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sonably well. To Americans of the time, it clearly did not. The agitation over silver in the 1880's, culminating in Bryan's Cross of Gold speech which set the tone for the 1896 election, was one sign of dissatisfaction. In turn, the agitation was largely responsible for the severely depressed years in the early 1890's. The agitation led to widespread fears that the United States would go off gold and that hence the dollar would lose value in terms of foreign currencies. This led to a flight from the dollar and a capital outflow that forced deflation at home. |
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Successive financial crises, in 1873, 1884, 1890, and 1893 produced a widespread demand for banking reform on the part of the business and banking community. The panic of 1907, involving the concerted refusal by banks to convert deposits into currency on demand, finally crystallized the feeling of dissatisfaction with the financial system into an urgent demand for governmental action. A National Monetary Commission was established by Congress, and its recommendations, reported in 1910, were embodied in the Federal Reserve Act passed in 1913. Reforms along the lines of the Federal Reserve Act had the backing of every section of the community, from the working classes to the bankers, and of both political parties. The chairman of the National Monetary Commission was a Republican, Nelson W. Aldrich; the Senator mainly responsible for the Federal Reserve Act was a Democrat, Carter W. Glass. |
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The change in monetary arrangements introduced by the Federal Reserve Act turned out in practice to be far more drastic than was intended by its authors or its supporters. At the time the Act was passed, a gold standard reigned supreme throughout the worldnot a fully automatic gold standard but something far closer to that ideal than anything we have experienced since. It was taken for granted that it would continue to do so and thus narrowly limit the powers of the Federal Reserve System. No sooner was the Act passed than World War I broke out. There was a large-scale abandonment of the gold standard. By the end of the war, the Reserve System was no longer a minor adjunct to the gold standard designed to insure the convertibility of one form of money into others and to regulate and supervise banks. It had become a powerful discretionary author- |
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