The roots of the American Federal Reserve and the Progressive era:Useful history to guide us in the current crisis

Among the few 1000 books in my library is a blue covered paperback with a green and black business cycle imposed on it with a photo of President Woodrow Wilson in the last peak to trough. I bought this book back in my undergraduate days in the mid 1960s. It is by Arthur Link who taught at Northwestern University. It is entitled Woodrow Wilson and the Progressive Era 1910-1917. I bought it on sale and the nicely stitched and bound  paperback published in 1963 by Harper Torchbooks cost me less than the list price of $1.95. It is well worth reading today because of the story it tells about the creation of the Federal Reserve in 1913 and the ferocious politics that accompanied its birth.

In many ways Americans are reliving these events today. The divisions within the Republican party and in the Congress over what ought to be the appropriate role for the Federal Reserve in response to the crisis, the populist claims of the tea party movement and the appearance of populist styled radical Republicans like Ron Paul and Sarah Palin, as well as the pragmatic but cautiously moderate approach of Barack Obama all have earlier echoes in that epoch.

In those days radical populists like William Jennings Bryan, former President Teddy Roosevelt who ran on a third party Bull Moose platform in the 1912 presidential election and the candidate of moderate progressivism,  Woodrow Wilson who ran as a reforming Democrat on a New Freedom slogan which argued that economic democracy was ”absolutely essential to political democracy” dominated the political scene. The incumbent President William Howard Taft, the official Republican candidate finished third with 3.5 million votes compared to Roosevelt’s 4.1 million, Wilson’s 6.3 million and the Socialist party candidate Eugene V. Debs 901.9 thousand votes. Wilson won 435 electoral college votes, Roosevelt 88 and Taft 8. Wilson also captured control of the House of Representatives with a majority of 73 and the Senate with a majority of 6. (pp.22-23, Link)

The 1912 election was influenced by the economic crash and financial panic of 1907 which had required the intervention of J.Pierpont Morgan to save the day.

Hence the push for the creation of the Federal Reserve. The Carter Glass- Robert Owen act which established the Federal Reserve was passed into law on December 23, 1913 (p.52,Link)and it was one of the greatest achievements of the first term of the  Wilson presidency. Its critics , from the populist left, principally the radicals around Bryan in the Democratic party and beyond were angry that the original draft of the bill did not go far enough in curbing the powers of the big banks and trusts in dominating the financial markets and exercising excessive influence over the regional central banks and separating the power to create currency from the supply of commercial paper. The southern agrarian reformers also complained there were no special provisions made for agricultural credit and that the farmers were sold out to the moneylenders.This was then partly remedied by an amendment that authorised the discounting of agricultural paper. This accomplished Bryan supported the bill.(pp.49-50 Link)

On the other side bankers, business leaders and their allies in congress denounced the Federal Reserve  bill as ”socialistic, theoretical, vicious” and  ”the preposterous offspring of ignorance and unreason”( Link, p.50) Despite the vitriol Wilson stood his ground and the bill became law.

In that era Teddy Roosevelt played a major progressive role in converting many of his populist supporters from a rather right wing Jeffersonian populist laissez-faire orientation to one that focused on federal power and regulation exercised to promote social justice and regulation of the trusts and established interests in the interest of all. In this role Roosevelt adopted the approach of a New York journalist Herbert Croly who in 1909 had published his progressive political treatise  Promise of American life wherein he compared the two dominant traditions in American politics, Hamiltonian democracy which emphasized a strong federal government role in managing and regulating the economy as compared with Jeffersonian democracy which emphasized decentralization and laissez-faire. Croly argued that progressives needed to abandon their opposition to a strong federal role which he admitted had been abused in the past to privilege the powerful financial and industrial interests, but now could be reoriented by using ”Hamiltonian means to achieve Jeffersonian or democratic ends.”(pp.18-19 Link)

President Obama, progressive Democrats and Independents and Republicans might well find  helpful inspiration in these circumstances 100 years later.

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About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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