Episode 505: A Locked Door, A Secret Meeting And The Birth Of The Fed : Planet Money A 70-year-old man with a bad cold and many mistresses, a nation that's ambivalent about a central bank, and a secret meeting on an island. Today on the show: The origin story of the Federal Reserve.

Episode 505: A Locked Door, A Secret Meeting And The Birth Of The Fed

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Hey, just a quick note - today's show originally aired in 2013.

Here at PLANET MONEY, we like to observe the big holidays. There's April 15, tax day.


There's January 11, which I don't need to tell you is Alexander Hamilton's birthday.

GOLDSTEIN: And of course, coming up, December 23rd...

SMITH: ...Yes...

GOLDSTEIN: ...The day the Federal Reserve was created. This is a particularly big one this year because the Fed is turning 100 years old.

SMITH: And it's one of the most powerful institutions in the world. Hey, you know, I'm going to say is the most powerful institution in the world. Today, we tell the story of its creation. There is a 70-year-old man with a bad cold and a bunch of mistresses. There's a nation that's deeply ambivalent about the idea of an immensely powerful central bank.

GOLDSTEIN: And there is a group of bankers who meet in secret in a private rail car, and to conceal their identities, they swear to use first names only.

SMITH: Hello, and welcome to PLANET MONEY. I'm Robert.

GOLDSTEIN: And I'm Jacob. Today on the show, the story of the Fed.


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SMITH: The story of the Federal Reserve System of the United States starts at 5:12 a.m. on April 18, 1906. You may know this date. It's when a massive earthquake hit San Francisco. The earthquake and the fires destroyed the city.

GOLDSTEIN: And the consequences of this are felt truly around the world. Insurance companies in London are paying millions of dollars in claims to people in San Francisco. The U.S. economy - the whole U.S. - winds up falling into a recession. Unemployment shoots up. On Wall Street, the stock market falls by 50 percent. And by 1907, banks start shutting down.

SMITH: And not just the bad banks, because this thing starts happening that often happens during a financial crisis. People panic. There are rumors on the street. People start pulling money out of banks that are totally stable. And it gets so bad that people start camping out overnight, waiting in line just to pull their money out of the bank when it opens. In fact, some banks make their tellers count up people's money very slowly - one, two, three - just to keep the money in the vaults.

GOLDSTEIN: A panic like this can be deadly for an economy. Healthy banks shut down, businesses can't borrow money, they lay people off. There's even more fear about the financial system. And the cycle just keeps going.

SMITH: And at this point in 1907, the U.S. government has no institution to deal with this panic. They have no way to stem it. So the job of saving the U.S. economy falls to one man, J.P. Morgan - of J.P. Morgan fame. He was basically, at one point, running the world economy from his private library in a mansion here on Madison Avenue in New York.

So we just look at it?

UNIDENTIFIED WOMAN #2: Sure, absolutely.

SMITH: This place is dripping money. It's a museum now, but you can see what it looked like in J.P. Morgan's time. There are tapestries and giant vaults filled with ancient manuscripts. And we're here with Liaquat Ahamed, a financial historian. And he points out that looking down on us from high above is the man himself.

LIAQUAT AHAMED: On the front wall is a portrait of J.P. Morgan looking very stern. He has very fiery eyes, and he's - he's not a, you know, he's not a pussycat. I mean he's - he's a very intimidating guy.

GOLDSTEIN: He's a guy who can summon the most powerful financiers in America to come to his library basically anytime he wants. And during the panic of '07, money was walking in and out the door of this place every day. It was where the presidents of the biggest banks in America came to try and figure out how to deal with the crisis.

SMITH: So these are guys with top hats and coats?

AHAMED: Yeah, they're are old-fashioned bankers with, you know, whiskers and top hats and frock coats.

SMITH: And monocles, I imagine?

AHAMED: Well, I don't know about monocles (laughter).

SMITH: Cigars?

AHAMED: Cigars were obligatory. J.P. Morgan, during this whole time, had a terrible cold and was eating nothing, but he would smoke a lot of cigars.

SMITH: And as the smoke builds, the panic gets worse and worse, until J.P. Morgan finally says guys, we have got to draw the line. We're going to stop this panic. And he comes up with a plan for the presidents of the big trust companies to contribute $25 million - that was a lot at the time - to a pool of money that's going to be used to save the healthy trusts, the banks that should not fail. And on one Saturday night, he calls some of the most powerful men in America into the library.

AHAMED: And so J.P. Morgan draws up a list - this is 25 million, this is how much each one of you owes - presents the trust company presidents with a piece of paper and says, OK, sign here. And they don't sign. So he locks the doors, and this was the door that was locked.

SMITH: Wow, there's an actual chain on here.

AHAMED: And says, we're not leaving until I've got all the signatures.

SMITH: I can't get in the door. It's still locked. He never unlocked it.


SMITH: There's still bankers inside.

GOLDSTEIN: That night, J.P. Morgan went into his secretary's office and played solitaire while the bankers hashed things out. And by 5 in the morning, they had all signed the list. And that, essentially, was the end of the Panic of 1907.

SMITH: Phew (ph), panic's over - time to make money, at least until the next panic.

GOLDSTEIN: That's probably what people on Wall Street were thinking. People in Washington, at least some of them, were thinking something pretty different. They were thinking, wait, why does the fate of the U.S. economy hinge on one rich guy in New York?

AHAMED: Relying on J.P. Morgan to bail out the U.S. financial system - and by the way, this had been the second time he'd done it - didn't make sense - and particularly since J.P. Morgan was 70 and was working two hours a day and liked to go off traveling with his bevy of middle-aged mistresses. So...

SMITH: He didn't have a lot of panics left him.

AHAMED: Yeah, exactly. And, you know, if he was somewhere in Italy when a panic broke out, that would be a problem.

GOLDSTEIN: One very powerful guy in particular decides this is a problem - Senator Nelson Aldrich. He's a Civil War veteran. He's been in the Senate for about 30 years. He's the head of the banking committee. Theodore Roosevelt called him the kingpin of the Republican Party.

SMITH: And Aldrich looks at the U.S. economy, and he sees that it's not just the most recent one, but these panics just keep happening. There was one in 1873. There was another in 1884.

GOLDSTEIN: There was 1890, the Panic of 1893, 1896...

SMITH: They keep coming. And then there's the big one in 1907. And Aldrich knows that there's something that America can do so that it will no longer have to rely on just one guy when these panics happen. The U.S. can create - he thinks - a central bank.

GOLDSTEIN: In 1907, creating a central bank is not some crazy, new idea. They've been around in Europe for a long time already. The U.S. itself had a central bank in the early part of the 19th century. And central banks had this key function back then. They served as what's called a lender of last resort.

SMITH: And what that means is when there's a panic - when people are pulling money out of banks that are basically healthy, sound banks, a central bank can step in and lend money - oftentimes unlimited amounts of money - to the healthy banks just so they can get through the panic and things can go back to normal.

GOLDSTEIN: But just consider the name central bank. Throughout American history, both of those words - both central and bank - have been deeply unpopular. That's why the U.S. got rid of its central bank back in the 1830s.

SMITH: Yeah, but Nelson Aldrich believes that if he draws up the right kind of plan, he can win over Congress and the American people. So Nelson Aldrich travels to Europe. And they say, hey, you know, this central bank thing, you should try it, it works great.

GARY RICHARDSON: They say, yeah, we don't have these American problems because we solved them 50 years ago or a hundred years ago.

SMITH: Gary Richardson is an economist at UC Irvine and at the Richmond Fed. And he told us this whole story of what Aldrich did next. So Aldrich looks around and says, OK, maybe we want a central bank. But in order to design a central bank, one that works in United States of America, he needs expertise. He basically needs bankers to help him create a central bank. And he knows that that's not going to look good - to have bankers sort of design their own central bank. So in 1910, he comes up with a plan.

GOLDSTEIN: Robert, we're standing here at the Hoboken train station in Hoboken, New Jersey. And we're here because this place, or someplace right near here, was key to Aldrich's plan. He told some of the most powerful bankers in the country, I want you to gather at the train station, but I want you to come in secret.

SMITH: And he meant really secret. He told these bankers, do not travel together; come alone; only use your first names; do not address each other by your last names; and most importantly, don't come here in your top hat and your monocle looking like a million bucks. They came here dressed as duck hunters - as if they were going on, oh, you know, I don't know, a Thanksgiving duck-hunting expedition.

GOLDSTEIN: One of these bankers who Aldrich invited, his name was Frank Vanderlip. He was an executive at National City Bank. And he wrote about this, decades later. He said that they were told that when they got here, they would find Aldrich's private rail car attached to the back of a southbound train. And he says, (reading) when I came to that car, the blinds were down, and only slender threads of amber light showed the shape of the windows. Once aboard the private car, we began to observe the taboo that had been fixed on last names. We addressed one another as Ben, Paul, Nelson, Abe.

SMITH: And Vanderlip writes that as soon as they got on this private rail car, they started work on a plan for a new central bank for the United States. But the car itself was bound for Georgia because they were going to meet in a private club on an island off the coast of Georgia - a private club, by the way, that J.P. Morgan used to be a member of - the name of that private club - the name of the island - Jekyll Island.

RICHARDSON: Jekyll Island.

GOLDSTEIN: Again, this is Gary Richardson.

SMITH: Now, at the time, did that sound as suspicious as it sounds today?

RICHARDSON: No. Actually, I haven't checked this. But I think that they had not - the book "Dr. Jekyll and Mr. Hyde" had not - was not as popular then - was not as widely known as it is today. So it didn't sound as crazily suspicious as it sounds today.

SMITH: 'Cause it sure does now.

RICHARDSON: Yeah. And I think if the word Jekyll had as much of a kind of mysterious, negative, dangerous connotation then as it does today, they would have chosen a different resort - you know, Key West or somewhere like that.

GOLDSTEIN: Robert, for the record, you and I did not get to go to Jekyll Island.

SMITH: Or to Key West.

GOLDSTEIN: Or to anywhere warm or nice. It was cold in Hoboken. But Richardson did go to Jekyll Island. And if you are going to go off and have a secret meeting with a cabal of bankers, it sounds like Jekyll Island's a really nice place to do it.

SMITH: Was there something at the club that made you think - now, this is swank? This is what J.P. Morgan would have liked.

RICHARDSON: Everything at the club makes you think that. It's old hardwood construction. It's just beautiful kind of European antique interiors.

GOLDSTEIN: So Aldrich and the bankers hole up in this beautiful, empty resort for about a week. It's actually Thanksgiving while they are there, and Vanderlip writes that they have turkey with oyster stuffing.

SMITH: And as they're enjoying their meal, they talk about sort of the big challenge that they face in bringing this to the American public. Americans think that a central bank would become too powerful, too influential in the economy.

GOLDSTEIN: All of the guys at Jekyll Island knew the history of money and banking in the United States. And they understood that the financial interest of Virginia tobacco farmers is different than the financial interest of an importer-exporter in New York.

SMITH: So they come up with a classic American workaround. The country's not going to have one central bank in Washington, D.C. It's going to have lots of central banks - little central banks scattered all around the country.

GOLDSTEIN: So they say, look, New York probably should have its own central bank, but they - the, you know, the cotton-growing South could get a central bank. The West Coast, with its extractive industries and rapid growth, can get a central bank.

SMITH: The Jekyll Island boys leave Georgia, return to Washington, D.C., and New York with a plan, now officially known as the Aldrich Plan. And they think it's pretty great. They think we have finally designed a central bank specifically for the United States of America. Well, it gets shot down in Congress. It gets tweaked. It gets debated - takes years. But the basic idea they came up with there in that swanky resort - it holds up. And so 100 years ago this month - December 1913 - President Woodrow Wilson signs the Federal Reserve Act, and the U.S.A. finally has a central bank. Actually, it has 12 central banks spread all around the country. Take that, Europe.

GOLDSTEIN: So here we are a hundred years later. And to this day, there is still a debate over what Aldrich and the bankers did at Jekyll Island. Clearly, creating the Fed did not solve the problem with financial panics. There was the Great Depression, to name a big one, and everybody, even Ben Bernanke himself, agrees that the Fed really screwed up - actually made the Great Depression worse.

SMITH: Yeah, the Fed continued to evolve. After the Depression, the Fed's power got more concentrated in Washington. It became basically one central bank, and it wasn't just the lender of last resort anymore. It became the creator of money from thin air.

GOLDSTEIN: And by 2008, the Federal Reserve had more power than J.P. Morgan ever dreamed of. When the financial crisis hit, the Fed used that power to step in, stop the panic and probably prevent another Great Depression. But at the same time, a lot of people have said the Fed's own policies contributed to the 2008 crisis in the first place.

SMITH: Clearly, that fundamental American uneasiness about a powerful central bank that everyone's been struggling with all along - that uneasiness is still with us. But there is this fact. Today, every major economy in the world made the same choice that we did. Every economy has a central bank.

Whenever we bring up the Federal Reserve or Ben Bernanke, we always get a lot of notes, so take this down carefully - planetmoney@npr.org.

GOLDSTEIN: You can also find us on Facebook and on Twitter. And I'll also mention here - Liaquat Ahamed, the financial historian we talked to - he wrote a fantastic book about central banking and the Great Depression. It's called "Lords Of Finance." If you're at all interested, read it.

SMITH: It's a Planet Money favorite. I'm Robert.

GOLDSTEIN: And I'm Jacob. Thanks for listening.

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