Another problem the national banks faced was the growing competition of private and state banks, neither of which had the national system’s high capital requirements. After 1873, total bank deposits were shifting in favor of non-national banks, as were clearings outside of New York. Furthermore, in 1887, St. Louis and Chicago bumped New York from its monopoly position as the base of the National Banking System’s inverted pyramid, and the two newcomers gained an alarming share of the percentage of total deposits of all three cities from 1880 to 1912. 
For bankers and government alike, the ideal monetary situation would seem to be a permanent state of specie suspension; even better would be a world in which everyone thought of money as only paper or deposits redeemable in paper, with specie relegated to the status of a collector’s item. The ideal in banking would be a government-enforced banking cartel that would ensure a uniform rate of monetary inflation to prevent currency drains and bank runs. With this power it could inflate its way out of recessions and bail out the big commercial banks as an emergency lender. And for its part, the government would have a reliable market for its debt in peacetime and war.
To bring this about the big bankers leveraged the rising tide of Progressive ideology. They began by hiring agents to promote the idea that banking crises were the result of inadequate regulation and an “inelastic” currency. As Rothbard has written, they formed an alliance with trained economists and other opinion-molders, many of whom already favored bureaucratic control of business from their exposure to Bismarckian statism while acquiring their doctorates in Germany. In the U.S., the National Civic Federation, founded in 1900, became the chief forum for promoting the “the new ideals of civic cooperation and social efficiency” for the purpose of “correcting” the rampant individualism of American society.
The academics were eager to use the state to license membership into their own professional organizations and thereby restrict competition and raise members’ incomes. They also saw themselves acquiring lucrative grants and filling vital government posts in running the bureaucracies. The public already had a deep distrust of Wall Street’s enormous concentration of wealth, and the task facing J. P. Morgan and other banking elites was to get opinion-molders to convince everyone that the big bankers needed public-spirited bureaucrats to reign in their power. 
Their push for a central bank, initiated by Morgan and Rockefeller forces, began following Republican William McKinley’s defeat of Democrat William Jennings Bryan in 1896 and ended with passage of the Federal Reserve Act in 1913. Bryan expunged the laissez-faire heritage of his party with his opposition to sound money and his proposal for a bold inflation of silver, an inflation that circumvented the banking system. In his famous “Cross of Gold” speech, Bryan said his party was “opposing the national bank currency” and stood “against the encroachments of aggregated wealth.” McKinley campaign manager Mark Hanna had no trouble raising a record amount of money from the Morgan-Rockefeller alliance to defeat Bryan.
Though the McKinley victory secured the gold standard, gold served mostly as a camouflage behind which the elite bankers could set up a system of inflation they controlled. 
A Banker’s Dream Comes True
When the next fractional-reserve breakdown occurred in 1907, Thomas Woodrow Wilson, then president of Princeton, endeared himself to the banking movement by declaring that “all this trouble could be averted if we appointed a committee of six or seven public-spirited men like J. P. Morgan to handle the affairs of our country.”  Colonel Edward Mandell House, a close Morgan associate who served as shadow president when Wilson was elected to the White House, became the “unseen guardian angel of the [banking] bill” that emerged in 1913.  Originally drafted at a secret meeting of banking elites at Morgan’s hunting lodge on Jekyll Island, Georgia in November, 1910, the Glass-Owen Bill, as it was finally called, overwhelmingly passed the House and Senate on December 22, 1913 and was signed into law by Wilson the following day.  The Fed began operations in November, 1914, with Morgan men occupying key positions.
The new law gave the bankers what they wanted: a monopoly of the note issue. Commercial banks could only issue demand deposits redeemable in Fed notes or nominally in gold. National banks were compelled to join the System but had the legal option of becoming state banks, which were not required to join though many state banks chose to do so in 1917 when federal regulations were relaxed.  Critically, gold coin and bullion were moved further away from the public when member banks shipped their gold to the Fed in exchange for reserves. 
The inflationary potential of the system is revealed by its structure: The Fed inflated by pyramiding on its gold, member banks by pyramiding on its reserves at the Fed, and nonmembers by pyramiding on its deposits at member banks. Furthermore, after a few years the Fed began withdrawing fully-backed U.S. Treasury gold certificates from circulation and substituting Federal Reserve Notes instead. With Fed notes requiring only 40 percent backing of gold certificates, more gold was available on which to pyramid reserves.
Also, with the advent of the Fed, reserve requirements for demand deposits were cut approximately in half, moving from a 21.1 percent average under the National Banking System to 11.6 percent, then lower still to 9.8 percent in June, 1917, after the U.S. had joined the war. Reserve requirements for time deposits dropped from the same 21.1 percent average to 5 percent, then 3 percent in 1917. Commercial banks developed a policy of shifting borrowers into time deposits to inflate even further. 
Thus, the country now had a government-privileged central bank called the Federal Reserve. By hoarding gold as its pyramidal base, the Fed was weaning the public from the use of gold coins, making them easier to confiscate later on. Through the Fed, member banks would be inflating at a uniform rate to avoid trouble with redemption demands.
Did this new system bring the big bankers in line? Did the Federal Reserve Act provide “a circulating medium absolutely safe,” as the Report of the Comptroller of the Currency of 1914 stated? How accurate was the report’s claim that
Under the operation of this law such financial and commercial crises, or "panics," as this country experienced in 1873, in 1893, and again in 1907, with their attendant misfortunes and prostrations, seem to be mathematically impossible. Did the Morgan men running the banking cartel create a better world for most Americans?
They indeed have if you believe wars, depressions, massive debt, depreciating helicopter money, and unaccountable government constitute improvements in our quality of life.
1. See Thomas J. DiLorenzo, The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War, Prima Publishing, Roseville, CA, 2002
2. Murray N. Rothbard, The Mystery of Banking, Mises Institute, Auburn, AL, 2008, p. 230
3. Carl Menger, Principles of Economics, Mises Institute, Auburn, AL, 2007, pp. 257-260; Ludwig von Mises, The Theory of Money and Credit, The Foundation for Economic Education, Inc., Irvington-on-Hudson, New York, 1971, pp. 30-33.
4. Murray N. Rothbard, “The Federal Reserve as a Cartelization Device,” from Money in Crisis: The Federal Reserve, the Economy, and Monetary Reform, edited by Barry N. Siegel, San Francisco, CA: Pacific Institute for Public Policy Analysis, 1984, pp. 91-93
5. Murray N. Rothbard, The Case Against the Fed, Mises Institute, Auburn, AL, 1994, pp. 84-90
6. Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, Mises Institute, Auburn, AL, 2002, p. 189
7. G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve, Fourth Edition, American Media, Westlake Village, CA, 2002, p. 448
8. Ibid, p. 459
9. Ibid., p. 468
10. Rothbard, Money in Crisis, p. 112
11. The Case Against the Fed, p. 119
12. Mystery, pp. 238-239
13. Annual Report of the Comptroller of the Currency, December 7, 1914, Vol. 1, p. 10