Murray N. Rothbard, The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930

Murray N. Rothbard’s historical-economic essay, originally published in 1984 and supplied here in a 2017 version, interprets the Federal Reserve’s creation and early operations as a project of banking cartelization. It asks whether the institution’s record becomes more intelligible when measured against its founders’ interests than against its public promises of monetary stability.

Rothbard combines a revisionist account of Progressive reform with a theory of monetary discipline. Banks expanding credit independently face demands for redemption from competitors; central banking relaxes this constraint by coordinating expansion and supplying reserves. Inflation here means monetary expansion, not necessarily rising prices. The question is whose power to create credit central banking enlarged.

The historical account begins with the National Banking System, which Rothbard presents as already privileged and partially centralized.

By levying a prohibitive federal tax, the national banking system in effect outlawed state bank notes, centralizing the issue of bank notes into the hands of federally chartered national banks.

The Federal Reserve thus did not emerge from an unregulated competitive order. Yet state banks, trust companies, and financial centers outside New York continued to challenge established institutions. Rothbard places demands for a more elastic currency within that competitive setting, while acknowledging a practical difficulty recognized by other monetary historians.

Friedman and Schwartz grant validity to the complaints of inelasticity in at least one sense: that deposits and notes were not easily interconvertible without causing grave problems.

For Rothbard, this technical problem does not establish that centralization served a disinterested public purpose. He follows banking reform’s development into an organized political project through Treasury experiments, banking commissions, the response to the panic of 1907, and the Jekyll Island negotiations. Earlier proposals reveal successive attempts to devise a politically acceptable structure.

The Hepburn commission was more cautious, and its report of November 1906 called for imperative changes in the existing banking system, including a system of regional clearing houses for the issue of bank notes.

Rothbard identifies Morgan, Rockefeller, and Kuhn, Loeb interests as central to the reform coalition, supported by economists and publicity organizations. He stresses continuity between the Aldrich plan and the Federal Reserve Act: regional organization and presidential appointments made centralized monetary authority acceptable without eliminating its cartelizing functions.

His treatment of structure and personnel presents governmental authority and private banking influence as complementary. Member banks benefited less from returns on Reserve Bank ownership than from coordinated reserve provision, lender-of-last-resort protection, and expanded lending capacity. Business and family connections provide evidence for tracing influence through appointments. Benjamin Strong, governor of the New York Fed, assumes particular importance through his Morgan connections and his command of open-market operations within the formally decentralized system.

World War I intensified centralization through Treasury financing, reserve changes, and the concentration of monetary gold at the Fed. Rothbard extends his argument internationally through Strong’s cooperation with Bank of England governor Montagu Norman. He interprets British policy as an attempt to restore sterling’s prewar parity without accepting the deflation required to sustain it. The gold exchange standard and American monetary expansion helped shelter Britain from redemption pressures, reproducing internationally the weakening of monetary discipline identified at home.

The policy analysis distinguishes securities purchases, cheap rediscounting, and support for bankers’ acceptances. Rothbard links the major open-market purchases of 1924 and 1927 to support for sterling. The acceptance market offers a concentrated example of institutional benefit: Federal Reserve purchases sustained a market associated with major New York banks, while its prominent advocate Paul Warburg also headed an acceptance bank.

The concluding discussion follows efforts to restrain speculation in 1928–29 and reserve expansion after the crash. Rothbard rejects the premise that cheap credit could be reserved for commerce while excluded from securities markets. He also distinguishes expansionary intentions from monetary outcomes: withdrawals, gold movements, and bank failures could frustrate policy. The essay joins monetary mechanisms, institutional design, and elite networks to explain instability as a consequence of protected credit expansion, rather than simply a failure to fulfill the Fed’s stated mission.