America’s Bank: The Epic Struggle to Create the Federal Reserve by Roger Lowenstein is a fascinating book about politics and how the Federal Reserve was started. Below is an excerpt from the book:
However, if the war temporarily thrust the Fed into a subservient role, it also broadened its field of action. Many people had envisioned that, apart from emergencies, the agency would play a passive role– as the Act put it, simply” discount[ing] notes, drafts, and bills of exchange arising out of actual commercial transactions.” Harvard’s Oliver Sprague had predicted an extreme degree of passivity, testifying just before enactment, “After the institution has been going ten or fifteen years it will almost run itself” This would soon seem ludicrous. In fairness, centralizers such as Warburg always wanted a more dynamic agency. Within a year of the Fed’s founding, so did the board. In its first annual report, the board signaled its disposition to be proactive. Its duty, it asserted, “is not to await emergencies but by anticipation to do what it can to prevent them.”
Just as Wall Street had hoped, the Fed’s emergence, coupled with the war, catapulted America’s standing in world finance. By keeping Britain and France afloat, the United States, long a debtor nation, suddenly became a significant creditor. In return for exports of food, arms, and other supplies, gold poured into American harbors. After America’s entry into the war, Congress fulfilled Warburg’s insistent demands and amended the Act to widen the board’s powers. The amendments greatly increased the Fed’s note-issuing capacity; notes in circulation doubled within months. And the Reserve Banks, by issuing more notes, were able to soak up much of the bullion previously stashed in people’s pockets and in the vaults of member banks. The Fed’s enlarged and unified gold cache elevated the dollar’s status as an international currency.