Formation of the Federal Reserve

The Formation of the Federal Reserve

• In 1910, seven men, including Paul Warburg, took a secretive 800-mile train journey to Jekyll Island, Georgia, under the guise of a "duck-hunting" expedition, marking the beginning of the process to formalize the Federal Reserve.

Previous Attempts at a Central Bank

• The first attempt at a Central Bank was in 1791 with the creation of the Bank of the United States, which failed to have its 20-year charter renewed due to contentious votes in the House of Representatives and the Senate.
• The second attempt came in 1816 with the Second Bank of the United States, which endured a prolonged closure and eventually ceased to exist within 25 years.

Advocates for a Central Bank

• Paul Warburg, a descendant of European banking royalty, was a key advocate for the introduction of a Central Bank, arguing that it would provide a "Lender of Last Resort" and facilitate the standardization of banknotes.
• Warburg believed that the absence of a Central Bank led to inefficiencies in commerce and economic prosperity, as users of bank-issued banknotes had to gauge the creditworthiness of individual banks.

Free-Banking in the US

• Prior to the formation of the Federal Reserve, the US had a system of Free-Banking, where banks operated without a Central Bank, relying on caution and prudence in extending loans to avoid solvency concerns and deposit withdrawals.

The Establishment of the Federal Reserve

• On December 23, 1913, the US established its third Central Bank, the Federal Reserve, after being persuaded by Warburg's arguments and the perceived benefits of a Central Bank.