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How The Fed Came To Be

English: Photograph of F. Augustus Heinze (186...

 F. Augustus Heinze

The Bank Panic of 1907 is considered the primary catalyst in the creation of the Federal Reserve System. As you might imagine, there were some very colorful characters and cunning schemes at the root of it all, but in the end, there was a need to create a central banking authority to assure that severe incidents like this would not occur again. Here’s a summary of the events leading up to the Fed’s creation.

You could say it all began with Fritz Augustus Heinze. Heinze was born in Brooklyn, NY in 1869 into the family of wealthy immigrant parents. Considered intelligent and devious, he followed his interests in mining, eventually forming the United Copper Company in 1902. His newly found company was up against some pretty tough competition. As the “new kid” on the block, Heinze decided to reduce the workday by two hours which earned tremendous loyalty from his employees. He also took advantageous of the mining laws on the books. For example, the law stated that if you found a vein on your mine, you could follow that vein to its end and mine it, even if it was under a competitor’s mine. His resourcefulness was a real thorn in the side of the Amalgamated Company, a company about three-times the size of his. After a decade of “mining wars” in Butte, Montana, Heinze finally sold his interests in the Butte mines to Amalgamated for a cool $12 million.

Leaving Montana, Heinze moved back to New York in 1907 and became a significant player in the financial arena. He entered the banking business and located his United Copper Co office just around the corner from Wall Street. The problem came when his brother Otto devised a scheme to corner the market on UCC stock by aggressively buying it, waiting for prices to soar, then forced the short-sellers to repay the borrowed stock. The short-sellers would have no alternative but to settle with Otto who would own a significant portion of the company’s stock.

However, when it became apparent that Otto’s scheme would fail, panic set in and depositors began a run on Heinze’s banks, and on any other bank or trust company which was connected. In a last-ditch effort to salvage things, New York City’s wealthiest and most famous banker, J.P. Morgan, was contacted while attending a church convention in Virginia. However, after Morgan and his associates examined the banks books, they determined it was insolvent, and did not intervene. There are other facts, but suffice it to say that the run on the banks and eroding confidence led to a reduction in market liquidity, and the stock market was en route to a decent of nearly 50%.

At that time, bankers were concerned that the United States was the last major country without a central bank which would provide emergency credit in times of financial crisis. Early in 1907, Paul Warburg, a German born American banker warned in a piece published in the New York Times Annual Financial Review, that without a properly structured central bank, the U.S. would undergo the most severe and far reaching money panic in its history. By October that same year, the “Panic of 1907″ was fully entrenched. There was now sufficient motivation and interest to move forward on this idea. Hence, on December 23, 1913, during the term of President Woodrow Wilson, Congress passed the Federal Reserve Act and the Fed was born.


Today, many believe that without Fed intervention during the Great Recession of 2008, we would be looking at a “Great Depression Part II.” I agree. In a subsequent article, we’ll discuss some possible ramifications of the Fed’s current money-printing binge. After all, do you believe they can expand the monetary supply by $80 billion each month without consequence? I do not. Moreover, I believe it could adversely affect every American! Stay tuned for more!

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