The Fed at 110 years old, the story of a rise to power

This year, Jerome Powell delivered an early Christmas present to the markets. On December 13, the institution he chairs, the Federal Reserve (Fed, American central bank), suggested that it would reduce its key rates three times in 2024 – which means that the financing costs of the economy the American ones will decline. A prospect received with euphoria by the stock markets, which did not expect so much.

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At the end of this eventful year, the Fed has another reason to rejoice: it is celebrating its 110th anniversary. On December 23, 1913, American President Woodrow Wilson signed the law establishing what would become the most powerful financial institution on the planet.

Looking at its history is also that of the United States: the construction of their federalism, the tensions between the States and the central administration, the banking crises, but also the way in which they gradually built their financial hegemony. “At the beginning of the 20th centurye century, the country does not have a central bank: President Andrew Jackson abolished the previous one in 1837 », recalls Jean-Marc Daniel, economist at ESCP Business School. This is partly because of the strong antagonisms between the agricultural regions of the West and South, indebted and in favor of a weak currency, and those more industrialized in the East and North, credits, which demand a strong currency.

“Lender of last resort”

In the absence of centralized credit regulation, banking crises keep coming. Like that of 1907. Triggered by an attempt at stock market manipulation on copper mines, its causes are reminiscent of those of the 2007 crisis. The panic spreads, depositors rush to the counters to withdraw their savings, the banks ferment one after the other… Faced with the absence of a central bank capable of coming to their aid, the financial magnate John Pierpont Morgan himself intervened to provide liquidity to the most fragile establishments.

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Subsequently, in 1910, a group of financiers and politicians met on Jekyll Island, off the coast of Georgia, and agreed on the need to create a “lender of last resort”. Namely, an institution capable of supporting the banks in the event of a panic – and putting an end to the domino effect. The Fed was created three years later.

“It is also the fruit of the work of a commission which closely studied the European monetary institutesexplains Eric Monnet, specialist in economic history at the Paris School of Economics. At the time, having a central bank was considered one of the attributes of the modern State: the United States followed suit. » Building the Fed also allowed them to gain a foothold in international markets, then financed in pounds sterling. “This is part of the context of expansion of American banking power,” adds Eric Monnet.

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