On the Georgian resort hideaway of Jekyll Island (which has some
excellent golf courses, by the way), there once met a coalition of Wall Street
bankers and U.S. senators.  This secret 1910 meeting had a sinister purpose,
the conspiracy theorists say.  The bankers wanted to establish a new central
bank under the direct control of New York’s financial elite.  Such a plan
would give the Wall Street bankers near total control of the financial system
and allow them to manipulate it for their personal gain.

G. Edward Griffin lays out this conspiratorial version of history in his
book The Creature from Jekyll Island. His
amateurish take on history is highly suspect, however.  Gerry
, in a series of well- researched essays on U.S. banking history,
reveals many historical inaccuracies, inconsistencies, and even contradictions
in Griffin’s book and others of its genre.  Instead of reproducing
Rough’s work here, I offer the reader a substantially more accurate view
of the events leading up to the creation of the Federal Reserve System
in 1913.  To get a proper historical perspective, the story of begins
just prior to the Civil War…

The National Banking Acts of 1863 & 1864

Prior to the Civil war there were thousands of banks in operation throughout
the Union, all of them chartered, that is, licensed by the state governments.  Banking
regulations were virtually nonexistent.  The federal government had
no meaningful controls on banking practices, and state regulations were
spotty and poorly enforced at best.  Economic historians call the
era leading up to the Civil War as the ‘state banking era’ or the ‘free
banking era.’

The problems with state banking were numerous, but three were conspicuous.  First,
the nation had no unified currency.  State banks issued their own
bank notes as currency, a system which at worst invited severe bouts of
counterfeiting and at best introduced additional uncertainty in the task
of determining the relative value of each bank note.  Second, with
no mitigating influence on the issuance of bank notes, the money supply
and the price level were highly unstable, introducing and perhaps causing
additional volatility in the business cycle.  This was due in part
to the fact that bank note issuance was frequently tied to the market value
of the bank’s bond portfolio which they were required to have by law.  Third,
frequent bank runs resulted in substantial depositor losses and severe
crises of confidence in the payments system.5

The National Banking Acts of 1863 and 1864 were attempts to assert some
degree of federal control over the banking system without the formation
of another central bank.  The Act had three primary purposes:  (1)
create a system of national banks, (2) to create a uniform national currency,
and (3) to create an active secondary market for Treasury securities to
help finance the Civil War (for the Union’s side).5

The first provision of the Acts was to allow for the incorporation of
national banks.  These banks were essentially the same as state banks,
except national banks received their charter from the federal government
and not a state government. This arrangement gave the federal government
regulatory jurisdiction over the national banks it created, whereas it
asserted no control over state-chartered banks.  National banks had
higher capital requirements and higher reserve requirements than their
state bank counterparts.  To improve liquidity and safety they were
restricted from making real estate loans and could not lend to any single
person an amount exceeding ten percent of the bank’s capital.  The
National Banking Acts also created under the Treasury Department the office
of Comptroller of the Currency.  The duties of the office were to
inspect the books of the national banks to insure compliance with the above
regulations, to hold Treasury securities deposited there by national banks,
and, via the Bureau of Engraving, to design and print all national banknotes.5

The second goal of the National Banking Acts was to create a uniform national
currency.  Rather than have several hundred, or several thousand,
forms of currency circulating in the states, conducting transactions could
be greatly simplified if there were a uniform currency.  To achieve
this all national banks were required to accept at par the bank notes of
other national banks.  This insured that national bank notes would
not suffer from the same discounting problem with which state bank notes
were afflicted.  In addition, all national bank notes were printed
by the Comptroller of the Currency on behalf of the national banks to guarantee
standardization in appearance and quality.  This reduced the possibility
of counterfeiting, an understandable wartime concern.5

The third goal of the Acts was to help finance the Civil War.  The
volume of notes which a national bank issued was based on the market value
of the U.S. Treasury securities the bank held.  A national bank was
required to keep on deposit with the Comptroller of the Currency a sizable
volume of Treasury securities.  In exchange the bank received bank
notes worth 90 percent, and later 100 percent, of the market value of the
deposited bonds.  If the bank wished to extend additional loans to
generate more profits, then the bank had to increase its holdings of Treasury
bonds.  This provision had its roots in the Michigan Act, and it was
designed to create a more active secondary market for Treasury bonds and
thus lower the cost of borrowing for the federal government.5

It was the hope of Secretary of the Treasury Chase that national banks
would replace state banks, and that this would create the uniform currency
he desired and ease the financing of the Civil War.  By 1865 there
were 1,500 national banks, about 800 of which had converted from state
banking charters.  The remainder were new banks.  However, this
still meant that state bank notes were dominating the currency because
most of them were discounted.  Accordingly, the public hoarded the
national bank notes.  To reduced the proliferation of state banking
and the notes it generated, Congress imposed a ten percent tax on all outstanding
state bank notes.  There was no corresponding tax of national bank
notes.  Many state banks decided to convert to national bank charters
because the tax made state banking unprofitable.  By 1870 there were
1,638 national banks and only 325 state banks.5

While the tax eventually eliminated the circulation of state bank notes,
it did not entirely kill state banking because state banks began to use
checking accounts as a substitute for bank notes.  Checking accounts
became so popular that by 1890 the Comptroller of the Currency estimated
that only ten percent of the nation’s money supply was in the form of currency.  Combined
with lower capital and reserve requirements, as well as the ease with which
states issued banking charters, state banks again became the dominant banking
form by the late 1880’s. Consequently, the improvements to safety that
the national banking system offered were mitigated somewhat by the return
of state banking.5

There were two major defects remaining in the banking system in the post
Civil War era despite the mild success of the National Banking Acts.  The
first was the inelastic currency problem.  The amount of currency
which a national bank could have circulating was based on the market value
of the Treasury securities it had deposited with the Comptroller of the
Currency, not the par value of the bonds.  If prices in the Treasury
bond market declined substantially, then the national banks had to reduce
the amount of currency they had in circulation.  This could be done
be refusing new loans or, in a more draconian way, by calling-in loans
already outstanding.  In either case, the effect on the money supply
is a restrictive one.  Consequently, the size of the money supply
was tied more closely to the performance of the bond market rather than
needs of the economy.5

Another closely related defect was the liquidity problem. Small rural
banks often kept deposits at larger urban banks.  The liquidity needs
of the rural banks were driven by the liquidity demands of its primary
customer, the farmers.  In the planting season the was a high demand
for currency by farmers so they could make their purchases of farming implements,
whereas in harvest season there was an increase in cash deposits as farmers
sold their crops.  Consequently, the rural banks would take deposits
from the urban banks in the spring to meet farmers’ withdrawal demands
and deposit the additional liquidity in the autumn.  Larger urban
banks could anticipate this seasonal demand and prepare for it most of
the time.  However, in 1873, 1884, 1893, and 1907 this reserve pyramid
precipitated a financial crisis.5

When national banks experienced a drain on their reserves as rural banks
made deposit withdrawals, new reserves had to be acquired in accordance
with the federal law.  A national bank could do this by selling bonds
and stocks, by borrowing from a clearinghouse, or by calling-in a few loans.  As
long as only a few national banks at a time tried to do this, liquidity
was easily supplied to the needy banks.  However, an attempt en
to sell bonds or stocks caused a market crash, which in turn
forced national banks to call in loans to comply with Treasury regulations.  Many
businesses, farmers, or households who had these loans were unable to pay
on demand and were forced into bankruptcy.  The recessionary vortex
became apparent.  Frightened by the specter of losing their deposits,
in each episode the public stormed any bank rumored, true or not, to be
in financial straights.  Anyone unable to withdraw their deposits
before the bank’s till ran dry lost their savings or later received only
pennies on the dollar.  Private deposit insurance was scant and unreliable.  Federal
deposit insurance was non-existent.5

The 1907 Banking Panic

The 1907 crisis, also called the Wall Street Panic, was especially severe.  The
Panic caused what was at that time the worst economic depression in the
country’s history.  It appears to have begun with a stock market crash
brought about by a combination of a modest speculative bubble, the liquidity
problem, and reserve pyramiding.  Centered on New York City, the scale
of the crisis reached a proportion so great that banks across the country
nearly suspended all withdrawals — a kind of self-imposed bank holiday.  Several
long-standing New York banks fell. The unemployment rate reached 20 percent
at the peak of the crisis.  Millions lost their deposits as thousands
of banks collapsed.  The crisis was terminated when J.P. Morgan, a
man of sometimes suspicious business tactics and phenomenal wealth, personally
made temporary loans to key New York banks and other financial institutions
to help them weather the storm.  He also made an appeal to the clergy
of New York to employ their Sunday sermons to calm the public’s fears.

Morgan’s emergency injection of liquidity into the banking system undoubtedly
prevented an already bad situation from getting still worse.  Although
private clearinghouses were able to supply adequate temporary liquidity
for their members, only a small portion of banks were members of such organizations.  What
would happen if there were no J.P. Morgan around during the next financial
crisis?  Just how bad could things really get?  There began to
emerge both on Wall Street and in Washington a consensus for a kind of
institutionalized J.P. Morgan, that is, a public institution that could
provide emergency liquidity to the banking system to prevent such panics
from starting.  The final result of the Panic of 1907 would be the
Federal Reserve Act of 1913.

The Federal Reserve Act of 1913

Following the near catastrophic financial disaster of 1907, the movement
for banking reform picked up steam among Wall Street bankers, Republicans,
and eastern Democrats.  However, much of the country was still distrustful
of bankers and of banking in general, especially after 1907.  After
two decades of minority status, Democrats regained control of Congress
in 1910 and were able to block several Republican attempts at reform, even
though they recognized the need for some kind of currency and banking changes.  In
1912 Woodrow Wilson won the Democratic party’s nomination for President,
and in his populist-friendly acceptance speech he warned against the “money
trusts,” and advised that “a concentration of the control of credit …
may at any time become infinitely dangerous to free enterprise.”3

Also in 1910, Senator Nelson Aldrich, Frank Vanderlip of National City
(today know as Citibank), Henry Davison of Morgan Bank, and Paul Warburg
of the Kuhn, Loeb Investment House met secretly at Jeckyll Island, a resort
island off the coast of Georgia, to discuss and formulate banking reform,
including plans for a form of central banking.  The meeting was held
in secret because the participants knew that any plan they generated would
be rejected automatically in the House of Representatives if it were associated
with Wall Street.  Because it was secret and because it involved Wall
Street, the Jekyll Island affair has always been a favorite source of conspiracy
theories.  However, the movement toward significant banking and monetary
reform was well-known.3 It is hardly
surprising that given the real possibility of substantial reform, the banking
industry would want some sort of input into the nature of the reforms.  The
Aldrich Plan which the secret meeting produced was even defeated in the
House, so even if the Jekyll Island affair was a genuine conspiracy, it
clearly failed.

The Aldrich Plan called for a system of fifteen regional central banks,
called National Reserve Associations, whose actions would be coordinated
by a national board of commercial bankers.  The Reserve Association
would make emergency loans to member banks, create money to provide an
elastic currency that could be exchanged equally for demand deposits, and
would act as a fiscal agent for the federal government.  Although
it was defeated, the Aldrich Plan served as an outline for the bill that
eventually was adopted. 5

The problem with the Aldrich Plan was that the regional banks would be
controlled individually and nationally by bankers, a prospect that did
not sit well with the populist Democratic party or with Wilson.  As
the debate began to take shape in the spring of 1913, Congressman Arsene
Pujo provided good evidence that the nation’s credit markets were under
the tight control of a handful of banks – the “money trusts” against which
Wilson warned.1 Wilson and the Democrats
wanted a reform measure which would decentralize control away from the
money trusts.

The legislation that eventually emerged was the Federal Reserve Act, also
known at the time as the Currency Bill, or the Owen-Glass Act.  The
bill called for a system of eight to twelve mostly autonomous regional
Reserve Banks that would be owned by the banks in their region and whose
actions would be coordinated by a Federal Reserve Board appointed by the
President.  The Board’s members originally included the Secretary
of the Treasury, the Comptroller of the Currency, and other officials appointed
by the President to represent public interests.  The proposed Federal
Reserve System would therefore be privately owned, but publicly controlled.  Wilson
signed the bill on December 23, 1913 and the Federal Reserve System was

Conspiracy theorists have long viewed the Federal Reserve Act as a means
of giving control of the banking system to the money trusts, when in reality
the intent and effect was to wrestle control away from them.  History
clearly demonstrates that in the decades prior to the Federal Reserve Act
the decisions of a few large New York banks had, at times, enormous repercussions
for banks throughout the country and the economy in general.  Following
the return to central banking, at least some measure of control was removed
from them and placed with the Federal Reserve.


1. Davidson, James West, Mark A. Lytle, et al, (1998), Nation
of Nations
, New York: McGraw-Hill.

2. Galbraith, John K. (1995), Money: Whence it Came,
Where it Went
, Boston: Houghton Mifflin.

3. Greider, William (1987), Secrets of the Temple,
New York: Simon & Schuster.

4. Griffin, G. Edward (1995), The Creature from Jekyll
Appleton: American Opinion Publishing, Inc.

5. Kidwell, David S. and Richard Peterson (1997), Financial
Institutions, Markets, and Money
, 6th edition, Fort Worth: Dryden

6. “Wilson Signs the Currency Bill,” New York Times,
pages 1-2, December 24, 1913.

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