By Henry Parker Willis

The Federal Reserve Act was not, however, a departure from past precedent. Its foundation had been deeply laid in American banking experience. Although opinion was slow in crystallizing about any specific plan of change, it was true that from and after the year 1890 dissatisfaction with the working of our national banking system was increasingly general. This dissatisfaction may be assigned to several causes which are worthy of specific enumeration as follows:"

(a) The gradual shrinking of the outstanding public debt, and the fluctuations in the price of government bonds, had made it difficult to obtain a regular and elastic supply of bonds for use as a basis of currency issue; hence a constant tendency on the part of the currency either to shrink or at best only to hold its own at times when it should have exhibited power of steady growth.

(b) The uncoordinated and entirely independent character of our banking system, with its great diffusion of reserves, had rendered it impossible for the banks to furnish relief to others, or to protect themselves, in times of special stress, when exceptional domestic demand, due either to lack of confidence or to need for sudden enlargement of credit, had compelled heavy drafts to be made upon the various institutions.

(c) The control of specie movements exerted in most foreign countries by the local central banking mechanism, and esteemed necessary in all, to the proper working and control of the reserve system of such countries, was entirely absent in our banking system, so that the nation had no way of protecting itself against the specie demands due to unfavorable merchandise balances.

(d) Even in spite of fairly good Federal oversight and examination, and in spite of state examination which varied from excellent to poor in quality, there was so much inefficiency and bad banking as to render it obvious that some central control of the business was desirable.

It must not be supposed that recognition of these defects in so concrete and definite a way was arrived at, either early in the period after 1890 or indeed at any specified time. Indeed, the beginnings of dissatisfaction with the national system took form as a demand for elastic note issues, and there was a proposal after 1893 merely to imitate the Canadian system of currency, thereby providing safe and elastic notes. But as time went on, it was more and more realized that a thoroughgoing type of banking reform, embodying the essentials of the experience of other parts of the world, would be necessary. After the election of 1896 many proposals were made for the rectification of various elements in our banking practice, but there was no general plan for an inclusive piece of legislation until after 1905, when the House Banking and Currency Committee, whose Chairman was then Hon. Charles N. Fowler of New Jersey, began to work out tentative banking measures based on the idea of a general organization of the banks which should embody the principles developed by the Clearing House Associations in years past.

These efforts reached a greater degree of coherence after the panic of 1907, when various plans of reform were attempted, culminating, however, in the measure of only partial reform known as the Aldrich-Vreeland Law. The basic thought in this law, as has been seen in the preceding chapter, was the establishment of so-called currency associations representing the local banking strength of various communities and designed to bring into effective operation the combined resources of the banks participating therein. The Aldrich-Vreeland Act, however, was a purely emergency plan. The immediate results of the panic of 1907 were soon over and the new measure was not called into effective use during the years between its passage and the adoption of the Federal Reserve Act.

During its development, however, there had been a fairly thorough threshing out of the prevailing views and ideas concerning what was then called currency reform, while the Act itself provided for the organization of a body known as the National Monetary Commission. This Commission, consisting entirely of members of Congress, eventually proposed a bill whose purpose it was to provide for a national reserve association or central bank with fifteen branches located at various points throughout the country. The measure had not been developed until just before a change in the political control of Congress occurred. But the Democratic Party having succeeded to the majority power in the legislative body was, in 1910, urgently pressed to proceed with the consideration of the National Monetary Commission Bill or else to substitute something else for it.

What was done by Congress in 1912-13 was thus a continuation of the efforts which had been on foot ever since 1890 or soon after that date, and it was the logical outcome of those years of discussion. During 1912-13 the many bills which had been devised and put before Congress in the course of the two decades since 1890, including the National Monetary Commission Bill, were taken under advisement, and as a result the bill which later became known as the Federal Reserve Act was introduced into Congress in June, 1913, becoming law on the 23d of the following December. While it was the outgrowth of a long period of banking discussion it nevertheless represented a great advance over any preceding measure, largely because it did not hesitate to select and include the best elements which had been worked out in previous discussion of the subject, regardless of their political origin. It, however, followed very closely none of the bills which had preceded it, nor did it model itself upon any of the plans for banking reorganization which were suggested from time to time by members of Congress, by outside business organizations or by individuals. It moreover embodied several fundamental features none of which had appeared in preceding bills, although they had been for years past regarded by financiers as measures whose introduction was desirable. The bill as eventually passed went through Congress by a narrow majority, consisting of votes drawn from both of the principal parties, and was signed by President Wilson who had steadily supported its proponents.