Why I Wrote It: The Federal Reserve of J.P. Morgan

**Why I wrote it is a series in which I explain interesting things about the topic I chose or why it matters that people know this history. Please see the story being referenced here.

I understand that to most people, economic history is a boring subject. It combines two topics they often tried to avoid in school. However, I find economic history to be a fascinating subject worthy of study. Most economic history reads like true crime. Our subject article about the Panic of 1907 and J.P. Morgan is a perfect example.

Three men, F. Augustus Heinze, Charles W. Morse, and Charles T. Barney, caused the near collapse of the American economy because they tried to illegally corner the market on shares for one company. They forced an artificial price increase in the market and hoped to reap the profits from others who suddenly found themselves in the unenviable position of needing to buy shares they had shorted.[1] Their plan left them and their financier scrambling for money, and it nearly killed the economy. As we covered in the article, the will of one man played a significant role in saving the country. If this were to happen in this decade, we would have a well-produced documentary. Millions would binge the miniseries in one weekend. It might even get a movie with Daniel Day-Lewis wearing a prosthetic to play a bulbous-nosed Morgan. However, because this happened in 1907, it is left to historians to cover, while others call it boring.

Entertainment value aside, there are genuine reasons why I consider it important enough to be studied. The results of these events have had lasting consequences for the United States. The Panic of 1907 was responsible for creating the Federal Reserve in 1913. I bet you’re wondering why it took six years to pass the Federal Reserve Act. It’s because they didn’t know what to do and had to study other countries. Congress created an entire commission that went around the world. The Federal Reserve fundamentally changed banking and economics for the United States.

When considering the Federal Reserve Act, knowing why Congress created it is the most important thing to understand. Who, what, when, where, and how are all interesting details, but why is the ultimate question. Why is why the most important detail to know? Someone at some point will likely bring legislation forward that has to do with the Federal Reserve. Even today, the Federal Reserve remains a highly controversial invention. Our elected officials will need to take a stance and vote for the issue, and they’ll look toward their constituents to see what they want. If we do not know why the Federal Reserve was created, how can we make proper decisions for its future? Knowing that Congress created it to help banks with liquidity and create better regulations will help voters decide its fate.

I apologize if I sound preachy, but clearly, this is a topic I am interested in. We should always appreciate what led to critical decisions so we can continue advancing society.

[1] Shorting a stock is when you sell shares you borrow on the assumption that the price will drop. If the price drops, you buy the shares back at the lower price to give to the lender you borrowed them from. You keep the difference. Essentially borrow something worth $100 and sell it for $100. Then it drops to $75 so you buy it again at $75 to pay back the lender for their borrowed shares. You keep the $25 profit.