The following description of the Federal Reserve was excerpted from a dialogue presented on 12/23/13 on National Public Radio’s Morning Edition by Robert Smith, Jacob Goldstein and Liaquat Ahamed with David Greene as host. Some of this story has been condensed to preserve space, but not altered.
This is an example of how the media spins stories and manages to leave out important details about what actually happened. Whether knowingly or unknowingly shouldn’t matter.
A listener should expect an investigative reporter approach particularly if they are covering the background of something as large an institution as the Federal Reserve.
Unfortunately, what is unstated in this discussion is important for readers or listeners to know.
The Spin on the Fed
Greene: And now to a financial panic that was far more widespread. It was at the beginning of the last century and it lead to the creation of our federal reserve system a hundred years ago today. Before that, the U.S. didn’t have a central bank to create money and set interest rates. Robert Smith and Jacob Goldstein from our Planet Money team have the story of the Fed’s birth.
It involves a secret expedition and a grumpy old man with multiple mistresses. [J.P. Morgan]
The story of the Fed really starts back in 1907. It’s a year after the great San Francisco earthquake and the U.S. economy is in trouble. Unemployment is up and people are panicking. They’re rushing to pull their money out of the banks.
At this point, in 1907, the U.S. government had no way to deal with a panic like this. There was no institution that could step in and stop the run on the banks.
Ahamed: And so J.P. Morgan draws up a list. It says 25 million. This is how much each one of you owes and says, okay, sign here. And they don’t sign. So he locks the doors and this was the door that was locked.So Morgan called together all the bankers on a Saturday night and he said we, we can stop this run, but to do it we’re going to have to pool our money to restore confidence.
He says we’re not leaving until I’ve got all the signatures. By 5:00 in the morning, they had all signed, and that essentially was the end of the panic of 1907. But even after the panic, some people were still worried. Do we really want the the fate of the U.S. economy to hinge on one rich guy in New York?
Relying on J.P. Morgan to bail out the U.S. financial system didn’t make sense, particularly since J.P. Morgan was 70 and liked to go off travelling with his bevy of middle-aged mistresses, so…
What the NPR Experts Left Out about the 1907 Panic
By 1907, a year after Teddy Roosevelt’s re-election, Morgan again tried to push for a central bank. Using their combined financial muscle, Morgan and his friends were secretly able to crash the stock market. Thousands of small banks were vastly over extended, some had reserves less than one percent, thanks to the principle of fractional reserves.
Within days bank runs were common across the nation. Morgan stepped into the public arena and promised to prop up the faltering American economy, by supporting failing banks with money he manufactured out of nothing.
Morgan printed 200 million dollars in completely worthless, private money and bought things with it, paid for services with it and sent some of it to his branch banks to lend out at interest.
The scheme worked and soon the public regained their confidence in money and quit hording their currency. However, as a result banking power was further consolidated into the hands of a few large banks.
By 1908 the panic was over. Morgan was hailed as a hero by the president of Princeton University, Woodrow Wilson:
Wilson would later become President of the United States. Guess whose side he would support- the public or the Federal Reserve?
Later economic textbooks would claim that the creation of the Federal Reserve system was a direct result of the panic of 1907:
However Minnesota congressman Charles A. Lindbergh Sr, father of Lucky Lindy, would later explain that the panic of 1907 was really nothing more than a scam perpetrated by J.P. Morgan and other banking interests.