In 1907, the U.S. economy was in the grip of a financial crisis. Unemployment was up. The stock market was down.

People started panicking. They were lining up overnight to pull their money out of healthy banks. This can be deadly for an economy: Healthy banks have to shut down, businesses can't get credit, they lay people off, and the economy gets worse.

At the time, the U.S. government had no way to deal with the panic. There was no institution that could step in to stop the run on healthy banks. So the job of stopping the panic fell to one man: J.P. Morgan (of JPMorgan fame).

He summoned dozens of the leading financiers in New York to his private library on Madison Avenue and essentially ordered them to contribute to a $25 million pool that would be used to backstop the system. Then he locked them in and made them stay there through the night, until they all agreed to his plan.

The plan worked — it essentially ended the Panic of 1907.

But some powerful people in Washington wondered: What about the next panic? Do we really want the fate of the U.S. economy to hinge on one rich guy in New York?

One person in particular decided this was a problem: Sen. Nelson Aldrich, chairman of the Senate finance committee. Aldrich knew there was something America could do so that it would no longer have to rely on one guy to end panics: The U.S. could create a central bank.

This was not a new invention. Countries in Europe already had central banks. And, during panics, the central banks basically did what J.P. Morgan did in the U.S.: act as lenders of last resort for healthy banks. When depositors were lined up out the door yelling for their money, banks that were basically sound could borrow from the central bank.

But just consider that name: central bank. Throughout American history, both of those words — "central" and "bank" — had been deeply unpopular. The thought of a bunch of rich bankers in New York controlling a powerful central bank did not inspire confidence.

Still, Aldrich realized he needed bankers' help to draw up a plan for a central bank. So he came up with a plan to gather in secret.

He told a handful of New York bankers to go on a given night, one by one, to a train station in New Jersey. There they would find a private rail car hitched to the back of a southbound train. To conceal their identities, Aldrich told the bankers to come dressed as duck hunters and to address each other only by first name.

The train headed south, and the bankers got off in Georgia. They spent the next week holed up in a private club at a place called Jekyll Island. (Apparently, the name didn't sound as sketchy then as it does today.)

At Jekyll Island, Aldrich and the bankers came up with a plan. They knew many Americans thought a central bank could become too powerful, too influential in the economy. So they came up with a classic American workaround: They decided the U.S. should create lots of little central banks, scattered all around the country.

The plan they came up with still had a long way to go. It got shot down the first time in Congress. The plan for a central bank was debated, changed significantly, renamed. But the basic idea held up. And on Dec. 23, 1913, President Woodrow Wilson signed the Federal Reserve Act into law.

Creating the Fed didn't solve the nation's economic problems. In fact, a few decades after the Fed was created, its policies made the Great Depression worse. And the Fed has changed significantly over the course of a century. But even after all those changes, there are still a dozen Federal Reserve banks scattered around the country in cities like Dallas, Richmond and, of course, New York.



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DAVID GREENE, HOST:

And now to a financial panic that was far more widespread. It was at the beginning of the last century and it lead to the creation of our federal reserve system a hundred years ago today. Before that, the U.S. didn't have a central bank to create money and set interest rates. Robert Smith and Jacob Goldstein from our Planet Money team have the story of the Fed's birth.

It involves a secret expedition and a grumpy old man with multiple mistresses.

JACOB GOLDSTEIN, BYLINE: The old man is J.P. Morgan of J.P. Morgan fame and he still looks grumpy today staring down at us from an oil painting in his old study.

LIAQUAT AHAMED: He has very fiery eyes and he's not a pussycat. I mean, he's a very intimidating guy.

ROBERT SMITH, BYLINE: Liaquat Ahamed is a financial historian and he's showing us around Morgan's private library in midtown Manhattan. It's now a museum.

GOLDSTEIN: And he says the story of the Fed really starts back in 1907. It's a year after the great San Francisco earthquake and the U.S. economy is in trouble. Unemployment is up and people are panicking. They're rushing to pull their money out of the banks.

SMITH: Yeah, the guys who own the banks - they're starting to panic too. Unsure of what to do, they came here, to J.P. Morgan's private library. Bank presidents lined up outside.

AHAMED: With, you know, whiskers and top hats and frock coats.

SMITH: And monocles, I imagine. Cigars.

GOLDSTEIN: Cigar smoke.

AHAMED: Cigars were obligatory.

GOLDSTEIN: At this point, in 1907, the U.S. government had no way to deal with a panic like this. There was no institution that could step in and stop the run on the banks.

SMITH: So Morgan called together all the bankers on a Saturday night and he said we, we can stop this run, but to do it we're going to have to pool our money to restore confidence.

AHAMED: And so J.P. Morgan draws up a list. It says 25 million. This is how much each one of you owes and says, okay, sign here. And they don't sign. So he locks the doors and this was the door that was locked.

SMITH: Wow. There's an actual chain on here.

AHAMED: He says we're not leaving until I've got all the signatures.

SMITH: I can't get in the door.

AHAMED: There's still bankers inside.

GOLDSTEIN: By 5:00 in the morning, they had all signed, and that essentially was the end of the panic of 1907. But even after the panic, some people were still worried. Do we really want the fate of the U.S. economy to hinge on one rich guy in New York?

AHAMED: Relying on J.P. Morgan to bail out the U.S. financial system didn't make sense, particularly since J.P. Morgan was 70 and liked to go off travelling with his bevy of middle-aged mistresses, so...

SMITH: He didn't have a lot panics left in him.

AHAMED: Yeah, exactly.

GOLDSTEIN: One very powerful guy in particular decides this is a problem - Senator Nelson Aldrich, Republican from Rhode Island. Aldrich knows there's something American can do so that it will no longer have to rely on one guy when these panics can happen. The U.S. can create a central bank.

SMITH: And this isn't a new invention. Countries in Europe already had central banks, and during panics they basically did what J.P. Morgan did; they acted as a lender of last resort for healthy banks. So if you're a bank and you're basically sound, you can go to the central bank when depositors are lined up out the door yelling for money.

GOLDSTEIN: But just consider that name, central bank. Throughout American history, both of those words, central and bank, have been deeply unpopular. The thought of a bunch of rich bankers in New York City controlling the economy did not inspire confidence.

SMITH: Still, Aldrich worried that the only people who could actually help design a central bank were rich bankers in New York City. They knew that was not going to look good. So in 1910, Nelson Aldrich comes up with a plan.

GOLDSTEIN: We're standing here at the Hoboken Train Station in Hoboken, New Jersey, and we're here because this place or someplace right near here was key to Aldrich's plan. He told some of the most powerful bankers in the country, I want you to gather at the train station. He told these bankers do not travel together, come alone. And most importantly, don't come here in your top hat and your monocle looking like a million bucks. They came here dressed as duck hunters.

They were told that when they got here, they would find Aldrich's private rail car attached to the back of a southbound train. The car itself was bound for Georgia because they were going to meet in a private club on an island off the coast of Georgia, a private club, by the way, that J.P. Morgan used to be a member of. The name of that private club, the name of the island? Jekyll Island.

SMITH: Apparently the name Jekyll Island didn't seem quite so sinister back in 1910. The bankers at Jekyll Island knew Americans thought a central bank could become too powerful, too influential in the economy, too much like J.P. Morgan. So they came up with a classic American workaround. The U.S. is not going to have one central bank in New York. It's going to have lots of little central banks scattered all around the country.

Now, the plan they came up with still had a long way to go. It was shot down the first time in Congress, got tweaked, debated, rewritten, but the basic idea they came up with at Jekyll Island held up, and 100 years ago today, President Woodrow Wilson signed the Federal Reserve Act into law.

GOLDSTEIN: It didn't solve all of America's economic problems.

SMITH: Not by a long shot.

GOLDSTEIN: Exhibit A would be the Great Depression. But today, though the Fed has changed a lot, there are still a dozen Federal Reserve banks scattered around the country in cities like Dallas and Richmond, and yes, New York. Jacob Goldstein.

SMITH: Robert Smith, NPR News. Transcript provided by NPR, Copyright NPR.