Introduction to the Federal Reserve and Modern Banking
Banks exist to make money for their owners rather than their customers. When you deposit money, the bank views it as a debt they owe you. To make a profit, they take your deposit and lend it to someone else at a high interest rate while paying you a much lower interest rate in return. This system only works because banks assume that every customer will not ask for their cash back on the same day.
In November 1910, a group of powerful financiers traveled in absolute secrecy to Jekyll Island, an exclusive resort off the coast of Georgia. Senator Nelson Aldrich led the group, which included high-ranking Treasury officials and the heads of the nation’s largest banks. Together, these men represented roughly one-fourth of the total wealth on Earth. Their destination was a private meeting to design a banking cartel that would limit competition and control the financial markets.
At the time, large New York banks faced growing competition from smaller banks popping up across the country. To regain control, the bankers needed a system that could disconnect the money supply from the physical limits of gold. They wanted a currency that could be expanded at will, favoring debt over savings. This would ensure that the big banks remained the primary source of capital for the growing nation.
A major problem for banks is the risk of a run, where too many customers try to withdraw their cash at once. Because banks only keep a tiny fraction of their deposits in the vault, they are physically unable to pay everyone back simultaneously. The men at Jekyll Island sought to solve this by pooling their resources into a central reserve. If all banks followed the same lending rules and were backed by a central authority, the risk of an individual bank failing would be greatly reduced.
The most difficult challenge was convincing the American public and Congress to accept this plan. The group decided to avoid the word bank entirely and instead use the name Federal Reserve to make the system sound like an official branch of the government. They framed the proposal as a way to protect the public from financial panics and stabilize the economy. In reality, it was a private agreement designed to serve the interests of the bankers themselves by shifting their financial risks onto the American people.
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