WI: No Federal Reserve

[RHaden]

It doesn't look like this WI has been brought up before, so I'll take a stab at it.

My POD is actually before 1900, but the effects do not really start until 1913. IOTL, Paul Warburg (one of the prime contributors to the Fed) met and married an American citizen, Nina Loeb. As a result, he began living part-time in New York. Six years later, he moved there permanently after getting a partnership in his father-in-law's banking firm. Obviously, the POD is that he somehow does not meet Miss Loeb. Instead, he stays in Germany and takes charge of the family banking business with his brothers.

This change has wide-reaching effects. IOTL, Warburg gained the ear of Senator Nelson Aldrich, chairman of the Senate Finance Committee and later head of the National Monetary Commission. He helped to convince Aldrich of the necessity for a central banking system similar to Europe's. With Warburg's presence butterflied away, it's quite conceivable that Aldrich would either 1) never be in favor of a central banking system in the first place, or 2) fail to gain sufficient support (due to Warburg's help, IOTL) for his ideas. The end result is that the Federal Reserve Act of 1913 is never passed, if it is even drafted.

So, what longer-range effects does this bring about? Well, WWI would probably have still happened, including America's entry in 1917 and Germany's defeat a year later. Things would have gone on much like they went on IOTL, with the possible exception of Calvin Coolidge running for re-election in 1928. After 1929, however, I think events would change dramatically. I propose that, without the Federal Reserve, the Great Depression would have never happened. From there, the Nazis do not take power in Germany, and WWII doesn't happen (at least, not as we know it). Likely the Cold War would also not happen, since it was a development from WWII. I have not given much thought to other effects, or what would happen in place of WWII etc. So far, my ideas are rather tentative.

What do the rest of you think? Does the above scenario sound realistic? Why or why not? I'd also like to hear any contributions that you all might have.

- Rob

P.S. Here is the source for my proposed POD: http://minneapolisfed.org/pubs/region/89-05/reg895d.cfm

[Steffen]

Interesting idea,

but I think it´s unlikely. As a important industrialised nation with interests in world trade, the US couldn´t possibly avoid the gold standard, and without a central bank sof some kind, it would have been hard to administer.

And it is also some kind of "must have" for a nation. Just like you wouldn´t say butterflying away the founder of the US navy prohibits the foundation of the US navy.

[xchen08]

Well, the U.S. as a rising economic powerhouse needed a central bank of some sort to control monetary policy, and that central bank needs to be independent of the Federal government to prevent inflation bias. I would argue that the Great Depression would still occur, as the Federal Reserve's culpability in the Depression is primarily one of inaction rather than action, and the U.S. had major depressions well before the formation of the Federal Reserve. In any case, even without the Federal Reserve, some form of central banking is bound to be formed, though if it has undesirable characteristics(like control by the Treasury), then later U.S. economic performance would suffer.

[RHaden]

Originally Posted by Steffen

Interesting idea,

but I think it´s unlikely. As a important industrialised nation with interests in world trade, the US couldn´t possibly avoid the gold standard, and without a central bank sof some kind, it would have been hard to administer.

And it is also some kind of "must have" for a nation. Just like you wouldn´t say butterflying away the founder of the US navy prohibits the foundation of the US navy.

The US already had the gold standard before the creation of the Federal Reserve. Furthermore, a central bank is not necessary to implement it.

I imagine that some kind of monetary reform would still have been effected, but nothing as drastic as the Federal Reserve itself. Herr Warburg did much to convince the leading bankers that some kind of central-banking system was necessary. Without his presence, things would likely have gone much differently.

Ironically enough, were there no Federal Reserve, the US would stand out as the prime example of an industrialized nation without a central bank, precluding your "must have" argument! :P

- Rob

[RHaden]

Originally Posted by xchen08

Well, the U.S. as a rising economic powerhouse needed a central bank of some sort to control monetary policy, and that central bank needs to be independent of the Federal government to prevent inflation bias.

Before Warburg came onto the scene (and certainly before the Jekyll Island Conference in 1910), most banking leaders were opposed to the idea of any central bank. I submit that your argument commits the ex post hoc ergo propter hoc fallacy.

I would argue that the Great Depression would still occur, as the Federal Reserve's culpability in the Depression is primarily one of inaction rather than action, and the U.S. had major depressions well before the formation of the Federal Reserve. In any case, even without the Federal Reserve, some form of central banking is bound to be formed, though if it has undesirable characteristics(like control by the Treasury), then later U.S. economic performance would suffer.

Actually, the Federal Reserve inflated the money supply almost continuously from 1921 through 1928. Source: http://www.mises.org/rothbard/agd/contents.asp

In the absence of the Federal Reserve Act, how was some form of central banking bound to be formed?

- Rob