Part Two. The Origins of the Federal Reserve. The Progressive Movement.
The Federal Reserve Act of December 23, 1913 was part and parcel of the wave of progressive legislation on local, state and federal levels of government that began about 1900.
Progressivism was a bipartisan movement which, in the course of the first two decades of the 20th century, transformed the American economy and society from one of roughly laissez-faire to one of centralized statism.
Until the 1960s, historians had established the myth that progressivism was a virtual uprising of workers and farmers who, guided by a new generation of altruistic experts and intellectuals,
tools surmounted fierce big business opposition in order to curb, regulate, and control what
had been a system of accelerating monopoly in the late 19th century.
A generation of research and scholarship, however, has now exploded that myth for all
parts of the American polity, and it has become all too clear that the truth is the reverse
of this well-worn fable.
In contrast, what actually happened was that business became increasingly competitive during
in the late 19th century, and that various big business interests, led by the powerful
financial house of J.P. Morgan & Company, had tried desperately to establish successful
cartels on the free market.
The first wave of such cartels was in the first large-scale business, railroads, and
in every case, the attempt to increase profits by cutting sales with a quota system and thereby
to raise prices or rates, collapsed quickly from internal competition within the cartel
and from external competition by new competitors eager to undercut the cartel.
During the 1890s, in the new field of large-scale industrial corporations, big business interests
tried to establish high prices and reduce production via mergers, and again, in every
case, the mergers collapsed from the winds of the new competition.
In both sets of cartel attempts, J.P. Morgan and company had taken the lead, and in both
Both sets of cases, the market, hampered though it was by high protective tariff walls, managed
to nullify these attempts at voluntary cartelization.
It then became clear to these big business interests that the only way to establish a
cartelized economy, an economy that would ensure their continued economic dominance
and high profits, would be to use the powers of government to establish and maintain cartels
by coercion.
In other words, to transform the economy from roughly laissez-faire to centralized and coordinated
ism. But how could the American people, steeped in a long tradition of fierce opposition to
government-imposed monopoly, go along with this program? How could the public's consent
to the new order be engineered? Fortunately for the cartelists, a solution to this vaccine
problem lay at hand. Monopoly could be put over in the name of opposition to monopoly.
In that way, using the rhetoric beloved by Americans, the form of the political economy
Monopoly had always been defined in the popular parlance and among economists as, quote, grants
of exclusive privilege by the government.
It was now simply redefined as, quote, big business or business competitive practices,
such as price cutting, so that regulatory commissions, from the Interstate Commerce
Commission to the Federal Trade Commission to state insurance commissions, were lobbied
for and staffed by big business men from the regulated industry, all done in the name of
curbing quote, big business monopoly on the free market.
In that way, the regulatory commissions could subsidize, restrict and cartelize in the name
of quote, opposing monopoly, as well as promoting the general welfare and national security.
Once again, it was railroad monopoly that paved the way.
For this intellectual shell game, the cartelists needed the support of the nation's intellectuals
Intellectuals, the class of professional opinion molders in society.
The Morgans needed a smokescreen of ideology, setting forth the rationale and the apologetics
for the new order.
Again, fortunately for them, the intellectuals were ready and eager for the new alliance.
The enormous growth of intellectuals, academics, social scientists, technocrats, engineers,
social workers, physicians, and occupational quote, guilds of all types in the late 19th
led most of these groups to organize for a far greater share of the pie than they could possibly achieve on the free market.
These intellectuals needed the state to license, restrict and cartelize their occupations so as to raise the incomes for the fortunate people already in these fields.
In return for their serving as apologists for the new statism, the state was prepared to offer not only cartelized occupations,
Patience, but also ever-increasing and cushier jobs in the bureaucracy to plan and propagandize
for the newly stateized society.
And the intellectuals were ready for it, having learned in graduate schools in Germany the
glories of statism and organicist socialism, of a harmonious, quote, middle way between
dog-eat-dog laissez-faire on the one hand and proletarian Marxism on the other.
Instead, big government, staffed by intellectuals and technocrats, steered by big business
and aided by unions organizing a subservient labor force, would impose a cooperative commonwealth
for the alleged benefit of all.