It’s Veterans’ Day, originally called “Armistice Day” to commemorate the end of the Great War (aka World War I) on Nov. 11, 1918.
In this regard, it’s appropriate to discuss the war. And since this is an investment-oriented letter, we’ll address how the U.S. Federal Reserve helped finance it.
Below, we’ll look at how the 1914-18 conflict reshaped America’s system of national finance, and laid foundations that eventually brought us to the current situation of $38 trillion in national debt and $4,000 gold.
Great War recruiting poster. Courtesy Imperial War Museum.
The Central Bank’s War
Most people don’t associate the Fed with World War I, but the institution played a crucial role in the event and I’ll go down that rabbit hole. Here are some historical basics.
Let’s begin on Friday night, December 23, 1913, meaning Christmas Eve weekend when few people (except deep insiders) were paying attention. President Woodrow Wilson signed the Federal Reserve Act into law.
President Wilson signs Federal Reserve Act. Courtesy Federal Reserve History site.
To all intents and purposes this new entity was America’s central bank, although its creators didn’t label it as such due to strong public aversion to the idea. Recall, for example, how in 1832 President Andrew Jackson vetoed a bill that proposed to re-charter the Second Bank of the United States. Long story; not here.
Later, as 1914 unfolded the Fed stood up and began to work within the U.S. government system and of course played a role within the national economy. By design of its promoters, the Fed was intended to oversee a so-called “elastic currency,” not necessarily tethered to a fixed supply of gold in the vaults of America’s banks.
That is, the idea behind the Fed was to avoid monetary disasters like the Panic of 1907, when the federal government literally ran out of cash and had to borrow gold from banker J.P Morgan. The Fed’s mission was to issue credit – aka “create money” in the form of dollars – during tight times and ensure the general liquidity of the American economy.