It was six o’clock in the evening on December 23, 1913 — just two days before Christmas. You could hear a pin drop in the Capitol Building.
Just an hour earlier, the United States Senate had cast one of the most consequential votes in American history. And then, in unison, the senators rushed out the doors and down to Union Station to catch their trains home.
Now the corridors were empty. The usual scuttlebutt of American politics was put on pause for the holiday season.
But a small group of men did not head for the train station. Instead, they made their way to the White House. There, President Woodrow Wilson sat waiting with their final bill in front of him and a small collection of gold pens laid out on the desk.
The bill was called the Glass-Owen Act, formally known as the Federal Reserve Act. With a few strokes of those gold pens, President Wilson signed the Federal Reserve System into existence.
When he finished, Wilson handed one of the pens to Carter Glass, the Virginia congressman whose name was on the bill. He handed another to Senator Robert Owen of Oklahoma, the bill’s Senate sponsor.
These were the “reformers” — the men who had spent the better part of a year, by their own account, writing legislation to break Wall Street’s grip on the American economy. They stood there beaming, holding up their gold pens. They seemed certain that they had just delivered a great victory for the common man.
“I’m not accustomed to signing bills with a whole series of pens like this,” Wilson remarked to the small group.
“The bill itself was made in installments, Mr. President,” Senator J. Hamilton Lewis of Illinois explained.
“Yes,” Wilson answered. “And very slowly.”
The room filled with cheers. Those politicians were completely oblivious to the series of events that had brought them together that evening.
You see, the men who actually designed the Federal Reserve System (the Fed) that Wilson signed into law were not in the room. Most of them weren’t even in Washington. All but one of them had never held elected office in their lives, and never would.
The Fed’s architects didn’t need to be there. Their work was already done.
The blueprint they had drafted in secret three years earlier — on a private island, using false names under false pretenses— had just become the law of the land. And it had done so wearing someone else’s name.
As we covered in the previous installment of this essay series, six of the most powerful financial men in the world gathered on Jekyll Island in 1910 to hammer out the design of a new American central bank. They took Paul Warburg’s blueprint and worked it into a concrete plan — one that could be carried back to Washington and turned into legislation.
But they had a problem.
Those men understood perfectly well that the American public did not want a central bank. The country had killed two of them already.
The very phrase carried the smell of European finance and concentrated money power. And they understood something else too — that if the public ever learned who had actually written the plan, they would furiously reject it.
Frank Vanderlip, one of the six men on the island, admitted it plainly in his memoir years later. He wrote: “If it were to be exposed publicly that our particular group had gotten together and written a banking bill, that bill would have no chance whatever of passage by Congress.”
That was the crux of the whole matter. The men who built the system could not be the men who sold it. Their fingerprints were poison. Anything with their names attached was dead on arrival.
So the design was one thing. Getting it past a suspicious public and a self-serving Congress was another thing entirely.
The Stealth Handoff
In 1912, the Democrats swept into power. They took the White House with Woodrow Wilson, and they took control of both houses of Congress.
Their electoral success came, in part, from the Democratic Party positioning its candidates as “reformers” — men who would stand up to the “Money Trust” and the New York banking interests. That messaging resonated with many Americans, who had grown weary of their country’s fight over money and periodic financial panics.
So the Democrats who were elected in 1912 appeared to be men who would oppose the central banking system designed by Paul Warburg and the Jekyll Island conspirators. At least on the surface.
In reality, they were exactly what the plan needed.
As the Democrats took office, the task of writing banking reform legislation fell to two long-time party members. In the House, it went to Carter Glass of Virginia, who chaired the Banking and Currency Committee. In the Senate, it went to Robert Owen of Oklahoma, who chaired its counterpart.
Both men were reformers by reputation. Both seemed to believe, genuinely, that they were writing legislation to rein in Wall Street.
But sincerity is not the same thing as authorship.
Glass and Owen were career politicians. They understood America’s financial system only at a surface level. And so when they sat down to write their reform bill, they consulted an expert.
They knew that they needed someone who understood the technical machinery of central banking better than anyone else in the country. And the man they turned to — the man whose technical expertise had come recommended to them — was Paul Warburg. The man who just wouldn’t give up.
Wilson’s closest political adviser, Colonel Edward House, met and corresponded with Warburg about matters of reform also. So did William McAdoo and Henry Morgenthau, two of Wilson’s senior men.
Warburg finally had an audience for his ideas in Washington. It was an audience that did not realize he had already crafted the blueprint in secret several years prior.
And so Warburg spoon-fed his system’s design to Wilson’s men, allowing them to envision it as their own.
Warburg emphasized how the system’s “elastic currency” would make financial panics and bank runs a thing of the past. And in so doing, he noted that Washington would never have to defer to men like JP Morgan for financial rescue ever again.
The ideas flowed from the Fed’s key architect to the reformers through a dozen quiet conversations that never made a headline. And Warburg’s messaging hit the right strokes. He gave the politicians just the populist positioning that the system needed to gain widespread support on Capitol Hill.
So the reformers wrote their bill… and it just happened to contain the same essential machinery that had been designed on Jekyll Island three years earlier – by men whose names could never be spoken.
The name and the packaging had changed. But the functional mechanics of the system were almost entirely the same.
The Confession Revealed All
In 1927, Carter Glass published a memoir titled An Adventure in Constructive Finance. In it, Glass claimed credit for the key ideas behind the Federal Reserve Act. He presented himself as the author, the architect, and the man who had built the system.
That was more than Paul Warburg could stand.
Warburg knew whose ideas had actually gone into that bill. They were his. He had been refining them since the turn of the 20th century. And he was not about to let a Virginia politician take the credit for his life’s work.
So in 1930, Warburg published a two-volume book on the origins of the Federal Reserve. And to settle the question of authorship once and for all, he included something devastating: a line-by-line comparison of the Aldrich bill – the plan drafted on Jekyll Island – and the Glass-Owen bill that President Wilson signed in 1913.
In his line-by-line comparison, Warburg showed the world that the Federal Reserve was the same functional system that his group of conspirators had designed in secret in 1910. The fundamental machinery was exactly the same.
So in his 1930 book, Warburg made it clear that the Federal Reserve Act of 1913 was not at all a “reform” bill crafted by Democrats in opposition to Wall Street.
To the contrary, it was, at its core, the blueprint that he had begun fleshing out in the decade prior – as a man with deep ties to both Wall Street and the great banking houses of Europe.
To Warburg, this was his life’s work. He had been agitating for a central bank in America since he stepped off the boat in New York in 1902.
Apparently he was too prideful to allow some self-serving politician to take credit for it. But in claiming credit for himself, Warburg confessed to the whole scheme.
Some had become wise to what had actually transpired much earlier, however.
In 1914, Columbia economist Edwin Seligman wrote that “in its fundamental features, the Federal Reserve Act is the work of Mr. Warburg more than of any other man.”
Others came to the same conclusion. Those who studied the Fed’s machinery and then went back and read Warburg’s earlier work could see it, clear as day.
The only real difference was that the Federal Reserve’s structure called for twelve regional banks instead of fifteen. But that was just smoke and mirrors. Everything else was functionally the same. And the real power still lay with the Federal Reserve Bank of New York.
So the politicians got their moment of glory as “reformers” in 1913. But Warburg got his system installed in America.
The question is – was he a true believer who felt his central bank would be a net positive for the country? Or was Warburg’s decade-long crusade for a central bank part of a more sinister plot?
One System, Three Moves
The Federal Reserve Act landed on President Wilson’s desk as standalone legislation. But it was the third piece of a larger puzzle that included three distinct “reforms” that, when packaged together, acted as one system… and completely changed the nature of America forever.
The first move came in February 1913. That’s when the Sixteenth Amendment was ratified. It established the federal income tax.
With the income tax, the federal government had a direct, permanent, and expandable claim on the earnings of working Americans for the first time in the country’s history. Think about what that means.
Ever since the Declaration of Independence was adopted by the Continental Congress on July 4, 1776, it was understood that all men were entitled to the fruits of their own labor. No man, and certainly no government, had any claim over an American’s earnings.
So for 137 years, the United States got along just fine without an income tax. Indeed, it rose from a hodge-podge collection of agrarian colonies to the greatest industrial power the world had ever seen in that time frame.
But with the Sixteenth Amendment, Washington now claimed ownership of a portion of Americans’ income. That created a revenue base — a reliable stream of money flowing into Washington.
What’s more, the income tax created a stream of future revenue against which the government could borrow. And borrow they did, as we well know.
The second move came in April 1913. That’s when the Seventeenth Amendment was ratified. It provided for the direct election of United States senators.
Of course, the populists presented this as a great victory for the common man. After all, shouldn’t Americans have a say in who their senators are?
The nuance, as always, is in the details.
Prior to 1913, US senators were chosen by state legislatures. They were to serve as a structural check on the House of Representatives, whose members were directly elected by the public.
Specifically, the senators’ job was to restrain any legislation coming from the House that would directly harm the interests of the people in the state they represented. And since they were appointed rather than elected, US senators were answerable to the states – not the fickleness of political gamesmanship.
The Seventeenth Amendment removed that check. From that point forward, US senators have been elected directly, making them answerable to a national electorate… and to the political financing machine that shapes national campaigns.
The Federal Reserve Act was the third move, and it went hand-in-hand with the first two. Signed into law in December of 1913, the Federal Reserve system created a European-style central bank with an “elastic currency”. This gave those controlling the Fed the ability to backstop government debt and expand or contract the money supply at will.
If we look at these three moves holistically, we can see clearly how they completely changed the fundamental nature of America.
The income tax created a permanent revenue base that enabled outsized government borrowing. The direct election of United States senators removed a structural check on federal power. And the Federal Reserve Act installed a machine that could create elastic currency and absorb the government’s debt as needed. It was the lender of last resort.
Individually, each looked on the surface like an isolated “reform”. Together, they form the financial architecture of the modern American state – architecture that’s fundamentally geared towards extraction rather than production.
Simply put, 1913 is the year America was captured. It was Alexander Hamilton and Thomas Jefferson’s worst fear, realized.
Turning the Key
As we’ve discussed throughout this essay series, Hamilton’s First Bank of the United States was designed to channel credit toward productive activity — toward factories, infrastructure, and agriculture.
It’s debatable whether that was the best mechanism for driving economic activity, but Hamilton’s view was clear. He wanted the American financial system to feature sound money and productive credit such that America could become an industrial power.
The system designed on Jekyll Island and enacted through the Federal Reserve Act of 1913 contained no such principle. Its central concept was “elastic currency”. That is to say, money and credit that could be created at will. Ex nihilo.
But when money and credit can be created out of nothing, it does not distribute itself evenly. Instead, the newly created money flows first to those standing closest to the point where it enters the system — to the banks, the financiers, and the interest groups with the closest ties to government.
Classical economist Richard Cantillon described this dynamic more than two centuries ago.
The men who receive the new money first get to spend it before prices adjust to account for the extra money in circulation. Then that new money trickles down into the economy after prices have risen.
Thus, regular folks have their purchasing power systematically stolen from them whenever such a system is in play.
That’s the Cantillon Effect in action. And it describes exactly why the Federal Reserve, modeled after European-style central banking, is an instrument of extraction rather than production.
That’s why the entire character of the American economy, and indeed the fundamental ethos of America, changed in 1913. But that is a story for what came next.
By Christmas Day in 1913, the gold pens had already done their work. Senators Glass and Owen went home for the holiday season believing that they were heroes who had tamed Wall Street.
The Federal Reserve System’s true architects, however, knew the real story.
More to come…
-Joe Withrow
P.S. This week’s episode of The Phoenician League podcast looks at Kevin Warsh, the new Federal Reserve Chairman. And our assessment may surprise you. The man does not appear to be who we expected him to be.
We drill into the details in the podcast episode, and we evaluate what they mean both for the American economy and our investment strategy. You can find the podcast at: https://phoenicianleague.com/podcast-episode-12-the-fed-chairman-who-isnt-a-keynesian-kevin-warsh-and-the-regime-change-at-the-fed/
And if you would like to explore the investment implications more deeply, we have scheduled our next public-facing strategy session for Wednesday, July 22 at 7:00 pm Eastern. Please mark your calendar for that – I’ll follow up with more information for you next week.