New York’s Bank: The National Monetary Commission and the Founding of the Fed

This Policy Analysis reviews the earlier Monetary Commission’s origins, organization, and shortcomings, in order to suggest how a new commission might improve upon it. In contrast to more conventional, celebratory accounts of the Fed’s establishment, it finds that, instead of serving as a means for achieving desirable reforms, the National Monetary Commission served as a façade behind which its chair, Sen. Nelson Aldrich (R-RI), pursued a personal monetary reform agenda heavily influenced by major New York bankers.

The resulting “Aldrich Plan” sought to preserve New York banks’ dominant position in the financial system, even though doing so meant setting aside alternative reform proposals that sought to address the root cause of crises, including plans that would have introduced nationwide branch banking while removing Civil War–era limitations on banks’ ability to issue circulating banknotes. Although the Aldrich Plan itself failed, many of its features, including those catering to the interests of the big New York banks, made their way into the later Federal Reserve Act.

Not surprisingly, that Act proved more effective in preserving New York’s financial hegemony than in securing financial stability. If the Centennial Monetary Commission is to prove more successful than its predecessor in serving as a means for achieving financial stability, it must be a genuine, bipartisan commission, with open proceedings, and free of the taint of special-interest influence, which today means not only the influence of Wall Street, but also that of the Federal Reserve establishment itself.

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