On This Day in 1914...
…newspapers buzzed with the news that former Secretary of State Richard Olney declined President Woodrow Wilson’s request that he serve as the first head of the newly-created Federal Reserve Board.
Olney’s refusal was considered a defeat for Wilson during his second year in office. Wilson wanted a New Englander to head the board, in part (he said) to provide it geographic balance. Olney fit the bill as an Ivy League-educated (Brown and Harvard) lawyer who became one of Boston’s leading railroad attorneys before being tapped to serve as the U.S. attorney general for Grover Cleveland in the 1890s. From the New York Times, May 6, 1914:
Wilson’s interest in Olney reflects the purpose of the Fed, then as now, was to serve the interests of those elite parties connected to the government that would stand to benefit from the inflation it would soon create (and that would result in the short but severe Depression of 1920). But perhaps Wilson was also impressed with Olney’s understanding of the implied relationship between the growing army of Progressive Era regulators and the regulated. After all, as attorney general, Olney defended the Interstate Commerce Commission, saying this first federal regulatory agency “is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, at the same time that that supervision is almost entirely nominal. Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things…. The part of wisdom is not to destroy the Commission, but to utilize it.”
So it was Olney’s view, as early as 1894, that big business firms should welcome federal regulation because, over time, they would surely manipulate the regulators to further their interests. Indeed, this “nod-nod, wink-wink” justification for the ICC would also be used to justify the Fed two decades later. The Fed was also created (ostensibly) in response to public clamor for government supervision of banks, especially with respect to the creation of a new, legal-tender currency. (The popular term for the Federal Reserve Act was the Currency Bill.) Since its creation, the value of the Fed’s dollar and the size of government proved to be inversely related. While banks that joined the new banking system ceded both their bullion supplies and the ability to create money based on them to the Fed, in return they received regulatory protection such that, today, the banking industry is highly concentrated and characterized by banks deemed too-big-to-fail.
As Olney might say, the older the Fed got, the more inclined it became to find the banking cartel’s view of things, and that their part of wisdom was not to destroy the Fed, but to utilize it. We would be wise to recognize those who maintain the Olneyan tradition, and to beware of its effects.
Postscript: Wilson eventually chose Olney’s fellow Boston lawyer, Charles Sumner Hamlin, to head the board. For more information, see Roger T. Johnson’s official history of the Federal Reserve, published by the Boston Fed. (One wonders how much this entity with no budget constraint paid for it.) See also Murray Rothbard’s masterful A History of Money and Banking in the United States: The Colonial Era to World War II, as well as Thomas E. Woods’ article, “Warren Harding and the Forgotten Depression of 1920.”