The Origin of the Federal Reserve Has Been Deliberately Shrouded in Myth: (1) Legends Around the Panic of 1907 and (2) The Myth of the "Impartial" Central Bank Altruistically Looking out for the Public Interest

The origin of the Federal Reserve has been deliberately shrouded in myth spread by pro-Fed apologists. The official legend holds that the idea of a Central Bank in America originated after the Panic of 1907, when the banks, stung by the financial panic, concluded that drastic reform, highlighted by the establishment of a lender of last resort, was desperately necessary.

All this is rubbish. The Panic of 1907 provided a convenient handle to stir up the public and spread pro-Central Bank propaganda. In actuality, the banker agitation for a Central Bank began as soon as the 1896 McKinley victory over Bryan was secured.

The second crucial part of the official legend claims that a Central Bank is necessary to curb the commercial banks' unfortunate tendency to over-expand, such booms giving rise to subsequent busts. An "impartial" Central Bank, on the other hand, driven as it is by the public interest, could and would restrain the banks from their natural narrow and selfish tendency to make profits at the expense of the public weal. The stark fact that it was bankers themselves who were making this argument was supposed to attest to their nobility and altruism.

In fact, as we have seen, the banks desperately desired a Central Bank, not to place fetters on their own natural tendency to inflate, but, on the contrary, to enable them to inflate and expand together without incurring the penalties of market competition. As a lender of last resort, the Central Bank could permit and encourage them to inflate when they would ordinarily have to contract their loans in order to save themselves. In short, the real reason for the adoption of the Federal Reserve, and its promotion by the large banks, was the exact opposite of their loudly trumpeted motivations. Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a Central Bank to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition.

The bankers, however, faced a big public relations problem. What they wanted was the federal government creating and enforcing a banking cartel by means of a Central Bank. Yet they faced a political climate that was hostile to monopoly and centralization, and favored free competition. They also faced a public opinion hostile to Wall Street and to what they perceptively but inchoately saw as the "money power." The bankers also confronted a nation with a long tradition of opposing Central Banking. How then, could they put a Central Bank across?

--Murray N. Rothbard, The Case Against the Fed (Auburn, AL: Ludwig von Mises Institute, 2007), 82-84.