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Chapter 25: Problem 5

In a column in the Wall Street Journal, Kevin Brady, a member of Congress from Texas, stated, "To get Congress to pass the Federal Reserve Act [in \(1913,\) President Woodrow] Wilson had to retain the support of \(\ldots\) northeastern lawmakers while convincing southern and western Democrats that legislation would not \(\ldots\) create a [single] central bank. Wilson's ingenious solution was federalism." Explain what Congressman Brady meant when he stated that Woodrow Wilson used "federalism" to convince Congress to pass the Federal Reserve Act.

Short Answer

Expert verified
Congressman Brady's assertion that Woodrow Wilson used 'federalism' to pass the Federal Reserve Act refers to how Wilson addressed concerns about a single central bank by proposing a Federal Reserve System that divided financial power among twelve regional reserve banks. Like federalism in government, this plan distributed power, ensuring that different regions could address their unique economic needs.

Step by step solution

01

Understanding Federalism

Federalism is a form of government in which power is divided between a central authority and constituent political units, such as states. In the United States, this division of power is outlined in the U.S. Constitution separating governmental powers of the Federal government and the States respectively.
02

Knowing the Southern & Western Democrats' Concern

Historically, Southern and Western Democrats were concerned about a central bank's potential to concentrate wealth and power in the Northeast, far from their regions. Their fear was that a central financial institution would favor industrial and commercial interests over rural and agricultural needs.
03

Understanding Wilson鈥檚 Solution

To address these concerns, President Woodrow Wilson proposed a Federal Reserve System that was not a single central bank, but a system of twelve regional reserve banks spread across the country. These banks would hold reserves, issue money, and supervise and support commercial banks in their respective regions. By doing so, they could address the unique economic needs of their regions, thereby alleviating the concerns of lawmakers from the South and West. This innovative structure is what Congressman Brady refers to as 'federalism', as it employs the federalist concept of divided power.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

US Government Federalism
Federalism is a crucial principle underpinning the American political system, entailing a division of authority between the national government and individual state governments. It is the constitutional arrangement that separates the power to govern cohesively across national and state lines.

In the context of the Federal Reserve Act of 1913, federalism played a pivotal role. President Woodrow Wilson utilized federalism to craft a compromise that satisfied diverse political factions. The act established a central banking system that was, in fact, a network of banks, thus dispersing power rather than centralizing it in a single institution. Such dispersion was designed to cater to the unique economic interests of different regions, a fundamental aspect of the federalist design.

By dispersing the centralized banking authority, the Federal Reserve Act embodied the federalist ethos of harmonizing the country's broad objectives with the states' localized needs. It created a dynamic balance that has been instrumental in navigating the complexities of the US economy.
Southern and Western Democrats Concerns
The apprehensions held by Southern and Western Democrats in the early 20th century were deeply rooted in their regional experiences. They feared that the establishment of a central bank would lead to economic domination by the industrialized Northeast, causing neglect for the agricultural sectors predominant in their regions.

These Democrats worried that a centralized authority would be insulated from the nuances of local economies, which could result in policies that were disadvantageous to agricultural communities. Their concerns echoed a broader historical anxiety about disproportionate financial power and the potential for a central bank to prioritize corporate over public interest.

To mitigate such fears, the Federal Reserve system was designed to distribute its presence across various regions, ensuring representation and attention to the diverse economic landscapes within the United States. This concession was essential to secure the support of Southern and Western Democrats for the Federal Reserve Act.
Central vs Regional Banking Authority
The debate between a unitary central bank and a system of regional banks is a longstanding economic issue. Central banking can streamline monetary policy and provide uniformity in financial governance, but it risks overlooking the individual economic circumstances and needs specific to each region.

President Wilson's Federal Reserve Act proposed a middle ground. It enabled the creation of twelve regional Federal Reserve Banks, each serving as a decentralized arm of the Federal Reserve System, with the Board of Governors in Washington, D.C. overseeing the network. This structure allowed for local input and responsiveness to regional economic conditions while maintaining an overarching central control to ensure a cohesive financial policy.

This balance between central and regional authority in banking has contributed to financial stability and responsiveness in the US, embodying a system that continues to adapt its unique model of central banking to meet the nation's ever-evolving economic challenges.

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Most popular questions from this chapter

In the late \(1940 \mathrm{~s}\), the communists under Mao Zedong were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its value, and most businesses refused to accept it. At the same time, there was a paper shortage in Japan. During those years, Japan was still under military occupation by the United States, following its defeat in World War II. Some of the U.S. troops in Japan realized that they could use dollars to buy up vast amounts of paper currency in China, ship it to Japan to be recycled into paper, and make a substantial profit. Under these circumstances, was the Chinese paper currency a commodity money or a fiat money? Briefly explain.

An article in the Wall Street Journal noted that online peer-to-peer lenders "have automated the processes of checking borrowers' credit metrics and looking up their histories while in many cases avoiding more labor-intensive practices of collecting and reviewing pay stubs or tax returns." The article also noted, "Charge-off rates, which reflect loans on which a lender doesn't expect to collect, have risen." a. Why do banks require borrowers to submit pay stubs and tax returns when applying for a loan? Why would online lenders skip this step in the loan application process? b. If online lenders find that borrowers are defaulting on loans at higher- than-expected rates, can they offset the problem by charging higher interest rates on the loans? Briefly explain.

If the money supply is growing at a rate of 6 percent per year, real GDP is growing at a rate of 3 percent per year, and velocity is constant, what will the inflation rate be? If velocity is increasing 1 percent per year instead of remaining constant, what will the inflation rate be?

During the years from 2010 to 2016 , the average annual growth rate of \(\mathrm{M} 1\) was 10.3 percent, while the inflation rate as measured by the GDP deflator averaged 1.6 percent. Are these values consistent with the quantity equation? If you would need additional information to answer, state what the information is. Are the values consistent with the quantity theory of money? Briefly explain.

An article in the American Free Press quoted Professor Peter Spencer of York University in England as saying, "This printing of money 'will keep the [deflation] wolf from the door." The same article quoted Ambrose Evans- Pritchard, a writer for the London-based newspaper The Telegraph, as saying, "Deflation has ... insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." a. What is price deflation? b. What does Spencer mean by the statement "This printing of money 'will keep the [deflation] wolf from the door'"? c. Why would deflation cause "shoppers to hold back," and what does Evans- Pritchard mean by saying "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?
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