engineers the boom and bust cycles that create 00:19:39.190 --> 00:19:41.730 those panics. So what does this all mean? When 00:19:41.730 --> 00:19:44.390 you read through these criticisms, the most striking 00:19:44.390 --> 00:19:47.410 realization is that the exact same fears Thomas 00:19:47.410 --> 00:19:50.650 Jefferson had in 1791, fears about a central 00:19:50.650 --> 00:19:53.289 bank undermining democratic control and favoring 00:19:53.289 --> 00:19:56.240 a wealthy commercial elite. Those are the exact 00:19:56.240 --> 00:19:58.180 same criticisms levied against the Fed in the 00:19:58.180 --> 00:20:01.039 21st century. It's wild. The architecture of 00:20:01.039 --> 00:20:03.299 the banking system changed dramatically, but 00:20:03.299 --> 00:20:05.980 the fundamental American anxiety about centralized 00:20:05.980 --> 00:20:08.859 financial power hasn't changed one bit. That 00:20:08.859 --> 00:20:11.720 is the incredible tension at the heart of this 00:20:11.720 --> 00:20:14.789 source document. The Federal Reserve Act successfully 00:20:14.789 --> 00:20:17.009 internationalized the U .S. dollar, turning it 00:20:17.009 --> 00:20:20.490 into the bedrock of global trade. It gave the 00:20:20.490 --> 00:20:22.730 nation the elastic currency it desperately needed 00:20:22.730 --> 00:20:25.410 to grow, and it provided a shock absorber that 00:20:25.410 --> 00:20:28.089 effectively ended the devastating seasonal bank 00:20:28.089 --> 00:20:31.089 panics that used to routinely wipe out regular 00:20:31.089 --> 00:20:33.130 people's savings. The price of that stability 00:20:33.130 --> 00:20:36.599 was centralization. Exactly. The design requires 00:20:36.599 --> 00:20:39.900 giving almost unfathomable power to a centralized 00:20:39.900 --> 00:20:43.420 board. It is a permanent, never -ending balancing 00:20:43.420 --> 00:20:46.579 act between ensuring financial stability for 00:20:46.579 --> 00:20:49.460 the nation and maintaining democratic oversight 00:20:49.460 --> 00:20:51.359 by the public. Which brings us back to where 00:20:51.359 --> 00:20:54.059 we started for you, The Learner. The core takeaway 00:20:54.059 --> 00:20:56.740 here is that the Federal Reserve Act of 1913 00:20:56.740 --> 00:21:00.400 wasn't just some administrative, boring, bureaucratic 00:21:00.400 --> 00:21:02.779 banking bill. Not at all. It was a dramatic, 00:21:03.039 --> 00:21:06.380 desperate policy. It was born out of secret island 00:21:06.380 --> 00:21:09.339 meetings, hidden identities, and severe economic 00:21:09.339 --> 00:21:12.819 terror. It fundamentally altered the entire trajectory 00:21:12.819 --> 00:21:15.619 of American history, and its mechanics dictate 00:21:15.619 --> 00:21:18.000 the value of the money you earn and spend every 00:21:18.000 --> 00:21:20.279 single day. And this raises an important question, 00:21:20.420 --> 00:21:22.539 something for you to think about long after we 00:21:22.539 --> 00:21:24.490 finish today. Okay, let's hear it. The original 00:21:24.490 --> 00:21:26.910 Federal Reserve Act was born because a nation 00:21:26.910 --> 00:21:29.549 running on paper notes and heavy gold couldn't 00:21:29.549 --> 00:21:32.029 physically move cash fast enough to stop the 00:21:32.029 --> 00:21:34.569 bleeding during the panic of 1907. Right. The 00:21:34.569 --> 00:21:36.349 train car literally couldn't get there in time. 00:21:36.529 --> 00:21:39.410 Exactly. But today we are rapidly moving toward 00:21:39.410 --> 00:21:43.029 a world of purely digital transactions, algorithmic 00:21:43.029 --> 00:21:45.690 high frequency trading and decentralized cryptocurrencies. 00:21:46.089 --> 00:21:49.769 Things move in milliseconds now. Right. So will 00:21:49.769 --> 00:21:53.599 a future unprecedented digital crisis one that 00:21:53.599 --> 00:21:55.460 happens at the speed of light rather than the 00:21:55.460 --> 00:21:58.400 speed of a train force, a completely new rewrite 00:21:58.400 --> 00:22:00.839 of the Federal Reserve Act for the 21st century. 00:22:00.960 --> 00:22:03.819 Wow. That's a fascinating thought. If the engine 00:22:03.819 --> 00:22:06.500 seizes in the digital age, do we need a new operating 00:22:06.500 --> 00:22:09.099 system altogether? We just might. Thank you so 00:22:09.099 --> 00:22:11.779 much for joining us on this deep dive. Keep questioning 00:22:11.779 --> 00:22:14.420 the systems operating invisibly around you. And 00:22:14.420 --> 00:22:16.240 remember, an engine running without oil is always 00:22:16.240 --> 00:22:18.920 just one bad bump away from seizing up. Stay 00:22:18.920 --> 00:22:20.660 curious, and we'll catch you next time.