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A Secret Meeting And The Birth Of The Federal Reserve | Planet Money | NPR - YouTube
Channel: NPR's Planet Money
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The story of the Federal Reserve System of
the United States starts at 5:12 a.m. on April
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18, 1906.
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At that moment, a massive earthquake hit San
Francisco.
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"They said it couldn't be done"
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It destroys the city.
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The U.S. economy falls into a huge recession.
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Unemployment rockets up.
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The stock market falls by 50 percent.
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And by 1907, banks start shutting down.
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This happens often during a financial crisis
-- you’ve probably heard of a run on the
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bank like in Mary Poppins or It’s A Wonderful
Life.
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"There's something wrong.
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The bank won't give someone their money."
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"Well, I'm going to get mine.
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Come along young man."
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"Don't look now, but there's something funny
going on over there at the bank, George.
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I've never really seen one, but that's got
all the earmarks of being a run."
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People panic, and then they start pulling
money out of banks that might otherwise be
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totally stable.
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The thing is, when the banks fail, businesses
can’t borrow anymore money, and they lay
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people off.
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Then there’s even more fear, and the cycle
just keeps going.
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And back in 1907, the U.S. government had
no institution to deal with this panic.
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There’s no way to even try and control it.
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So the job of saving the U.S. economy falls
to the most powerful banker -- one man, J.P.
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Morgan.
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At this point, Morgan is basically running
the world economy from his private library
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in a mansion on Madison Avenue.
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He starts summoning the presidents of the
biggest banks in America to try and figure
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out how to deal with the crisis.
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And he says, “Gentlemen.
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We have to draw the line.
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We have to stop this panic.”
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One Saturday night, he calls some of the most
powerful bankers in America into the library
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and he tells them how he’s going to fix
the panic.
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He says, “We’re going to pledge to contribute
$25 million to a pool of money that will be
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used to save the banks.
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And we're not leaving until all of you sign.”
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He locks the doors and goes into his secretary’s
office to play solitaire until the bankers
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figured things out.
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By five in the morning, they had all signed
the list.
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And that, essentially, was the end of the
Panic of 1907.
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But here’s the deal.
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The panic of 1907 wasn’t the first America
had barely survived.
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There was the panic of 1819, the panic of
1837; the panic of 1893, the panic of 1896.
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This was not a one-time thing, it was bound
to happen again.
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And Morgan was 70, working two hours a day.
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He was just not the guy who was going to keep
saving the entire financial system.
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The government needed a plan to help them
manage future panics better.
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And one very powerful guy in particular decides
he’s going to get it done: The head of the
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Senate’s finance committee, Senator Nelson
Aldrich of Rhode Island.
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Aldrich looks at the US economy and says “we
gotta do something about these panics.”
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And it comes to him that “the US needs an
organization that can loan money to banks.
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That way people will know their banks won’t
run out of money.
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It would stop bank runs.
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What we need is some sort of central bank.”
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"Good God, man!
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Did somebody say something about a central
banks?!"
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Back in the day, though, people really weren’t
fans of the words “central” or “bank.”
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So in 1910 he comes up with a plan.
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He told some of the most powerful bankers
in the country, “Dear Gentlemen, I want
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you to gather at the Hoboken train station,
but I want you to come in secret.
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Come alone.
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Use only your first names.
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Don’t come in your top hat and your monocle.”
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They came dressed as duck hunters because,
even though he needs their expertise, it’s
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not going to look good to have bankers designing
a system to bail themselves out during future
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panics.
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They got on a southbound train, in Aldrich’s
private rail car attached to the back.
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The blinds were down.
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And they start work immediately on a plan
for a new central bank while on their way
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to a private club on an island off the coast
of Georgia.
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An Island...called...Jekyll Island.
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[ominous organ music]
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They hole up in this beautiful empty resort
for about a week over Thanksgiving.
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Arguing, debating, going through one plan
after another.
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After a week the Jekyll Island gang leaves
Georgia with a plan now officially known as
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the Aldrich plan.
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And on December 1913, President Woodrow Wilson
signs the Federal Reserve Act.
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"Well, it's a great plan Senator."
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And the U.S.A. finally had a central bank.
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Now whenever a bank starts to run low on money,
the Fed can step in and loan them money.
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It stops the whole cycle of bank runs.
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And in the US we can thank an earthquake,
a rich guy with a cold, a Senator’s secret
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train, and a bunch of undercover bankers dressed
as duck hunters.
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