Published by EH.Net (February 2019)

Richard A. Naclerio, The Federal Reserve and its Founders: Money, Politics and Power, Newcastle upon Tyne: Agenda Publishing, 2018. vii + 226 pp. $22.50 (paperback), ISBN: 978-1-78821-078-2.

Reviewed for EH.Net by Mary Tone Rodgers, Department of Finance, State University of New York at Oswego.

Scholars have been keenly interested in the Federal Reserve system since its inception, and the subject has motivated many books. Authors’ tones, viewpoints and theses about the Fed are understandably shaded by the political discourse of the period in which they write. Richard Naclerio writes The Federal Reserve and its Founders: Money Politics and Power in 2018, a time of rising populist sentiment and, while not explicitly identifying himself as a populist, Naclerio argues the populist viewpoint. The book’s thesis is that the Federal Reserve was formed by elites to preserve their informational advantages over the “little guy,” primarily by preserving a monopolistic structure of the banking industry. He supports his argument by providing biographical evidence that six men who suggested critical features of the Federal Reserve Act disdained the common man, perceived themselves to be elite and were interested in extracting profits for the central bank from elevated interest rates charged on loans to the “little guy.”

This book is permeated with the rhetoric of economic populism providing an “us versus them” framework for the author’s writing style. The approach is not the traditional one taken by economic historians; it does not test theories of political economy, industry structure, formation of efficient financial systems, or financial panics by examining past quantitative data. Instead, it uses qualitative archival evidence from personal writings, contemporary critiques and newspaper stories for thesis support. Its primary contributions are for the reader to understand, first, how the populist viewpoint may be informed by biographical evidence, and second, what the implications of populism for the future of Federal Reserve might be. Naclerio argues that from the “American people’s” viewpoint a central bank that does not bail out banks, does not profit from high interest rates charged to the “little guy,” and that has oversight by non-elites appears to be the type of institution a populist might prefer.

Naclerio devotes one chapter to each of the six men who attended a private conference at Jekyll Island in 1910 to draft policy proposals to create an American central bank. He also writes a chapter about J. Pierpont Morgan who did not attend the conference but who Naclerio considers a central historical figure epitomizing the elite who formed the central bank. After examining the seven men’s attitudes toward the “little guy,” Naclerio then argues that those attitudes were institutionalized in the legislation that formed the Federal Reserve Act of 1913. A chapter devoted to a post-2008 interview with one journalist at Bloomberg News is used as evidence that elitist attitudes continue to drive Fed policy in the present period. The interview explores how Bloomberg News found it difficult to obtain information from the Fed about loans the Fed made during the 2008 crisis.

The seven chapters about the Jekyll Island attendees and Morgan comprise about two-thirds of the book. Each chapter presents biographical evidence that each man embodied the populist lament that the “little guy” is disadvantaged by elite who create opacity and monopoly for self-aggrandizement. Nelson Aldrich eliminated small sugar producers and refiners by changing the tariff structure for sugar imports, benefitting his family’s wholesale grocery business. Felix Warburg’s proposal to allow the central bank to discount commercial paper disadvantaged small bankers and gave preference to large banks. Benjamin Strong’s efforts to coordinate Europe’s post-World War I reconstruction created a Western monopoly of central banks in defiance of each government’s citizenry and was achieved using loopholes in the Charter of the League of Nations. Strong’s venom toward small bankers is supported by his characterization of them as an “unorganized mob.” Henry Davison persuaded Woodrow Wilson to break his promise to the average American to stay out of World War I – so that loans to France and Britain organized by Davison at J. P. Morgan & Co. could be paid off. Davison’s efforts to preserve Morgan’s profits would be at the expense of the “European working class” whose taxes would pay the interest and principal on war loans. A. Piatt Andrew’s suggestion that the central bank would support itself by charging rates to banks on loans it provided meant that small businessmen’s and farmers’ rates would be higher, benefitting the elites in money center banks. Frank Vanderlip’s assessment that borrowers must sign loan contracts but small depositors earned no such reciprocal contract from the banker was evidence that elite bankers supported the inequity and imbalance of power inherent in the banking business model. J. P. Morgan’s takeovers of weak trust companies and corporations after the Panic of 1907 is evidence of an unscrupulous act of self-dealing. (Morgan is referred to as a “pirate” in the chapter title.)

The book’s populist argument is not completely convincing because it does not explore how concern about the “little guy” was indeed part of the policy formation process; it does not adequately describe how the grassroots debate had been ongoing since at least the Baltimore plan of 1894 and the Indianapolis Monetary Convention of 1896. Rather, Naclerio seems to attribute most of the policy formation process to the seven men showcased in the book.

Nor does the book describe how the “little guy” benefitted from the formation of the Fed. The book does not explore how achieving economies of scale in information production and liquidity coordination became overwhelming tasks for a fragmented banking system during the period of industrialization and urbanization that accompanied technological advancement that opened up opportunities for the “little guy” of the early twentieth century.

Furthermore, Naclerio does not suggest how populists of the day, such as William Jennings Bryan or Theodore Roosevelt. might have managed the problems of providing a lender of last resort in periods of exogenous economic shocks any differently than the “elitist” Wall Street bankers did. The difficulty in compelling collective action in the absence of a lender of last resort was not the purview of the federal government at the time, nor was it easily managed by private actors in an increasingly complex economy.

Naclerio interprets the Great Depression as evidence that the Fed reneged on its promise to shield the “little guy” from shocks to the economy and fluctuations in the business cycle from 1921 through the late 1930’s, without describing the remedial changes to the Fed’s policy formation process made during the subsequent Franklin Roosevelt administration that improved the institution’s future capabilities to become more responsive.

Naclerio pays scant attention to how the Federal Reserve Act was influenced by politicians to include a decentralized system of twelve regional banks that served twelve distinct regions of the country, an effort to give voice to the “little guy.”

The shortcomings of the book do not mar the usefulness of the references it provides to see the Federal Reserve system through the eyes of a twenty-first century populist. Giving voice to those who have felt alienated from or disillusioned by the system can support constructive institutional change going forward.

(Naclerio has worked extensively in business operations and real estate investment in New York City and Denver. While continuing to manage his own real estate companies and stock portfolios, he is pursuing a Ph.D. in history at the CUNY Graduate Center. He worked as an adjunct instructor and academic advisor at Sacred Heart University and Monroe College.)

Mary Tone Rodgers, DPS, CFA, is the Marcia Belmar Willock Professor of Finance and Director of the Gordon Lenz Center for Finance and Risk Management at the State University of New York at Oswego. She has published several articles in financial history, including “Monetary Policy and the Copper Price Bust: A Reassessment of the Causes of the Panic of 1907” with James E. Payne” in Review of Economic History. She is currently working on a book with Jon R. Moen (University of Mississippi) on J. Pierpont Morgan’s role as lender of last resort in the pre-Federal Reserve period.

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