Liberalism: Power, Economic Crisis, Reform, War 83oversight so they engaged in dangerous practices, giving out loans to many
companies that were on weak ground and would not repay them, or offering
interest rates that were too low, thus making it easier for shaky businesses to
get credit that they might not be able to obtain from more “conservative”
banks, but that they might well have trouble paying back in tough times. Many
banks were failing and those who had deposits in them were losing their
money, leading them to complain to the government and seek reform.
Americans were not thrilled with bankers in any case, so they took a negative
view of the entire industry. As a result, big bankers, especially the largest
banks on Wall Street in New York and conservative financial leaders in other
areas like Chicago and Philadelphia, wanted federal laws to regulate the indus-
try, to drive out the unstable smaller banks and stabilize, and centralize, the
entire system. By 1907, the banking industry was in crisis as there was inad-
equate capital to keep businesses running. The government helped [as it
would again during the banking crisis of 2008] with a bailout of $38 million
and the famed banker J.P. Morgan went to Europe and raised another $50
million. Just a few years later, a congressional committee headed by
Representative Arséne Pujo revealed that John D. Rockefeller and J.P. Morgan,
with just five banking firms, controlled 112 corporations valued at $22 billion.
The country—citizens and bankers alike—were frightened into reform, before
the banks crashed again or the people rose up in anger.
The result was the Federal Reserve Act of 1913, still a controversial institu-
tion today. “The Fed,” as it came to be known, was a collection of the biggest
private banks, especially on Wall Street, supervised by the federal government
[The Washington D.C. Federal Reserve Bank] and consisting also of 12 dis-
trict federal reserves banks, that would control the money supply, set reserve
requirements, and set interest rates. The act came from a banker-led move-
ment to “rationalize” their industry. The goal was to make it harder for
decentralized and often unregulated small and state banks, which were giving
all of banking a bad name, to operate because they could not meet the new
rules established. The Fed’s responsibilities were to create a banking environ-
ment that was beneficial to Wall Street and other large banks. By setting
reserve requirements, the Fed established rules regarding the amount of
money a bank actually had to have on hand relative to the deposits in that
institution. Smaller banks, with less than $25 million in deposits, could be
required to have 3 percent on hand for reserves, while banks with more than