Bryan Yach, CFP®: 0:00

It's New York City. October. 1907. The city's loud in a way that only New York can be. Not 2026 loud. 1907 loud. Horses and carriages fight for space in streets increasingly shared with automobiles. Elevated trains thunder overhead. Coal smoke hangs through buildings. On Wall Street, men in dark suits move quickly between banks, brokerage houses, and exchanges carry pieces of paper worth fortunes. And suddenly the mood changes.

Lucille: 0:38

You're listening to Money's the Matter, a podcast about understanding money through the lenses of history, stories, and human psychology. Here's Bryan.

Bryan Yach, CFP®: 0:48

People began lining up outside financial institutions. Rumors move faster than information. A bank might be perfectly healthy in the morning and fighting for its life by the afternoon. Depositors don't want explanations. They don't want assurances. They want their money. They want cash. There is no Federal Reserve. There's no central bank waiting behind the financial system with an emergency supply of money. There's no institution capable of simply announcing that liquidity will be provided and solvent banks will survive. So the bankers in New York go looking for someone who can. They find him at 36th and Madison. John Pierpont Morgan. JP Morgan is 70 years old. His nose is badly scarred by rosacea. His stare is famously uncomfortable. He smokes giant cigars. He spent decades assembling railroads, steel companies, and financial empires. His private libraries panelled in dark wood and lined with books, paintings, manuscripts collected from around the world. In October 1907, that library became something else. It became the closest thing the United States has had to central bank. Bank presidents come through the door. Balance sheets are examined. Money's assembled. About the institutions that can survive and the ones that cannot. The financial system of one of the richest countries on earth is beginning to buckle. And increasingly, the man standing between panic and catastrophe is not the president of the United States. He's a private citizen. With a library, a cigar, and enough power that when he tells America's bankers to find the money, they listen. How did this happen? To understand why JP Morgan was sitting in that library, we have to look backwards. Not 10 years, more than 100. Because almost from the moment the United States became a country, Americans had been fighting over one question. Who should control the money? Should the country have a powerful national financial institution capable of organizing credit, supporting the government, and stabilizing the banking system? Or would creating such an institution simply create enormous power in the hands of politicians, bankers, and wealthy financiers? It's tempting to think of central banking as a technical question. Interest rates, reserves, monetary policy, acronyms delivered by people sitting behind microphones in Washington. But before it was technical, it was philosophical. It was an argument of power. And that argument began with two men who disagreed about what America itself should become. Alexander Hamilton and Thomas Jefferson. The America that Hamilton and Jefferson looked at in the 1790s was not the financial superpower that we know today. It was young, full of debt, financially fragile. The revolution had been won, but wars leave behind bills. The federal government owed a ton of money. The states owed money. Public credit was uncertain. The country had political independence, but Hamilton understood that independence meant very little if nobody trusted your promises to pay. Hamilton imagined something larger, a national debt that could be organized rather than feared. Reliable public credit, a financial system capable of connecting private capital with national ambition. At the center of it, a national bank. To Hamilton, finance wasn't a separate idea from building the nation. It was how the nation building happened. Thomas Jefferson, on the other hand, looked at the proposal and saw something very different. Jefferson's America lived closer to the soil. He was suspicious of cities, speculators, concentrations of financial power. A national bank didn't look like the infrastructure. It looked more like the beginning of an American financial aristocracy. Wealthy men accumulating influence through an institution. The Constitution never explicitly said the federal government should create. Their disagreements became constitutional as well as economic. Jefferson asked in effect, "Where does the Constitution say you can do this?" Hamilton's answer was more expansive. A government given the responsibilities must also possess reasonable powers necessary to carry them out. George Washington listened to both sides, and in 1791 he signed Hamilton's bank into existence. The first bank of the United States was born, but the argument wasn't settled. America, and the argument, had merely just begun. Twenty years later, the first

Bryan Yach, CFP®: 5:13

bank's charter expired. Congress refused to renew it. For a moment, Jefferson's vision had won. Then came the War of 1812. War has an ability to turn philosophical arguments over into practical problems. Armies had to be paid, supplies had to be purchased, governments had to borrow, and suddenly the young United States discovered that coordinating national finances without a national financial institution was considerably easier to debate than to actually do. By 1816, America created another one, the Second Bank of the United States. Then came Andrew Jackson. Jackson was not a man inclined towards subtle disagreement. To him, the bank represented concentrated privilege, an institution capable of enriching connected financiers while exercising enormous influence over the lives of ordinary Americans. Its president, Nicholas Biddle, was sophisticated, wealthy, comfortable, and precisely the financial world Jackson distrusted. The conflict became known as the Bank War, and it was a war. Jackson vetoed the bank's re-charter. He attacked it publicly. Federal deposits were removed. Biddle fought back by restricting credit, hoping economic pain might demonstrate why the bank was necessary. Instead, he proved Jackson's point about how much power the institution possessed. The bank died. And for decades afterwards, America tried something different. Banks multiplied. Notes circulated. Financial networks stretched across an expanding continent. Eventually the Civil War brought a new nation banking system and a more standardized currency. But there was still something missing. There was no true central bank. There was no bank that was envisioned by the first secretary of treasury, Alexander Hamilton. And every so often, the American economy sent out a stark reminder of what that meant. 1837, 1857, 1873, 1893. The dates changed. The details changed. Railroads, land speculation, banks, trust companies, credit booms. But panics had become familiar rhythm. Confidence disappears. Everyone suddenly wants the same thing at the same time. They want cash. They want liquidity. And banks, by their nature, don't want to give everyone money sitting untouched in a vault waiting for precisely that moment. So when enough people demand cash simultaneously, even fear itself can become contagious. The question Hamilton and Jefferson had debated in rooms lit by candles was becoming harder to ignore in an industrial economy powered by steam, steel, railroads, and increasingly enormous pools of capital. When everyone runs for the exits at once, who stands at the door? 1907, the answer was J.P. Morgan. The panic began with speculation. The kind of financial scheme that seems ingenious right up until the moment it doesn't. An attempt to corner the market and United Copper collapsed. The institutions connected to the men involved suddenly looked a bit suspicious. Depositives were pulling money, trust companies came under pressure, and fear spread. That's the dangerous thing about financial panic. It doesn't need to understand accounting. A crowd forming outside a bank is itself an advertisement for another crowd to form outside of another bank. It's snowballs. The problem escalates. Morgan began summoning people to his library. Imagine the room. Heavy red walls, dark wood, Renaissance artwork, shelves filled with rare books, rich mahogany as they say. The smell of cigars hanging in the air while some of the most powerful financial men in America studied balance sheets and tried to determine how much money they could find before the morning. There was no button Morgan could push. He didn't create reserves. He couldn't order the financial system to remain open. He had persuasion, reputation, information, and leverage. So he used them. Bankers were brought together, assets examined, monies were pooled, institutions were judged, solvent, save it, hopeless, let it go. At one point Morgan famously gathered bankers in his library while a financing agreement was hammered out. The doors were locked. They weren't leaving until the money was found. Does this sound familiar? This happened again pretty recently. Think about how extraordinary that is. More than a century earlier Jefferson had warned Americans about concentrating too much financial power in the hands of a privileged few. Hamilton had warned in his own way about the weakness of a country without a strong financial architecture. And now America had somehow managed to prove both of them right. The country desperately needed centralized financial power. And that power was exercised by one unelected banker in a mansion in Manhattan. The panic of 1907 eventually subsided, but the uncomfortable question remained. What happens next time? Morgan was 70 years old. A national financial system couldn't reasonably expect a rich person to bail him out every time. So Washington began looking for another answer. Senator Nelson Aldrich traveled to Europe, studied the central banks, Americans had spent generations distrusting. And in November 1910, a small group of men boarded a private railroad car in New Jersey. Their destination was an island off the coast of Georgia, Jekyll Island. The meeting was deliberately secretive. The men avoided attracting attention. First names only were reportedly favored. They represented a mixture of government and some of the most powerful banking interests in the country. It's difficult to imagine a scene better designed to terrifying Thomas Jefferson. A handful of powerful financiers traveling in secrecy to a secluded island to discuss the future of American banking. And yet the problem that they were trying to solve was real. How do you create an institution powerful enough to stop a financial panic without creating the concentrated financial monster Americans had always feared since the founding? The answer took years of political fighting and looked different from the original plan discussed at Jekyll Island. In 1913, President Woodrow Wilson signed the Federal Reserve Act. And even its structure carried the fingerprints of America's old argument. And even its structure carried the fingerprints of America's old argument. There wouldn't simply be a giant central bank sitting on Wall Street. There'd be regional Federal Reserve banks scattered throughout the country combined with federal oversight in Washington. Centralized, but not entirely. Public, but with unusual connections to private banking. Powerful, but deliberately fragmented. With the appropriate checks and balances in place. The Federal Reserve wasn't the end of the Hamilton-Jefferson argument. In a strange way, it was the result of it. So let's go back to that library. New York, 1907. Outside the window, the city's still moving. Horses are striking the pavement. Elevated trains shake in the streets. Newspapers carry rumors from one corner of Manhattan to the other. Inside a mansion on Madison Avenue, an old banker sits beneath shells of rare books while America's financial system waits for him to decide what happens next. It's tempting to tell the story at that moment that J.P. Morgan saves America. Maybe in a way he did, but I think there's a more compelling lesson than that. For more than a century, Americans had worried about giving anyone too much control over money. Jefferson feared bankers. Jackson feared monopoly. Generations of Americans feared centralized government. And those fears were not irrational. Financial power is power. But in 1907, we saw the other side of the problem. Refusing to create that power doesn't necessarily make it disappear. Sometimes it simply determines who has it when you desperately need it. Hamilton believed the modern nation required financial institutions strong enough to support it. Jefferson believed those institutions could become powerful enough to threaten the society they were supposed to serve. Two centuries later, we're still living somewhere between those two arguments. We still argue about the Federal Reserve. We still argue about interest rates, inflation, bailouts, money creation, and whether unelected officials have too much influence over the economy. The names have changed. The buildings have changed. The candlelit rooms become marble offices and television press conferences. But underneath all of it, we still run into the same question that America's been asking since the beginning. Not simply who controls the money, but when everything falls apart... Who do we trust with power to save it? [MUSIC]