Bankers, Fed Origins, and World War I

 The push for central banking in America was central to the Progressive movement, framed as a way to combat banking monopoly and stabilize the financial system. Key voices pointed out that this drive, while marketed as reform, actually established a form of monopoly under the guise of fighting against it. Prior to the creation of the Federal Reserve, banking elites in New York were dissatisfied with existing systems, feeling they lacked adequate centralization and control over money and credit. Their main complaint was “inelasticity,” meaning they were unable to expand money and credit sufficiently.

Competition from non-national banks was seen as a threat to their financial supremacy. The banking landscape shifted significantly from the 1870s to 1913, with a growing number of non-national banks that created pressure on national banks. This shift undermined New York's status as the financial hub. The Panic of 1907 led to a unified call for central banking, as banks desired a system that could bail them out when needed. They sought a central bank that could regulate the economy and stabilize the financial system.

World War I offered a great opportunity for the newly established Federal Reserve to expand its powers. During the war, it doubled the money supply, which concealed the costs of military actions through inflation rather than taxation. This increased the Federal Reserve’s influence and helped solidify the federal government’s control over the economy. Additionally, Wall Street banks gained tremendous financial benefits as they became key players in financing war-related industries.

The banking sector, fearing financial loss if the Allies lost the war, advocated for U. S. entry into the conflict. They believed that control over financing would allow them to shape post-war peace agreements. The Federal Reserve’s origins and the role it played during World War I lesson that the system was not created to eliminate monopoly but to establish control under the guise of reform. It was the competition from state and private banks that prompted the call for centralization rather than a genuine need to curb monopoly.

The creation of the Federal Reserve was presented as a solution to the economic turmoil caused by banks and government through their previous inflationary policies. Central banking, thus, became a mechanism for concealing the costs of government projects, particularly during wartime, allowing for increased government centralization. During World War I, financial institutions found new opportunities for profit and pushed for U. S. involvement to mitigate losses and ensure loan repayments from Allies.

The conclusion drawn from the history of the Federal Reserve and World War I includes several points: the formation of the Fed arose not from a lack of competition but from too much of it, the partnership between banks and government further exacerbated the issues, central bank actions masked the costs of war, and wartime dynamics enabled greater government control. Ultimately, financial interests sought to secure their investments and profits through U. S. involvement in the war, showcasing the intertwined nature of banking and state interests.

https://mises.org/mises-wire/bankers-fed-origins-and-world-war-i