Part 2: The Rise of Central Banking and the Federal Reserve

By Black Hills Financial Planning

If Part 1 of this series showed us how banking evolved from trust to debt, then Part 2 reveals how debt became centralized — reshaping not only banking, but also the way governments, businesses, and families interact with money. This shift took its most important form in the creation of the Federal Reserve System in 1913.

The story of the Federal Reserve is about more than a new financial institution. It’s about power, secrecy, and the transformation of money into something entirely different than what most Americans think it is.

Why Central Banks Were Created

By the late 1800s and early 1900s, the United States had gone through repeated financial panics. Banks lent aggressively during booms and then collapsed during downturns when borrowers couldn’t repay. The Panic of 1907, in particular, sparked widespread demand for reform.

On the surface, the solution seemed simple: create a central bank that could stabilize the system by:

• Acting as a “lender of last resort” when banks faced runs.

• Coordinating credit so banks didn’t overextend.

• Ensuring the public maintained confidence in money itself.

But behind the scenes, something else was happening. Large Wall Street banks were frustrated by competition and wanted a way to protect their own interests. Historian Murray Rothbard explains that powerful financial groups — led by J.P. Morgan and allies — sought to use government to enforce what the free market would not allow: a cartel of banks working together.

The Secret at Jekyll Island

In November 1910, a small group of bankers and politicians boarded a private railcar in New Jersey under cover of night. They traveled to Jekyll Island, a private retreat off the coast of Georgia. For nine days, they crafted a plan for what would become the Federal Reserve.

Those present included:

• Senator Nelson Aldrich, tied to both politics and banking.

• Paul Warburg, representing European banking interests.

• Henry Davison and Charles Norton, close to J.P. Morgan.

• Frank Vanderlip, president of National City Bank.

They were sworn to secrecy, even using first names only so servants wouldn’t recognize them. Their purpose wasn’t to protect the public — it was to design a system that gave banks more power to expand credit while insulating them from collapse.

The plan they drafted became the basis for the Federal Reserve Act of 1913.

What the Federal Reserve Does

The Federal Reserve, often called simply “the Fed,” serves several key functions:

1. Issues Money – Every U.S. dollar is now a Federal Reserve Note. Unlike earlier money, it isn’t backed by gold or silver but by government debt.

2. Controls Credit – Through policies like setting interest rates and buying government bonds, the Fed influences how much money circulates.

3. Supports Banks – The Fed stands ready to bail out banks in crisis, ensuring they can continue lending.

At first glance, these functions may seem like necessary tools to maintain stability. But critics point out that the Fed institutionalized what was once considered usury. It made debt — not gold or real assets — the foundation of the U.S. money system.

Inflation: The Hidden Tax

One of the most important consequences of the Federal Reserve system is inflation. Because the Fed creates money by purchasing government bonds (which are promises to pay later), the money supply grows continuously. This erodes the purchasing power of every dollar.

Think about it: a dollar in 1913 could buy far more than a dollar today. Over the last century, the dollar has lost over 95% of its value due to inflation. This isn’t an accident — it’s a feature of a system where money must constantly expand to keep up with the interest owed on all debt.

In other words, inflation is a hidden tax. It transfers wealth from ordinary people, whose savings lose value, to institutions and governments that benefit from freshly created money.

What This Means for Families

The rise of the Federal Reserve changed not just banking, but everyday life:

• Your savings shrink – Traditional savings accounts can’t keep up with inflation.

• Debt feels normal – Because all money is issued as debt, society conditions us to borrow for houses, cars, education, and even emergencies.

• Boom-bust cycles continue – Despite its promises, the Fed hasn’t eliminated financial crises. Instead, its interventions often fuel larger bubbles, from the Great Depression to the 2008 housing collapse.

Understanding the Federal Reserve is essential to understanding why building wealth in the traditional way — by saving in banks and relying on employer retirement accounts — rarely works out as planned.

The Opportunity: Taking Back Control

At Black Hills Financial Planning, we don’t simply point out the flaws of the system — we empower families to navigate it differently.

Here’s how we help clients respond to the reality of central banking:

• Protect assets from inflation by using financial tools designed to preserve purchasing power.

• Reduce dependence on debt by creating a personal “family bank” system that allows clients to borrow from themselves instead of Wall Street.

• Break the cycle of interest payments by restructuring finances so clients earn interest rather than give it away.

By understanding the Federal Reserve, you begin to see why traditional financial advice often fails. And once you see it, you can’t unsee it.

Conclusion

The creation of the Federal Reserve was not just about preventing panics — it was about consolidating financial power. By issuing money as debt, the Fed built inflation into the economy and guaranteed that interest payments would always flow back to banks.

But families don’t have to stay stuck in this system. By learning how money truly works, you can make informed decisions that protect your wealth and empower future generations.

👉 Curious about how to insulate your family from inflation and take back control of your money? Book a free consultation with Black Hills Financial Planning today. Knowledge is power — and financial freedom begins with education.