On December 23rd, 1913, while Americans celebrated the holidays, President Woodrow Wilson signed the Federal Reserve Act into law. 112 years later, it remains one of the most consequential (and least understood) moments in American history. The Federal Reserve was created by bankers and for bankers, but was sold to the public as protection from those same bankers.

The result of this system speaks for itself in the form of hard data. A dollar saved in 1913 retains roughly $0.03 of its original purchasing power. The M2 money supply has expanded from approximately $15 billion to over $21 trillion – a 140,000% increase. The Fed’s own balance sheet, essentially nonexistent at its founding, now exceeds $7 trillion.

The Federal Reserve And The Jekyll Island Meeting

The Federal Reserve’s origin story reads like conspiracy fiction, except that it happened. In November of 1910, Senator Nelson Aldrich, who at the time was the chairman of the Senate Finance Committee and father-in-law to John D. Rockefeller Jr., organized a secret meeting at the Jekyll Island Club, an exclusive resort off the coast of Georgia.

The attendees traveled by private rail car from Hoboken, New Jersey, using only first names to avoid recognition by journalists. The cover story was that they were all going duck hunting. The actual agenda was designing a central banking system that would serve Wall Street’s interests along with the American economy as a whole.

The guest list represented perhaps a quarter of the world’s wealth. It included Henry Davidson, a senior partner at J.P. Morgan; Frank Vanderlip, president of National City Bank (which would one day become Citibank); Paul Warburg of the investment bank Kuhn, Loeb & Co., who had studied European central banks and provided technical expertise; Benjamin Strong of Bankers Trust, who would later become the first chairman of the New York Fed; and A. Piatt Andrew, Assistant Secretary of the Treasury, which lent government credibility to the proceedings.

The participants understood their public relations problem. Americans harbored deep suspicion of concentrated financial power, having rejected two previous central banks. The solution was to put on what amounted to a theatrical performance called the Pujo Committee. This series of hearings in 1912 and 1913 created the appearance of a Congressional investigation into the “money trust,” even as the targets of the investigation drafted the legislation that emerged from it. The National Citizens League campaigned for banking reform as if representing grassroots concerns, though its funding came entirely from the banks themselves. By the time Wilson signed the Federal Reserve Act, the public believed they had won a victory against Wall Street.

The Problems of Elastic Money

The problem the Fed was created to solve was the inelasticity of the dollar. Because the American economy in the 19th century was highly seasonal in its growth, there were times when there simply weren’t enough dollars to meet demand, while other times there was a glut of dollars. The Fed’s stated purpose was to provide a mechanism to make the supply of dollars “elastic” – able to expand to meet cyclical demand and contract when demand subsided.

This framing deserves a closer look. Economies do experience fluctuating demand for money. Harvest seasons, holiday shopping, and industrial output cycles all create periods when more transactions occur and participants need more liquidity. Under a gold standard, this presented a genuine problem. Gold is heavy, and transporting it is slow and expensive. Dividing it into small amounts is impractical, and verifying its authenticity requires expertise (and carries an additional expense). On a gold standard, when demand for money spikes, the physical limitations of gold mean that money causes friction and inefficiency in the market.

The architects of fiat currency solved this problem through a particular mechanism: expanding the money supply itself. If gold cannot move fast enough to meet demand, why not create paper claims on gold that move faster? If demand consistently exceeds the gold supply, perhaps it would be time to sever the link to gold entirely and create money without physical constraint. This is what “elasticity” inevitably leads to, and why the Fed’s mandate to manage the money supply led inevitably to the birth of a purely “fiat” (unbacked) dollar in the late 20th century.

A secondary side effect of elastic money is a serious social cost. When new money enters the economy, it does not become available to all market participants at the same time. Some people are able to acquire it sooner than others. Those who receive it first (banks, government contractors, wealthy asset holders) are able to use it before prices adjust. Those who receive it last (savers, wage earners, retirees on fixed income) find their purchasing power relatively diminished. By the time money reaches them, many of the asset prices in the economy have already adjusted upward in response to the increased money supply. Economists call this the Cantillon effect, after the 18th-century theorist who first described it. The Fed’s elastic money does accommodate cyclical demand – but that capability also happens to transfer wealth upward with each expansion.

Could Bitcoin Solve The Same Problem Differently?

The problem that elastic money solves is real. However, the solution that fiat provides is flawed. Fiat was a “new money technology” when it was invented, and, just as in other domains, newer technology is now available that can reduce some of these flaws while maintaining advantages. Bitcoin is a recent money technology advancement that increases the availability of money without requiring dilution to do so.

Consider the monetary properties of bitcoin. Each one subdivides into 100 million units called satoshis. This means a single bitcoin can theoretically service demand for 100 million distinct users of money without any new issuance. A gold coin cannot be practically divided more than a few times. A bitcoin can be divided to eight decimal places, and could theoretically be divided into infinitely small amounts, since it’s digital.

Settlement speed compounds this effect. A bitcoin transaction confirms in approximately ten minutes, reaching final settlement – irreversible change of ownership requiring no trusted third party – within an hour. The Lightning Network, a second-layer protocol, enables bitcoin transactions that settle in milliseconds at negligible cost.

Geographic reach extends availability further. Bitcoin does not require bank branches, corresponding banking relationships, or government permission. a farmer in rural Argentina and an institutional investor in Tokyo can transact directly, at any hour, with transparent terms.

These properties – extreme divisibility, rapid final settlement, and global accessibility – address the same underlying problem that elastic money was designed to solve. When demand for money increases, bitcoin does not need to expand in quantity. The same fixed supply simply moves faster, divides smaller, and reaches further. The availability that fiat achieves through dilution and institutional coordination, bitcoin achieves through superior monetary technology.

A Matter Of Time For The Federal Reserve

The Federal Reserve is 112 years old, while bitcoin is only 17 years old. This means bitcoin has existed roughly 15% of the Fed’s lifespan.

That percentage can be interpreted in two ways. It is a small fraction – bitcoin is young, untested by certain stresses, and still maturing. It is also a remarkable achievement. Consider the forces that have opposed bitcoin since its inception, which include regulatory hostility across multiple administrations, dismissal from mainstream economists and financial media, technical skepticism from computer scientists who predicted it would fail. Most of all, it has begun to turn the tide against the inertia of a global financial system built entirely around fiat technology.

That bitcoin has not merely survived but grown to a multi-trillion-dollar asset class in 15% of the time the Fed has existed reveals something about the relative fitness of these systems.

Bitcoin returns monetary policy to natural constraints. Its issuance follows a predetermined schedule, constrained by physics, halving approximately every four years until the final bitcoin is mined around 2140. No committee decides when to expand the supply. No emergency can trigger a deviation from the protocol. Mathematics and energy replace politics and discretion.

The Federal Reserve was a Christmas gift from Wall Street to itself, wrapped in the language of public protection. Over a century later, Americans are finally unwrapping what they actually received. The next century will reveal what happens when sound money competes with elastic money in an open market.