A Brief History of the Fed

The origins of the public/private Federal Reserve Bank is the subject of a new book “Innumeracy”, by John Allen Paulos. Established in 1913 when Congress passed the Federal Reserve Act in an attempt to prevent financial panics, the Fed still had an aura of mystery. Even more curiously, the Fed’s founders knowingly created the perception that they were forming a secret society – much to the exasperation of a public that widely distrusted bankers.

One of the interesting tidbits is that the organizers traveled via private train, used assumed names, and held a hush-hush meeting on an isolated island off the Georgia coast to discuss their vision of how the Fed should be structured.

These “Lords of Finance” created the Fed as a means to keep all money in circulation pegged to the now-abandoned gold standard, which remained in effect in the United States until 1971. In practice, this meant that someone could go to the bank and exchange (for the sake of discussion) $100 for a specified amount of gold. The standard was 23.22 grains of gold to the United States dollar. The grain is based on the weight of a grain of wheat, which translates to 1/7,000 of a pound.

The world’s first central bank is the venerable Bank of England, established in 1694 to finance Britain’s foreign wars. To this day, the so-called “Old Lady of Threadneedle Street” maintains a monopoly on issuing banknotes, and manages the nation’s monetary policy.