The Crisis that Propelled Public Currency and Led to the Establishment of the Federal Reserve
The Crisis that Propelled Public Currency and Led to the Establishment of the Federal Reserve
It's launch day for a new book I've co-authored with finance expert Benton Howser. Titled "Free Money: Bitcoin and the American Monetary Tradition," this work delves into the history of our monetary system, from the 1700s onward, through the lens of Bitcoin and cryptocurrency. Our research reveals an intriguing fact: prior to 1913, when the Federal Reserve was founded, and even before the implementation of FDR's policies in 1935, private money, including privately issued dollar bills, served as the primary medium of exchange. Remarkably, during this period, the American economy was in its prime, boasting the most prosperous economy in the world's history.
Let's revisit a fascinating historical event – the Panic of 1907. Unhappily, this episode marked the beginning of the Federal Reserve, which later became a substantial component of the monetary system.
In the late 19th century, the United States economy was soaring. A few hiccups occurred during the 1890s due to inopportune tariff increases and flawed management of the gold standard. However, growth resumed in earnest during the early 1900s. Then, in the fall of 1907, the wheels started to wobble. Faced with a sudden need for liquidity, banks discovered they had inadequate cash reserves to meet their customers' withdrawal demands. Panic ensued.
You'll find a variety of theories explaining why banks found themselves short on cash in 1907. Some argue that the agricultural population's financial needs sapped bank reserves each year. Others point to the widespread aftereffects of the 1906 San Francisco earthquake that left major depositors in disarray. Still, others suggest that the gold standard is inherently unstable and prone to crisis. Whatever the case may be, these theories continue to garner attention primarily due to the emergence of the Federal Reserve out of the turmoil of 1907.
Our investigation, guided by monetary historian Richard Timberlake, has unearthed evidence that the federal government had long been seeking to assert greater control over the banking system. Following the American Civil War, officials proposed a system that allowed private banks to issue their own "greenbacks" – United States dollar bills – as long as they held a substantial amount of federal bonds in reserve. This arrangement continued well into the early 1900s, despite the government's drastic reduction in size and near-absence of new debt issuance.
As the American economy grew, the demand for federal bonds to serve as bank reserves escalated. Understandably, it became challenging to source enough bonds to meet this need in a booming economy. Treasury Secretary Leslie Shaw acknowledged this reality and advocated for diversifying the government's reserve requirements. Sadly, this drive forward was hampered by the swift departure of Shaw from office at the behest of President Theodore Roosevelt, who appointed a new Treasury Secretary with different priorities.
Subsequently, as the crisis deepened in 1907, regulation-friendly policies put in place by Shaw's replacement weakened the financial system. With scarce amounts of federal bonds in circulation, banks found themselves unable to lend to one another during the challenging fall months. Consequently, a panic ensued, leading to the creation of the Federal Reserve in 1913.
An endearing anecdote from that time is the cooperation among banks. Despite the fact that interbank loans during a crisis were technically illegal – as they were not backed by federal bonds and hence subject to a 10% penalty – key players nevertheless embraced this practice as an effective measure to mitigate the crisis. The 10% tax was not assessed, and these loans went unpaid until the crisis subsided.
Assessing the extent to which the government is necessary to stabilize the monetary system, banks, and financial sectors has proven challenging. In fact, we've often seen disastrous consequences arising from onerous government regulations and policies. Bitcoin's emergence as a non-governmental digital currency offers a stimulating perspective on the past and provides an intriguing glimpse into how autonomous systems can function successfully.
"Free Money" invites readers to delve into this world of monetary history, offering unique insights into the role of Bitcoin in shaping our understanding of the economy – both past and present.
- Despite the gold standard being in place, private money, such as privately issued dollar bills, served as the primary medium of exchange before the establishment of the Federal Reserve in 1913.
- The Panic of 1907 marked the beginning of the Federal Reserve, which later became a substantial component of the monetary system, following the heels of the US economy's flourishing period in the late 19th century.
- In the investigation led by monetary historian Richard Timberlake, it was discovered that the federal government had long sought to assert greater control over the banking system, with Treasury Secretary Leslie Shaw advocating for diversifying reserve requirements.
- Bitcoin, as a non-governmental digital currency, offers an intriguing perspective on the past and provides a stimulating glimpse into how autonomous systems can function successfully in shaping our understanding of the economy.
- Leslie M. Shaw, the former Treasury Secretary, proposed allowing private banks to issue their own "greenbacks" during the early 1900s, as long as they held a substantial amount of federal bonds in reserve, a practice that continued despite the government's drastic reduction in size and near-absence of new debt issuance.