The Journal of American History

85, 3 (December 1998): 1108-09.

The International Origins of the Federal Reserve System. By J. Lawrence Broz. (Ithaca: Cornell University Press, 1997. xvi, 269 pp. $35.00, ISBN 0-8014-3332-0.)

Although Progressives hailed the Federal Reserve Act as a blow against the "money trust, historians have long known that New York financiers played a key role in designing and promoting the measure. Some scholars, such as Gabriel Kolko, consider the act a special interest measure that served chiefly to strengthen the stranglehold of New York’s banks on the economy. But others, such as Ron Chernow, point out that a properly managed central bank benefits society as a whole by stabilizing the financial system and the economy. They contend that the New Yorkers acted from a combination of enlightened self-interest and public duty. Yet while this explanation accounts well for the activities of some individuals, it fails to explain why a reform that promised to help the entire country depended so heavily on the efforts of a handful of men associated with New York’s leading banks.

J. Lawrence Broz’s new book, The International Origins of the Federal Reserve System, convincingly answers this question. It argues that New York’s bankers sought first and foremost to make the dollar an international currency. Although the United States greatly increased its share of international trade after 1870, particularly manufactured exports, during the 1900s the pound sterling still financed most of this business—an arrangement that allowed London banks to earn as much as $150 million a year. This situation persisted because banks could resell (discount) short-term loans denominated in sterling in London, where the Bank of England guaranteed liquidity by serving as a lender of last resort. In contrast, United States banking law sharply limited the discounting of loans, and the nation had no central bank. Without a more liquid, secure money market, New York would never be able to compete with London in financing international trade.

According to Broz, however, the sort of changes required to make New York competitive would also strengthen the financial system as a whole. By increasing liquidity and creating a lender of last resort, they would mitigate such panics as that of 1907, which had seriously damaged the economy. New York’s bankers used this fact to round up support for their program, even making concessions on peripheral matters to win over outsiders—for instance, broadening the type of loans eligible for discount to secure the favor of Chicago’s bankers, whose chief business was financing domestic, rather than international, trade. Although the New Yorkers provided the impetus for reform, in the end they lost control of the legislative process. The final bill provided for a much higher degree of government control than they desired. Nevertheless, the Federal Reserve Act created a lender of last resort and a discount market—the key demands of those who had launched it.

Broz is a political scientist, and some historians may find his extensive discussion of theory off-putting. Moreover, in some cases, he may claim too much from his evidence—particularly, his detour into the demise of the Second Bank of the United States involves assumptions that many historians would question. Nevertheless, Broz has produced a valuable book that opens a new perspective on the origins of the nation’s most powerful financial institution.

Wyatt Wells

Auburn University

Montgomery Alabama