Gold, Populism, and Morgan’s Midnight Rescue (1879-1907)
In 1879, gold and silver payments were successfully restored, and the United States officially entered the classic gold standard era. The US dollar was pegged to gold at $20.67 per ounce, and green backed coins, gold certificates, and national bank notes could be freely exchanged for gold. From 1880 to 1914, this period saw strong economic growth, rapid industrialization, and the rise of the United States as a global economic powerhouse. However, frequent bank panics (1884, 1890, 1893, 1907) highlighted the deep-seated structural flaws in the financial system. In these crises, credit and currency have dried up, interest rates have soared, banks have hoarded reserves, leading to a contraction in loans. The clearing house associations in major cities have attempted to curb losses by issuing emergency loan certificates, but these temporary measures highlight the lack of formal liquidity injection mechanisms. The debate over monetary policy has intensified, and farmers and debtors in the western and southern regions have demanded the free minting of silver to expand the money supply due to deflation caused by gold and the decline in agricultural product prices. The panic of 1907 forced financier J.P. Morgan to personally organize a private sector rescue, locking in the head of the New York Trust Company until a rescue agreement was reached, which became the ultimate catalyst for the creation of the Federal Reserve System.
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From Jekyll Island to the Federal Reserve System (1907-1913)
In 1910, Senator Nelson Aldridge secretly convened five famous financiers on Jekyll Island, using a pseudonym to plan a new central bank plan. Paul Wahlberg jokingly referred to it as “as secret as the Confederate Navy”. The result is the Aldridge Plan, which proposes the establishment of a central institution with regional branches, ensuring flexibility with a currency supported by commercial paper and gold, and governance led by bankers. In 1912, Aldridge announced his plan, but the political direction had changed: the Democratic Party had long suspected centralization of financial power and won the White House and Congress after Woodrow Wilson was elected. The Aldridge Plan was hindered by its excessive pro Wall Street and secretive origins. However, its core philosophy has been preserved. Wilson acknowledged that the plan was “60-70% correct”. The Democratic Party led by Congressman Carter Glass and Senator Robert Owen revised the proposal, and after intense debate, Wilson finalized it. On December 23, 1913, the Federal Reserve Act was signed to establish the Federal Reserve System, with 12 regional “banker banks” authorized to issue flexible Federal Reserve notes and manage the national monetary system.