When the Federal Reserve Bank was created in 1913, no one, other than the bankers like J.P. Morgan, and the politicians like the head of the National Monetary Commission, Sen. Nelson Aldrich, understood the true and nefarious role of the new federal bureaucracy.
You see, at the turn of the century two panics had occurred, the first in 1903 and just four years later, 1907, a second rocked the financial world and the public at large. The 1903 Panic was known as the “Rich Man’s Panic” a financial downturn that primarily affected wealthy investors. It began around 1901, following the assassination of President William McKinley, and was fueled by high interest rates, excessive stock offerings, and President Theodore Roosevelt’s aggressive trust-busting policies.
By November 9, 1903, the Dow Jones Industrial Average had dropped 46% from its 1901 peak, hitting a low of 42.15. Major companies suffered severe losses—United States Steel fell from $55 to $10, U.S. Rubber dropped from $44 to $8, and American Can lost 90% of its value.
The panic was largely confined to wealthy investors, as stock ownership was not yet widespread among the general public. The market eventually recovered, but it wasn’t until 1905 that the Dow returned to its pre-panic levels.
The Panic of 1907, also known as the Knickerbocker Crisis, was a financial meltdown that struck the U.S. in October of that year. It was triggered by a failed attempt to corner the market on United Copper Company stock, which led to a cascade of bank runs and trust company failures. Bank runs and failures affected anyone with money in the banks, and thus almost everyone.
It is widely believed that J.P. Morgan and his cohorts, contrived the panic and planned the collapse of his biggest rival bank, Knickerbocker Trust Company. The failure of Knickerbocker and the collapse of the stock market by nearly 50% put the public on edge, priming them for the soon to be recommended “flexible banking system”, the Federal Reserve Bank. Morgan created a crisis for which he had a solution as long as he could convince the public that his solution was sound. A scared and nervous public was ready for any solution that they believed would protect their money.
In future articles I will explain how the FRB came to be. It is as fascinating and chilling a story as any horror film. Look for it soon. In the meantime, Mises Institute, my favorite Austrian School website, hosts this original video about the inner workings of the Fed. Most of you have no idea that the Federal Reserve Bank is not federal, nor does it have any reserves, nor is it actually a bank though it has the appearance of one. The name is an intentional misnomer. Watch and learn.
