In November of 1910, some of the wealthiest and
most powerful men in America boarded a train
in the dead of night. Oh, yeah. The whole thing
is incredibly dramatic. Right. I mean, they were
literally using fake names. The shades on their
private rail car were completely drawn shut,
and they were heading to this highly exclusive
secret club on Jekyll Island off the coast of
Georgia. And their mission was to, well, completely
rewrite the United States financial system. entirely
from the shatters. It really does sound like,
I don't know, the opening scene of a heist movie
or something. Oh boy. But this is the actual
documented origin story of the institution that
controls the money in your pocket right now.
Welcome to the deep dive. We are so thrilled
you're here with us. Yeah. We know you, the learner,
are always looking to get past those surface
-level summaries to really understand the invisible
machinery around the world. Absolutely. And today
we've got an incredibly detailed Wikipedia article
covering the history, the mechanics, and the
pretty intense controversies of the Federal Reserve
Act of 1913. Our goal today is to really decode
the DNA of the US financial system. We want to
help you look past the dense legislative language
and understand how a mix of extreme secrecy bitter
political compromises and just sheer economic
terror birthed the modern Federal Reserve. OK,
let's unpack this, because to understand why
a group of millionaires felt the need to sneak
out of New York under assumed names, you really
have to realize that for roughly 80 years, the
United States basically operated without a central
bank. Yeah, 80 years. Like an 80 -year financial
wild west. It really was. And to grasp the sheer
instability of that era, we have to trace the
source material back to the original clash over
American money, which is Alexander Hamilton versus
Thomas Jefferson. Oh, a classic showdown. Right.
So after the Revolutionary War, the US was saddled
with massive debt and this highly fragmented
local banking system. And Hamilton wanted a strong
centralized bank modeled on European institutions.
Because you thought it would bring stability,
right? Exactly. He believed you needed centralized
power to bring order to the monetary system,
manage government revenues, and basically provide
reliable credit for a growing commercial nation.
But then Jefferson looked at that and saw, like,
an existential threat to democracy. Oh, completely.
He was terrified of it. He and the Southern members
of Congress were super worried that a central
bank would just serve the wealthy commercial
interests of the North at the direct expense
of Southern agriculture. I mean, they relied
on local banks, and they viewed a centralized
financial authority as just another version of
the British monarchy. They had literally just
fought a war to escape. And that fundamental
tension, centralized commercial power versus
decentralized local power, that is the blueprint
for the entire history of American banking. Wow,
yeah. So Congress did actually establish the
first bank of the United States in 1791, giving
it a 20 -year charter. But that Jeffersonian
anxiety just never went away. They kept arguing
it concentrated way too much power in the hands
of the elite. Right. So when that charter came
up for renewal in 1811, it failed. By a single
vote. Right? Yeah. One vote in the House and
one in the Senate. That's wild. It's crazy how
close it was. And then after the financial chaos
of the War of 1812, they try again with the Second
Bank of the United States. But that one doesn't
last either. No, because that institution gets
blamed for overextending credit and causing the
panic of 1819. Fast forward a bit and President
Andrew Jackson rise into office, making it his
like his personal crusade to destroy the bank.
Because he argued it functioned as a monopoly
for the Exactly. So its charter expires in 1836,
and by 1841 it's just completely liquidated.
Which leaves the nation without a central steering
wheel for eight whole decades. Yeah. I mean,
the economy was growing at an unprecedented explosive
rate during the Industrial Revolution, but the
financial architecture was basically stuck in
the 18th century. And that void leads directly
to the catalyst for the Federal Reserve Act,
which is the panic of 1907. So let's talk about
what a panic actually looked like on the ground
for regular people. At the time, the entire United
States only had about $3 .8 billion in coins
and banknotes in total circulation. Which is
really not a lot when you think about it. No,
not at all. So if the economy gets spooked, say,
a major copper trust collapses, which is actually
what triggered 1907 people rushed to their local
banks to pull out their cash. Right, a classic
bank run. But the banks don't keep all that cash
in the vault. They've lent it out. So when the
banks run out of physical cash, they have nowhere
to turn. There is literally no central reserve
to borrow from. They just close their doors.
Yeah, they close up and businesses go bankrupt
overnight. It really makes me think of an engine
running without oil. Oh, that's a good way to
look at it. Like, you can drive for a little
while, sure, and maybe even go pretty fast. Yeah.
But the second you hit a bad bump, the internal
friction is just too much. The parts grind together,
and the whole thing just violently seizes up.
That is precisely what happened. The engine seized
so badly in 1907 that JPMorgan, like the man
himself, had to physically lock prominent New
York bankers in his private library. Wait, he
literally locked them in a room. He literally
locked the doors and forced them to pool their
own personal money to bail out the system. That
is insane. It terrified the country's leadership.
I mean, a modern industrial powerhouse could
not rely on one very rich man locking people
in a room to save the economy. Right. So Congress
passes the Aldrich -Freeland Act in 1908, which
creates the National Monetary Commission to you
know, finally find a structural solution. Which
brings us back to that dark train car. Yeah.
Senator Nelson W. Aldrich, a conservative Republican
who chaired the commission, knows he needs a
plan. So he gathers the absolute titans of finance.
Frank A. Vanderlip, president of National City
Bank. Paul Warburg. Henry P. Davison, who was
a JP Morgan partner. The heavy hitter. Exactly.
And they sneak away to Jekyll Island to write
what becomes known as the Aldrich Plan, which
proposed a National Reserve Association run primarily
by banking directors. And you mentioned earlier
that they went in secret under fake names. Yeah,
why all the cloak and dagger? They did that because
they knew exactly how toxic the public's view
of bankers was at the time. If the American people
saw the architects of Wall Street writing the
new banking laws, the bill would be dead on arrival.
OK, wait, let me pause you there. If the top
bankers had a functional plan to stop the panics,
to pour oil back into the engine so businesses
wouldn't collapse, why didn't Congress just pass
it immediately? Well, didn't the rural and western
states want protection from another crash? What's
fascinating here is that for the average American,
The cure proposed by the Aldrich plan was actually
far scarier than the disease of the panics. Really?
Oh, yeah. The public was terrified of what was
known as the Money Trust. From 1912 into 1913,
a congressional group called the Pujo Committee
held these explosive hearings investigating Wall
Street. OK. And they mathematically exposed something
called interlocking directorate. OK, let's define
that because it's a crucial piece of the puzzle.
Imagine looking at the board of directors for
the biggest railroad, the biggest steel company,
and the biggest bank. Interlocking directorates
meant the exact same small group of wealthy financiers
were sitting on all of those boards simultaneously.
Wow. So they were basically coordinating the
entire American economy over cigars. Exactly.
The Pujo Committee proved that this handful of
men controlled billions of dollars of the nation's
wealth. So when the public looked at the Aldridge
plan, they realized it gave almost no oversight
power to the government. Oh, I see. It was basically
handing the permanent legal keys to the financial
system over to the exact same cartel that had
caused the panics in the first place. Okay, so
the Aldridge plan is completely toxic. Half the
country inherently distrusts Wall Street. And
then the political landscape shifts dramatically
in the 1912 election. Right. The Democrats win
the White House with Woodrow Wilson and they
take both chambers of Congress and their official
party platform explicitly opposes the Aldrich
plan. But Wilson is left staring at a ticking
time bomb. I mean, the engine is still out of
oil. He has to pass a central banking bill, but
he has to somehow reconcile to. wildly opposing
forces. It was an incredible political tightrope.
On one side, you have conservative Republicans
and bankers demanding a centralized, efficient
system to stop the panics. Right. But on the
other side, progressive firebrands like William
Jennings Bryan demand that any new system must
be fiercely decentralized and entirely controlled
by the government. completely free of Wall Street's
influence. So Wilson brings in advisors like
Louise Brandeis to sort of thread this needle.
Yeah. And Wilson declares the new system has
to be public, not private, and that banks must
be the instruments, not the masters of business.
But how do you actually build that? You build
it through the Glass -Owen Compromise. Yeah.
It was crafted by Congressman Carter Glass and
Senator Robert L. Owen. Rather than one massive
central bank in New York, they created a franchise
model. A franchise, like a fast food chain. Think
of it exactly like a national restaurant chain.
To decentralize power away from Wall Street,
they established regional federal reserve banks
scattered across the country, eventually settling
on 12th. Okay. These regional banks are like
the local franchisees. A regional bank in Kansas
City understands the seasonal credit needs of
wheat farmers far better than a banker in Manhattan
ever could. That makes sense. But a franchise
still needs a corporate headquarters to set the
ultimate rules. Exactly. So to maintain public
and government control, these 12 regional banks
would be overseen by a Federal Reserve Board
of Governors based in Washington, DC. And crucially,
those governors would be appointed by the President
of the United States and confirmed by the Senate.
Here's where it gets really interesting though.
When you dig into the mechanics of the source
text, it notes that the law required all nationally
chartered banks to join the system. And to join,
they had to purchase specific non -transferable
stock in their regional Federal Reserve bank.
That's right. They even got a 6 % annual dividend
on that stock. So wait, if private banks literally
own the stock of the regional branches, how on
earth Did Wilson convince the progressives this
was a public institution? Well, that is the genius
and honestly the ongoing friction of the compromise.
You give the private bankers a financial stake
and seats on the regional board so they buy into
the system and provide the capital. OK. But Wilson
won over the progressives by changing the nature
of the paper money itself. Before this, a bank
note was often just a promise from a private
bank. Wilson ensured that the new Federal Reserve
notes would be direct obligations of the United
States government. Which creates the elastic
currency the text talks about. Precisely. If
a local bank needs cash during a panic, they
can take your solid business loans, hand them
over to the regional Federal Reserve bank, and
get brand new U .S. government -backed currency
in return. Wow. The government controls the printing
press at the top, allowing the currency supply
to stretch or be elastic when the economy needs
it, while the private banks handle the plumbing
at the bottom. It's a master class in political
survival. It really was. Even during the final
Senate debates, a banker named Frank A. Vanderlip,
who was actually one of the original Jekyll Island
attendees, he pushed a competing amendment. Trying
to strip away government control and give the
private banks more power. They fought it right
up to the end Yeah, Wilson had to furiously rally
his party to defeat it but finally the Senate
passes the Federal Reserve Act 54 to 34 and Wilson
signs it into law on December 23rd 1913. And
the timing is just staggering because they had
zero time to test the system before the world
completely fractured. The ink is barely dry and
World War One breaks out. The U .S. enters the
war in April 1917 and the financial demands are
just incomprehensible. The government needed
to find two billion dollars just to cover the
first year of the war effort. So the Federal
Reserve Act was immediately put to the massive
test and they realized they had to patch the
system right away. In June 1917, Congress passed
massive amendments to the act to allow the Fed
to expand the money supply drastically. And to
understand how they did this, we have to talk
about the gold standard. Right, because before
the war, there was a strict tether. For every
paper dollar the Federal Reserve issued, they
were legally required to hold a certain high
percentage of physical gold in a vault to back
it up. And that strict ratio naturally limited
how much money could exist. Exactly. But to fund
a global war, you need massive amounts of cash
flowing through the economy to buy bonds and
manufacture weapons. You can't be held back by
how much gold you have. So the 1917 amendments
basically changed the rules of that tether. They
de facto allowed less gold backing for each paper
note. By lowering the required ratio of gold
to paper, they decoupled the currency just enough
to flood the system with cash. I mean, the amount
of currency in circulation more than doubled
from $465 million to over $1 .2 billion in just
six months. Which naturally triggered massive
price inflation. But it allowed the U .S. to
finance the war the system held. It did. But
the source material highlights another crucial
amendment 10 years later that easily flies under
the radar. And that's the 1927 McFadden Act,
which included a charter extension. Oh, right.
Because when the Federal Reserve Act was written
in 1913, it only granted the Fed a 20 -year operating
charter mirroring the first and second banks
of the United States. Exactly. If it passed in
1913 with a 20 -year lifespan, the charter was
set to expire in 1933. Now, put yourself in the
mindset of 1933. The United States is in the
absolute lowest, most desperate depths of the
Great Depression. Thousands of banks have collapsed.
Yeah, unemployment is skyrocketing. And the public's
hatred of the banking community is at an all
-time high. If the Federal Reserve had been forced
to face a charter renewal vote in Congress in
1933, amid the New Deal and Franklin D. Roosevelt's
administration, it is highly likely the institution
would have been dismantled entirely. Wow. But
that 1927 amendment quietly made the Fed's charter
permanent. Yeah. It was like a legislative lifesaver
that prevented the entire system from expiring
right when the economy was at its most vulnerable.
And because it survived, it had to adapt to the
failures of the Depression. So in 1933, new banking
acts created the Federal Open Market Committee,
or the FOMC. OK, the FOMC. Right. Because before
this, the 12 regional banks were somewhat uncoordinated.
One regional bank might be trying to expand credit
while another was contracting it. They were working
at cross purposes. That sounds messy. It was.
The FOMC centralized the steering wheel by directing
what's called open market operations. OK, let's
make sure we define that, because open market
operations is one of those... you hear on the
news literally all the time. What is the actual
mechanism? It is the primary way the Fed expands
or shrinks the money supply today. If the Fed
wants to put oil into the engine, if they want
to inject cash into the economy, the FOMC buys
U .S. government bonds from private banks. And
they pay for them by essentially crediting those
banks with newly created money. The banks now
have cash to lend to businesses. If the Fed wants
to pull money out to slow down inflation, they
just do the reverse. They sell government bonds
to the banks, pulling that cash out of circulation.
and locking it away. So they are physically adjusting
the volume of money in real time. Exactly. And
that power leads directly to the monumental shift
in 1977. Congress passes an amendment 12 USC
section 225A which legally establishes what we
now call the dual mandate. This is a huge turning
point. Yeah, the Fed is no longer just a shock
absorber for bank panics. They are legally required
to promote maximum employment and stable prices.
And those two goals are constantly at war with
one another. How so? Well, to get maximum employment,
you generally want to keep interest rates low
and pump money into the system so businesses
can borrow cheaply, expand and hire workers.
Right. Everyone has a job. But if you pump too
much money into the system, that cash chases
the same amount of goods, and prices skyrocket.
You get inflation. To stabilize prices, you have
to pull money out and raise interest rates, which
cools down business expansion and can lead to
layoffs. Wow. So the Fed basically has to drive
the economy with one foot pressing the gas and
the other hovering over the brake. Pretty much.
If we look at the Federal Reserve Act, like a
complex piece of software, the 1913 version was
just the beta release. Oh, definitely. It was
buggy. It was a massive compromise. World War
One forced the first major patch to handle the
gold standard. And that 1977 Amendment basically
installed a whole new operating system by fundamentally
changing the ultimate purpose of the institution.
If we connect this to the bigger picture, the
Fed morphed entirely. It started as a simple
emergency check clearinghouse to stop local bank
runs, and it evolved into the active daily manager
of the entire global macroeconomy. And when you
manage the entire macroeconomy, every single
decision you make is going to be intensely scrutinized.
Oh, without a doubt. Which brings us to the endless
debates and criticisms surrounding the Federal
Reserve. And this is where we really have to
look at the source material objectively, because
to this day, this exact mechanism sparks intense
debate across the political spectrum. Right.
And just to be super clear here, we are completely
neutral on this. We're just holding up a mirror
to these historical and modern arguments so you
can understand the landscape of the debate. Absolutely.
So one of the most foundational criticisms is
the constitutional argument. Article 1, Section
8, Clause 5 of the U .S. Constitution explicitly
states that Congress has the power to coin money
and regulate its value. Right. It's right there
in the text. Exactly. So for over a century,
critics have argued that Congress delegating
this immense power to an independent central
bank with a board of unelected governors is,
well, fundamentally unconstitutional. There is
also a deep -seated protectionist critique that
really echoes all the way back to the Puccio
Committee. Critics argue that despite the government
oversight, the Fed still functions as a private
banking cartel. Yeah, you hear that phrase a
lot. Because the banking sector is so intimately
involved in the regional reserve branches, there
is a persistent fear that the Fed's policies
naturally serve the interests of powerful Wall
Street financiers at the direct expense of small
producers, local businesses and everyday consumers
whose purchasing power is eroded by inflation.
And then there is the historical blame. Oh, yeah.
When you are the manager of the macro economy,
people are naturally going to ask if you were
the one who drove the car into the ditch. Right.
There is serious ongoing debate among economists
about whether the Federal Reserve's contraction
of the money supply actually triggered or severely
worsened the Great Depression in the 1930s. And
more recently, too. Yeah. Similarly, critics
ask if the Fed's policy of keeping interest rates
artificially low fueled the housing bubble that
caused the late 2000s recession. The debate really
centers on whether an institution designed to
prevent financial panics sometimes, inadvertently,
engineers the boom and bust cycles that create
those panics. So what does this all mean? When
you read through these criticisms, the most striking
realization is that the exact same fears Thomas
Jefferson had in 1791, fears about a central
bank undermining democratic control and favoring
a wealthy commercial elite. Those are the exact
same criticisms levied against the Fed in the
21st century. It's wild. The architecture of
the banking system changed dramatically, but
the fundamental American anxiety about centralized
financial power hasn't changed one bit. That
is the incredible tension at the heart of this
source document. The Federal Reserve Act successfully
internationalized the U .S. dollar, turning it
into the bedrock of global trade. It gave the
nation the elastic currency it desperately needed
to grow, and it provided a shock absorber that
effectively ended the devastating seasonal bank
panics that used to routinely wipe out regular
people's savings. The price of that stability
was centralization. Exactly. The design requires
giving almost unfathomable power to a centralized
board. It is a permanent, never -ending balancing
act between ensuring financial stability for
the nation and maintaining democratic oversight
by the public. Which brings us back to where
we started for you, The Learner. The core takeaway
here is that the Federal Reserve Act of 1913
wasn't just some administrative, boring, bureaucratic
banking bill. Not at all. It was a dramatic,
desperate policy. It was born out of secret island
meetings, hidden identities, and severe economic
terror. It fundamentally altered the entire trajectory
of American history, and its mechanics dictate
the value of the money you earn and spend every
single day. And this raises an important question,
something for you to think about long after we
finish today. Okay, let's hear it. The original
Federal Reserve Act was born because a nation
running on paper notes and heavy gold couldn't
physically move cash fast enough to stop the
bleeding during the panic of 1907. Right. The
train car literally couldn't get there in time.
Exactly. But today we are rapidly moving toward
a world of purely digital transactions, algorithmic
high frequency trading and decentralized cryptocurrencies.
Things move in milliseconds now. Right. So will
a future unprecedented digital crisis one that
happens at the speed of light rather than the
speed of a train force, a completely new rewrite
of the Federal Reserve Act for the 21st century.
Wow. That's a fascinating thought. If the engine
seizes in the digital age, do we need a new operating
system altogether? We just might. Thank you so
much for joining us on this deep dive. Keep questioning
the systems operating invisibly around you. And
remember, an engine running without oil is always
just one bad bump away from seizing up. Stay
curious, and we'll catch you next time.