Public sentiment had been supportive of national monetary reform since the Panic of 1907. The National Monetary Commission, created under the Aldrich-Vreeland Act, issued a report in 1912, which called for creation of what many regarded as a third to the string of Banks of the United States. All major European powers had developed centralized controls over their banking systems, but the U.S. remained alone in failing to do so. Full centralization of banking had not proved popular earlier in the country`s history, but the recurring bank panics and instability of the currency clearly pointed to the need for major reform.
Following Wilson’s victory in 1912, Arsène P. Pujo of Louisiana, chairman of the House Banking Committee, led the so-called Pujo Commission in a wide-ranging examination of the nation’s financial ills. Among other actions, Pujo brought in J.P. Morgan to testify and eventually came to the conclusion that a “money trust” existed in the country and the central banking solution offered by the Monetary Commission would not work.
In 1913, the Democrats controlled both houses of Congress and crafted a regional, rather than fully centralized, approach to banking reform. Carter Glass of Virginia headed matters in the House and Robert L. Owen of Oklahoma did so in the Senate. The final legislation created 12 Federal Reserve Banks* that would act as central banks for all national banks and other member state institutions. The Banks would not be federal bodies, but private ones owned by the member banks. A Federal Reserve Board was formed to oversee the system and establish policy. Members of the Board would be appointed by the president, providing a considerable measure of federal direction over the system.
A new form of currency was created—the Federal Reserve Note—as a means to solve the problem of inelasticity. The notes were to be backed by commercial credit and reserves of gold of at least 40 percent of the amount of the notes issued. Government funds were to be deposited in the Banks, which ended the old sub-treasury system.
The greatest power bestowed on the new Federal Reserve System was establishment of the discount rate — the rate of interest charged by the Banks when lending to member institutions. The ability to raise the discount rate was to have the tendency to slow down the economy, while dropping rates would tend to stimulate economic activity.
*Regional Federal Reserve Banks were created in Boston, New York City, Philadelphia, Atlanta, Richmond, St. Louis, Cleveland, Chicago, Kansas City, Minneapolis, Dallas and San Francisco.
See other early domestic legislation under Wilson.