§ Since 1971

Wissensbasis / Geschichte

The Federal Reserve Act of 1913

“Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily traveling hundreds of miles south, embarking on a small launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance.”

B. C. Forbes, Leslie’s Weekly, October 19, 1916

This document traces the Federal Reserve System from the panics that were used to justify it, through the secret 1910 meeting at Jekyll Island, to the December 23, 1913 signing of the Act, and its actual performance against its stated mandate. Every claim is anchored to a primary source. Where a popular quotation turns out to be spurious, that is stated plainly.

1. The pre 1913 banking landscape

The United States entered the twentieth century with no central bank. The Second Bank of the United States had been killed by Andrew Jackson in 1832 (Jackson’s veto message of July 10, 1832 is the canonical primary source on the politics of that fight, archived at the Yale Avalon Project). The system that replaced it was the National Banking system, created by the National Currency Act of February 25, 1863 and the National Bank Act of June 3, 1864. Those two statutes were Civil War expedients. They forced banks holding a federal charter to back their notes with United States bonds, which created captive demand for the war debt and produced the first uniform national paper currency since the Bank War.

The system worked for the Treasury. It did not work for depositors. The national banking era saw repeated, severe banking panics: 1873, 1884, 1893, and 1907 (Federal Reserve History on the Panic of 1893 and 1907). Each time the panic followed the same pattern. Country banks held reserves at “reserve city” banks. Reserve city banks held reserves in New York. When confidence broke, the chain unwound from the periphery toward Wall Street, and the New York banks suspended cash payments. There was no lender of last resort.

The 1907 panic is the one that mattered politically. It was triggered in October 1907 by a failed corner of United Copper by F. Augustus Heinze and Charles W. Morse, which spread to the Knickerbocker Trust Company and from there to the broader trust company sector (Federal Reserve History; Library of Congress, Inside Adams blog). The man who brokered the rescue was J. P. Morgan, then seventy years old, who locked the heads of the New York banks in his library and had them commit private capital to backstop the survivors. The country had been saved from a worse outcome by one private banker’s personal authority. That fact, more than anything else, became the argument for a permanent institutional alternative.

Congress responded with the Aldrich-Vreeland Act of May 30, 1908. The act did two things. It authorized emergency currency issuance through national currency associations (a stopgap that was actually used in August 1914). And it created the National Monetary Commission, an eighteen member joint commission of Congress charged with studying banking systems and recommending reform. The chairman was Senator Nelson W. Aldrich of Rhode Island. Aldrich was the father in law of John D. Rockefeller Jr. through the marriage of his daughter Abby to John D. Jr. in 1901, a connection of public record (Wikipedia, Nelson W. Aldrich). Aldrich led the Commission on a tour of European central banks and returned convinced that the United States needed something similar, dressed up to be passable in Washington.

2. Jekyll Island, November 1910

In late November 1910, six men boarded Senator Aldrich’s private railroad car at the Hoboken, New Jersey terminal. They had been instructed to use only first names. Their destination was the Jekyll Island Club, a hunting retreat off the coast of Georgia owned by, among others, J. P. Morgan. They stayed roughly nine days. What they wrote there became the Aldrich Plan, which became, with cosmetic edits, the Federal Reserve Act.

The attendees, by name, title, and institution:

AttendeeTitleAffiliation
Nelson W. AldrichUnited States Senator (R, Rhode Island), Chairman of the National Monetary CommissionFather in law of John D. Rockefeller Jr.
A. Piatt AndrewAssistant Secretary of the TreasuryTreasury, formerly Director of the Mint
Frank A. VanderlipPresidentNational City Bank of New York (Rockefeller)
Henry P. DavisonSenior partnerJ. P. Morgan and Company
Charles D. NortonPresidentFirst National Bank of New York (Morgan group)
Paul M. WarburgPartnerKuhn, Loeb and Company

This roster is not contested. It is given in identical form by the Federal Reserve’s own history essay on the Jekyll Island Conference, by the Richmond Fed’s Econ Focus magazine, by Murray Rothbard in The Case Against the Fed, and by Frank Vanderlip himself in his February 9, 1935 Saturday Evening Post memoir. Some accounts (Mullins, Griffin) add Benjamin Strong of Bankers Trust, who would later become the first Governor of the Federal Reserve Bank of New York; the Federal Reserve’s own narrative does not include him among the six on the train, which is why this document lists six.

Vanderlip’s confession in the Saturday Evening Post, twenty five years after the fact, is the single most important primary document on what happened:

“Despite my views about the value to society of greater publicity for the affairs of corporations, there was an occasion, near the close of 1910, when I was as secretive, indeed, as furtive, as any conspirator. None of us who participated felt that we were conspirators; on the contrary we felt we were engaged in a patriotic work. We were trying to plan a mechanism that would correct the weaknesses of our banking system as revealed under the strains and pressures of the panic of 1907. I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual conception of what eventually became the Federal Reserve System.”

Frank A. Vanderlip, From Farm Boy to Financier, Saturday Evening Post, February 9, 1935

That statement is from one of the men who was in the room. Its provenance is not contested. The earliest public leak came six years before that, in the October 1916 edition of Leslie’s Weekly, in an article by B. C. Forbes (the founder of the magazine that bears his name), with the railroad car passage quoted at the top of this document and the line that has been repeated for a century: “The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done.” (Forbes’s account is reproduced and footnoted; the meeting was also catalogued in detail in Eustace Mullins’s Secrets of the Federal Reserve (1952), and in G. Edward Griffin’s The Creature from Jekyll Island (1994).)

The Federal Reserve System’s own history page does not deny any of this. It says, in plain words, that the six men met in secret, that the meeting was “kept secret for years,” and that “the plan written on Jekyll Island laid a foundation for what would eventually be the Federal Reserve System.” (Federal Reserve History, The Meeting at Jekyll Island.) The factual record is therefore not a matter of left or right or conspiracy or skepticism. It is a matter of who was in the room: a senator married into the Rockefeller family, a Treasury official, and four men representing the three largest banking houses in the United States, drafting in secret the legislation that would govern the country’s money.

The substantive disagreement at the meeting was tactical. Aldrich wanted a single, openly chartered, European style central bank. Warburg, who had grown up inside the Hamburg banking house M. M. Warburg and Company and who knew German political instincts did not transfer to American ones, persuaded the others that, in Rothbard’s summary, “political realities required the reality of central control to be cloaked in the palatable camouflage of decentralization.” (Rothbard, The Case Against the Fed, ch. on Jekyll Island.) That single choice, central control dressed as twelve regional banks, is the architectural signature of what shipped in 1913.

3. The Aldrich Plan and the Glass Owen Bill: cosmetic differences, identical kernel

Aldrich introduced the plan as the National Reserve Association bill in 1911. It died in committee, in part because Aldrich’s name was so visibly tied to Wall Street that the bill was politically toxic for Democrats, who were on the rise. After the Democrats took the White House and Congress in 1912, Senator Robert L. Owen of Oklahoma and Representative Carter Glass of Virginia took up a “different” reform bill. They sold it as a populist, decentralized, government supervised alternative to the Aldrich Plan.

Paul Warburg, the man who actually drafted the central architecture at Jekyll Island, was one of the few people who said in writing what was actually true about the two bills. From his own published comparison, after the Federal Reserve Act had passed:

“Brushing aside, then, the external differences affecting the ‘shells,’ we find the ‘kernels’ of the two systems very closely resembling and related to one another.”

Paul M. Warburg, quoted in Federal Reserve History, Federal Reserve Act Signed into Law

The two bills both centralized reserve holding, both centralized currency issuance, both gave private member banks ownership stakes in the regional reserve banks, and both rested on the same theory of an “elastic” currency expanded and contracted through commercial paper rediscount. The political surface was different. The financial mechanism was, by Warburg’s own admission, the same kernel.

Inside Congress, the most direct opposition came from Representative Charles A. Lindbergh Sr. of Minnesota’s 6th district, a Republican who served from 1907 to 1917. (He was also the father of the aviator.) Lindbergh’s words from the House floor, recorded in the Congressional Record of December 22, 1913 (archived in the Government Publishing Office’s bound Congressional Record, 63rd Congress, vol. 50, part 5):

“This Act establishes the most gigantic trust on earth. When the President signs this Act, the invisible government by the Monetary Power will be legalized. The people may not know it immediately, but the day of reckoning is only a few years removed. The trusts will soon realize that they have gone too far even for their own good. The people must make a declaration of independence to relieve themselves from the Monetary Power. This they will be able to do by taking control of Congress. Wall Street cannot be permitted to be the ruling power.”

Rep. Charles A. Lindbergh Sr., December 22, 1913

Lindbergh expanded the argument in his book Banking and Currency and the Money Trust (1913) and again, in 1917, by filing articles of impeachment against the members of the Federal Reserve Board, alleging conspiracy and constitutional violations. The articles went nowhere; the line of opposition was set.

4. December 23, 1913

The Owen Glass conference report cleared the House on December 22, 1913. The Senate adopted it the same day, in a vote held while a number of opposing senators had already left for the Christmas recess. The official Senate record gives the final Senate vote as 43 yeas to 25 nays, with twenty seven senators not voting (paired or absent). (U.S. Senate, The Senate Passes the Federal Reserve Act; Federal Reserve History, Federal Reserve Act Signed.) President Woodrow Wilson signed the Act later that same day, December 23, 1913.

The popular claim that Wilson later wrote, “I am a most unhappy man. I have unwittingly ruined my country,” in regret for signing the Act is not supportable from the surviving record. The Woodrow Wilson Presidential Library has classified the passage among Wilson’s spurious quotations. The component sentences appear to be stitched from his earlier 1912 and 1913 New Freedom essays, which were written before the Federal Reserve Act existed. Professor John M. Cooper of the University of Wisconsin, a Wilson biographer, has stated flatly that “this is not a statement of regret for having created the Federal Reserve. Wilson never had any regrets for having done that.”

It is worth noting this honestly. The case against the Fed does not need a quote that may have been fabricated. The record of the men in the room, the structure of the institution they wrote, and its measured performance across the next century are sufficient.

5. Mandate and outcome

The Federal Reserve Act gave the new system two flagship promises:

  1. An “elastic currency,” meaning a money supply that could expand to meet legitimate commercial needs and contract when those needs subsided.
  2. A “lender of last resort” function, meaning that solvent banks facing temporary illiquidity could discount commercial paper at the Fed and stay open through a panic.

Both of these were sold to the public, repeatedly, as the means by which the Fed would prevent another 1907.

The first major test of the new system was the period from 1929 to 1933. The Fed failed it. Between 1929 and 1933 the United States money supply (M2) contracted by roughly one third. Roughly nine thousand banks failed. The Federal Reserve, the institution explicitly chartered to prevent exactly that outcome, presided over the worst banking collapse in United States history sixteen to twenty years after its creation.

This is not a marginal claim. It is the central conclusion of Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867 to 1960 (Princeton University Press, 1963). Their chapter on the Great Contraction was reissued as a stand alone book; their argument is summarized in the Federal Reserve Bank of St. Louis’s working paper series on Friedman and Schwartz, and was famously ratified by then Federal Reserve Governor Ben Bernanke in his November 8, 2002 remarks at Friedman’s 90th birthday: “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” That admission, on the record, is the Federal Reserve agreeing in 2002 that the Federal Reserve caused the depth of the Great Depression by letting the money supply collapse.

This pattern recurs. The Fed’s stated mandate is stability. Its measured record across the post 1913 century includes the 1920s asset bubble, the 1929 to 1933 contraction, the 1970s stagflation, the 2000 to 2002 dot com bust, the 2008 financial crisis, and the post 2020 inflation surge that prompted the steepest tightening cycle since Volcker. The decoupling of the dollar from gold by Richard Nixon on August 15, 1971 (covered separately in 04-nixon-shock-1971.md) removed the last remaining external constraint on Federal Reserve money creation; the post 1971 inflation curve is the visible consequence.

6. Ownership and the 6 percent dividend

The Federal Reserve System is structured as twelve regional Federal Reserve Banks, each owned in stock form by the commercial banks that are members of the System within its district. The largest member banks include the largest banks in the United States. The terms are not hidden. They are written in Section 7 of the Federal Reserve Act and codified at 12 U.S.C. § 289.

Originally, member bank stockholders received a cumulative annual dividend of 6 percent on paid in capital stock. That arrangement was modified by the Fixing America’s Surface Transportation Act (FAST Act) of December 4, 2015, effective January 1, 2016. Under the current rule, member banks with total consolidated assets of $10 billion or less continue to receive the 6 percent dividend. Member banks with more than $10 billion in consolidated assets receive the lesser of 6 percent or the high yield of the most recently auctioned 10 year Treasury note. The asset threshold is adjusted annually for the GDP price index. (Federal Reserve Board, final rule on dividend payments, November 23, 2016.)

After dividends and a statutory aggregate surplus cap (currently $6.785 billion across all twelve Reserve Banks), residual net earnings are remitted to the United States Treasury. The Reserve Banks themselves are exempt from federal, state, and local taxation, except on real estate. (Section 7.)

The structure is therefore: privately owned regional banks, with statutorily guaranteed dividends to their bank shareholders, conducting monetary policy under a Board of Governors appointed by the President and confirmed by the Senate, with residual earnings flowing to the Treasury. Whether one calls this “private” or “public” is largely a question of which feature one wants to emphasize. The relevant point for this knowledgebase is that the institution combines, by design, public power over the money supply with private ownership of the operating banks.

7. The 16th Amendment, the same year

The Federal Reserve Act of December 23, 1913 was not the only constitutional level financial change of 1913. On February 3, 1913, Delaware, New Mexico, and Wyoming became the 36th, 37th, and 38th states to ratify the Sixteenth Amendment, which removed the apportionment requirement for federal income taxation. Secretary of State Philander C. Knox certified ratification on February 25, 1913. (National Archives, 16th Amendment; U.S. House History, Art and Archives.)

The two changes pair structurally. The Federal Reserve creates the monetary mechanism by which the federal government can issue and finance debt without an immediate hard money constraint. The income tax creates the revenue stream that services that debt out of personal earnings. Sequenced in the same calendar year. The first federal income tax under the new amendment, the Revenue Act of 1913, was signed by Wilson on October 3, 1913, two and a half months before the Federal Reserve Act. The mechanism of permanent expandable federal finance, money creation plus income extraction, was completed in a single twelve month window.

8. The line of opposition

Opposition to a privately influenced central money authority is not a recent or fringe American tradition. It is older than the Federal Reserve.

Thomas Jefferson, letter to John Taylor, May 28, 1816 (one of the few sourceable Jefferson banking quotations; the popular “private banks … by inflation, then by deflation” longer version is classified as spurious by Monticello, so it is not used here):

“And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

Andrew Jackson, July 10, 1832, veto message of the bill to recharter the Second Bank of the United States:

“It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. … When the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society, the farmers, mechanics, and laborers, who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government.”

(The much quoted “you are a den of vipers and thieves, I will rout you out” is attributed to a separate February 1834 meeting between Jackson and a Philadelphia banker delegation; sourcing is weaker than the veto message itself.)

Charles A. Lindbergh Sr., House floor, December 22, 1913: “This Act establishes the most gigantic trust on earth,” cited above.

The twentieth century scholarship that picks up this line and applies it specifically to the Federal Reserve has three central works that are repeatedly cited together:

These three books should be read with care for what they document (the Jekyll Island meeting, the Aldrich Plan to Glass Owen continuity, the structural ownership) versus the speculation each adds on top.

9. Performance: the dollar, 1913 to 2026

The clearest single test of the institution chartered to deliver “stable prices” is what has actually happened to the unit it issues. According to the Bureau of Labor Statistics CPI Inflation Calculator and the underlying CPI U series maintained by the BLS (compiled in the long form table at the Federal Reserve Bank of Minneapolis), one dollar of 1913 purchasing power equates to roughly thirty three dollars of 2026 purchasing power.

YearWhat $1.00 of 1913 purchasing power equalsCumulative inflation since 1913Purchasing power of the 1913 dollar
1913$1.000 %100 %
1933~$0.76 (deflation through Great Contraction)-24 %132 % (briefly above)
1971 (Nixon Shock)~$3.30~230 %~30 %
2000~$17.40~1,640 %~5.7 %
2026~$33.35~3,143 %~3 %

Source for column figures: in2013dollars.com, BLS CPI series, cross checked against the Minneapolis Fed CPI 1913 series and the official BLS calculator. The cumulative figure varies by a percentage point or two depending on the month chosen; the underlying conclusion does not.

The dollar of 1913, the year the Federal Reserve was chartered to safeguard the dollar’s stability, has lost approximately 97 percent of its purchasing power against the official CPI by 2026. The CPI itself understates true purchasing power loss against assets (housing, equities, education, healthcare), so 97 percent is the conservative reading.

10. What the record actually shows

Strip the rhetoric away. The documentary record establishes the following propositions, each anchored to a primary source above:

  1. The legislation that became the Federal Reserve Act was drafted in secret in November 1910 at Jekyll Island by a senator related by marriage to the Rockefeller family, a Treasury official, and four representatives of the Morgan, Rockefeller, and Kuhn Loeb banking houses.
  2. The participants admitted, in their own later words, that they kept the meeting secret because public disclosure would have made the bill politically impossible.
  3. The Aldrich Plan of 1911 and the Glass Owen Bill of 1913 differed in surface and political framing; Paul Warburg, the principal drafter, stated in print that their kernels were the same.
  4. The Act passed on December 22 and was signed on December 23, 1913, with a substantial number of senators absent for the Christmas recess.
  5. The Act gave the Fed two flagship promises: elastic currency and lender of last resort. Sixteen years later, the Fed allowed the United States money supply to contract by approximately one third in 1929 to 1933, the result the institution was specifically chartered to prevent.
  6. The Fed’s regional banks are owned in stock form by member commercial banks, which receive a statutory dividend of up to 6 percent on paid in capital. The largest member banks are the largest commercial banks.
  7. The Sixteenth Amendment, ratified February 3, 1913 and certified February 25, 1913, paired the new monetary mechanism with a permanent personal income tax revenue stream in the same calendar year.
  8. The dollar of 1913 has lost roughly 97 percent of its purchasing power against the official BLS CPI by 2026.

None of this requires a hidden conspiracy. It requires only reading the men’s own published statements, the text of the Act, the Congressional Record, and the BLS price index. The argument of this knowledgebase is that the post 1913, and even more so the post 1971, monetary architecture is the proximate engine of the worldwide twentieth century inflation. The Federal Reserve Act of December 23, 1913 is where that architecture begins.

Primary sources used in this entry