The biggest problem was clear and from their faces in 1987 with the financial system failed or there was a panic and we've seen
plenty of panics in our own time. 1987 2001 to 2008 I don't have to go through them all. And we
know what happened. The central bank comes in pumps liquidity and after either a longer or shorter amount of time things go
back more or less to normal and off we go. Except in 1987 there was no central bank. So this bank run it was it was a good old
fashioned bank run not something that happened on computer screens. It was people running to the bank because banks had
turned very illiquid based on some panics and failures in what started in the trust banks had moved into the standard sort of
commercial banks. In any case there not being a Federal Reserve. The country tried the next best thing which was his eminence
J.P. Morgan senior who called together a bunch of the leading financiers into his famed study. He tried to get them all to put
up some money. They put up some. It wasn't really enough. And people began to realize that to have what was now
the leading or was about to become the leading industrialized country in the world with a primitive financial system without a
central banking system no longer played. We needed a financial system that was on a par with with our industry and our
financial our private financial capability. That was that was to be a lender of last resort was was the way they put it or a
Reserve Bank literally to create a reserve of capital.
So that starts with a guy named Nelson Aldrich Nelson Aldrich is a classic Gilded Age senator investor
very close to all sorts of industrialists. He doesn't have the same view let's say of conflict of interest or avoiding it that
we might wish on him today. He was a mover and shaker amongst industrialists a power in the Senate very much a believer in the
status quo which back then did not include a central bank. But after the financial crisis
a little window of doubt began to open up. The Congress authorized a mission to Europe after this panic of 1987 to sort
of investigate European systems. Aldrich insisted that he go. He led a team of observers. He talked to people in course England
with the Bank of England France the Bank of France Germany.
Every country has a version of the question what do you do when you have panics in every country. Got a version of this answer.
We don't have them because a central bank intervenes. Aldrich realized that he'd been wrong that America needs a central bank.
He knew the people who could help him form it. Beginning with Paul Warburg the famous immigrant financier from Germany who'd
been privately military hating for institution like a European Central Bank. But Aldrich had a problem which may sound very
familiar to people today. Bankers were not very respected or very trusted among the American public. The American public
wouldn't have wanted private bankers to set up a financial system. So he did something even more conspiratorial sounding.
He invited a bunch of them to meet with him in secret to plan this meeting on an island off Georgia where a J.P. Morgan senior
had a private club. And the idea was there off with nobody paying any attention. They would map out America's financial
future or this new institution. They dismissed all of the people who worked at this club except for a few trusted people who were
told not to tell anybody. They pretended to be going duck hunting and actually carried with them rifles that all sorts of
paraphernalia quite ludicrously. Paul Warburg for one wouldn't go in the front end of a barrel from the back end. But when they
got down to hard work they spent seven or eight days down there mapping out what this central bank would look like someone like
the European banks. But different America was a bigger country. It had a federal system. It didn't have a history of central
banks and so on and so on. They had to come up with some American answer. But this was actually
the the object later of conspiratorial this dreams because actually a leading U.S. senator and the top bankers of the
country did go down in secret and plant a prototype of what would become the Federal Reserve.
Well I think we're better off. I think the central bank has contained them. I think if you look at the the Covid
the pandemic induced financial crisis of 2020 a terrific example because not only did the Fed contain it but it got the country
back on its feet and the economy growing again in quite rapid time even in 2008.
It was contained. It was brutal while it went on. But by
I believe June the end of June 2009 the recession was over and we were growing again. The financial crises of the 19th century
were not so benign. The crisis of 1837 lasted four or five six years depending on how you calculate it. When Jay Cook the
railroad financier went belly up in 1873 that went on for six years. In the 80s 90s there was a depression from 1893 1896 7.
These were hard brutal long depressions. So I think it's to the Fed's credit it's thanks to the Fed that they don't last so
long.
I think the Fed is sort of caught between a rock and a hard place. Populists don't like it when the Fed raises rates. After
all the great monetary struggles the 19th century were all about money being too scarce i.e. interest rates being too high. That
was the cry of farmers that the little people if you will. Today we have something else. We have a Fed which has for a long time
and repeatedly insisted on very low rates. You would think this is just where would the populace want. But it turns out not to
be because now the cry is well low rates are good for investors. They've raised equities. What does it do for us. It's caused
inflation which has overtaken salaries. The Fed certainly has had I think the best of intentions. But there's always this fear
or this conspiratorial urge or suspicion in a period of inequality that the Fed which is close to Wall Street is going
to be governing and make its decisions with Wall Street in mind. I don't envy the job of the Fed in this respect.