CHAPTER 4 – BANKING IN THE UNITED STATES
The constitution originally granted congress the power to “coin” gold and silver money. Whenever paper dollars (once called “bills of credit”) were used, they represented a fixed amount of gold or silver that could be exchanged at any time for physical gold or silver. Thus, the money supply could not be easily expanded because doing so would require mining more gold and silver.
However, in 1913 the federal government delegated its money-creation role to a quasi-private banking conglomerate called the Federal Reserve. The dollars it issued were still redeemable in physical gold until 1934 when congress passed the Gold Reserve Act, making it illegal for Americans to own physical gold for the next 40 years. In 1971 President Nixon forbade even foreign banks and governments from redeeming their dollars for physical gold. This severed every link between the dollar and gold or any other intrinsically valuable commodity, thus ushering in the age of the U.S. fiat currency.
The original mission of the Federal Reserve in 1913 was to strategically expand and contract the money supply to manage employment and price stability (as if it could do this better than natural market forces). However, since its inception, contraction of the money supply has been virtually nonexistent; expansion alone has been standard practice. The dollar has lost over 95% of its purchasing power. If you had a legal money-printing machine, would you shut it down and flush your bill stacks down the toilet?
This is why prices rise dramatically every decade. On March 23, 2006, the Federal Reserve announced it would no longer publish the total money supply (called the “M3 Money Supply”), which means it is at least partially unaccountable for how much new money it creates. Meanwhile, the rising-price metric it uses for deciding how much new money to create, the core CPI, excludes the price of food and gas and often attaches more value to other products as they technologically advance. All of this helps the Federal Reserve justify creating more of the fiat money we are forced to use if we want to participate in society. In other words, with legal empowerment by the government, the Federal Reserve commits fraud, theft, and coercion – the very things government is supposed to punish.
The Roots of the Federal Reserve
Does anyone really believe the world’s wealthiest, most powerful men were motivated by altruism when they secretly met and conspired to create the Federal Reserve in 1913? Of course not. They did it to fortify their own wealth, power, and control over the American government and the global economic system.
The fact that the Federal Reserve was planned in secret is well-established. On February 9, 1935, The Saturday Evening Post, published an article written by Frank Vanderlip, president of Citibank, Rockefeller (owner of Chase Manhattan Bank) business partner, and attendee of the secret Jekyll Island meeting at which the Federal Reserve Act was conceived. Vanderlip described the meeting this way:
“I was as secretive—indeed, as furtive—as any conspirator… I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual conception of what eventually became the Federal Reserve System… Discovery, we knew, simply must not happen, or else all our time and effort would be wasted. If it were to be exposed publicly that our particular group had got together and written a banking bill, that bill would have no chance whatever of passage by Congress.”
Other attendees of the secret meeting included:
· Nelson W. Aldrich (Republican Senate “Whip”, National Monetary Commission Chairman, J.P. Morgan business associate, John D. Rockefeller father-in-law)
· Abraham Piatt Andrew (U.S. Treasury Assistant Secretary)
· Henry P. Davison (senior partner of the J.P. Morgan Company)
· Benjamin Strong (head of J.P. Morgan’s Bankers Trust Company)
· Paul Warburg (chairman of J.P. Morgan Company)
Vanderlip was right to be concerned about the Federal Reserve Act surviving scrutiny by congress. Less than a year before its passage, an investigation into the proposal by a subcommittee of the House Committee on Currency and Banking was led by Arsene Pujo of Louisiana. The Pujo Committee Final Report, dated February 28, 1913, stated:
“…a small group of men and their partners and associates have now further strengthened their hold upon the resources of these institutions by acquiring large stock holdings therein, by representation of their boards and through valuable patronage, we begin to realize something of the extent to which this practical and effective domination and control over our greatest financial, railroad and industrial corporations has developed, largely within the past five years, and that it is fraught with peril to the welfare of the country.”
The report specifically named the Morgan and Rockefeller interests in its findings – the same men whose interests were represented in the Jekyll Island meeting.
The Federal Reserve had other critics as well. Congressman Louis T. McFadden served as Chairman of the House Committee on Banking and Currency from 1920 to 1931 and was famous for his vocal opposition to the institution. On June 10th, 1932, he stated the following in a speech to congress:
“When the Federal Reserve Act was passed, the people of these United States did not perceive that a world banking system was being set up here. A super-state controlled by International Bankers and international industrialists acting together to enslave the world for their own pleasure. Every effort has been made by the Fed to conceal its powers, but the truth is – the Fed has usurped the Government. It controls everything here, and it controls all our foreign relations. It makes and breaks governments at will.”
Similarly, Congressman Charles Lindbergh, father of the famed aviator, on December 22, 1913, one day before President Wilson signed the Federal Reserve Act, said in a speech to the House of Representatives:
“This act establishes the most gigantic trust on earth. When the president signs this bill, the invisible government by the monetary power will be legalized… The people must make a declaration of independence to relieve themselves from the monetary power… The worst legislative crime of the ages is perpetrated by this banking bill.”
Then, in 1917, Lindbergh introduced articles of impeachment against the Federal Reserve Board of Governors, claiming they were involved “in a conspiracy to violate the Constitution and laws of the United States”.
But critics weren’t the only parties make such assertions. One of the Federal Reserve’s advocates, Carroll Quigley, did likewise. In his voluminous 1966 history book, “Tragedy and Hope”, he stated:
“The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences.”
“Each central bank… [including] the New York Federal Reserve Bank… sought to control and dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.”
Carroll Quigley’s credentials as a political historian are beyond dispute. He studied history at Harvard University, where he earned his earned his B.A, M.A., and Ph.D. He went on to become a professor at Princeton, Harvard, and Georgetown. He also worked as a consultant to the Department of Defense.
Quigley was the opposite of a right-wing conspiracy theorist. In fact, as an outspoken liberal, Quigley made such an impact on one of his students, Bill Clinton, that Clinton credited him as a primary inspiration for going into politics when he accepted the democratic nomination for president in 1992, stating: “…as a student at Georgetown I heard that call clarified by a professor named Carroll Quigley…” Furthermore, Quigley was known to be close with many financial elites of his day and wrote “Tragedy and Hope” based on his personal examination of their private records, as he explained in the book.
Even John Maynard Keynes, the father of modern central banking, acknowledged the possibility that central bankers could use the system as a conspiracy for legalized theft and control. In his 1919 book, The Economic Consequences of the Peace, he wrote:
“…the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. …while the process impoverishes many, it actually enriches some. …Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers’… There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Notice from Keynes’ quote that when bankers enrich themselves through money supply expansion, this is not capitalism. In fact, as Keynes’ points out, it is a destroyer of capitalism.
The Great Depression
The practice which Keynes warned against was precisely what the Federal Reserve quickly implemented after its birth, thus causing the Great Depression. Austrian economists have pointed this out for years. For example, in his 1975 book, “Wall Street and FDR”, UCLA Economics Professor and Stanford Research Fellow, Antony Sutton, wrote:
“It was irresponsible manipulation of money supply by this Federal Reserve System that brought about the inflation of the 1920s, [and] the 1929 Depression…”
Similarly, his 2012 book, “The Real Crash”, economist Peter Schiff pointed out that the Federal Reserve caused the Great Depression by expanding the money supply in the decade or so leading up to it. He stated:
“From mid-1921 to mid-1929, the Fed increased the money supply by 55 percent. This extra money was in the air that filled the stock and real estate bubbles.”
(Austrian economists believe in free marking forces, minimal government intervention, no central banking, living within your means, and a stable money supply that is connected to an intrinsically valuable asset like gold and silver. By contrast, Keynesian economists believe the exact opposite – heavy government intervention, central banking, deficit spending, and an inflatable fiat money supply. Can you guess which breed is touted by our government, media, banks, and higher education bureaucrats?)
While many Keynesians bristle at the simple, correct explanation offered by Sutton and Schiff, even the face of modern Keynesianism himself, Federal Reserve Chairman Ben Bernanke, admitted as much. At a conference honoring economist Milton Friedman at the University of Chicago on November 8, 2002, although he held to the notion that a central bank is beneficial overall, Bernanke nevertheless acknowledged the Fed’s role in causing the Great Depression. He stated:
“The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman’s words, a ‘stable monetary background’ – for example as reflected in low and stable inflation. Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton…: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
Notice the ironic timing and his last statement, “we won’t do it again”. November 2002 was when the Federal Reserve was just beginning a several-year process of inflating the money supply by fixing ultra-low interest rates to “help” the economy in the wake of 9/11, which caused the Great Recession. It looks like they did it again after all.
Not only did Ben Bernanke acknowledge the Fed’s culpability for the Great Depression, but so did his predecessor, Federal Reserve Chairman Alan Greenspan. In his 1966 essay, “Gold and Economic Freedom”, he stated:
“…the Federal Reserve pumped excessive paper reserves [money] into American banks… The Fed… nearly destroyed the economies of the world… The excess credit which the Fed pumped into the economy spilled over into the stock market – triggering a fantastic speculative boom.”
It’s safe to say that these two titans of economics, Greenspan and Bernanke, are also titans of hypocrisy for implementing the same destructive practices before, during, and after the 2008 meltdown that they criticized their predecessors for using in the 1920’s. Why did they do it? Was it a forgetful, innocent mistake? Or was there some other agenda at play?
The Housing Bubble
The primary reason the housing bubble occurred was because the Federal Reserve fixed the price of borrowing (interest rates) low. Therefore, the demand for borrowing went up, as did the things that people most frequently borrow money to purchase – homes.
This artificially pushed up the price of houses to unrealistic and unsustainable levels. The bubble could not possibly have grown to the size it did if interest rates (the price of borrowing) had been allowed to move freely according to natural market forces.
It is a complete fabrication that no one saw the Great Recession or Housing Bubble coming. Austrian economists (Congressman Ron Paul and economist Peter Schiff, for example) began warning of a housing bubble as early as 2002, less than one year after the Federal Reserve fixed interest rates so low.
Many Americans never heard the simple, correct explanation the housing bubble. It was barely mentioned in the media or by either political party. Instead, all attention was focused on secondary, exacerbating factors such as the government guaranteeing home loans, which induced unscrupulous bankers to make loans to unqualified borrowers and, in some cases, place stock market bets that they would default. This precipitated a false debate about whether the problem would be best “fixed” by no longer guaranteeing home loans or by regulating the financial industry more tightly.
As the housing bubble grew, false price signals misallocated huge amounts of wealth, labor, and raw materials into the housing market that had to be redirected to other industries once the bubble popped. Making matters worse, millions of people were tricked into borrowing against their skyrocketing home values, thinking the trend would last.
Contrast this to what happened when recession hit in the seventies. Interest rates were allowed to rise naturally. At one point, they reached nearly 20%. This was exactly what needed to happen. The overall supply of savings in society was low due to excessive borrowing the years before. Savings were rare. Therefore, they commanded a high price. As people responded to this incentive and started saving again, the price moved down. Natural market forces corrected the situation beautifully.
Can you imagine being able to put money in a savings account today and earn 20% interest on it? That’s a better return than the best mutual fund you could ever find.
A Free Market?
Does America have a free market? The two most basic economic freedoms are:
1) The freedom to choose what to use for money
2) The freedom of savers and borrowers and to choose the price of borrowing money
There is nothing more foundational to a free market than these. However, in America, neither of these freedoms exists. Money definitions and interest rates are controlled by a few powerful banks, unconstitutional empowered by the federal government.
Government Guarantees
As stated, a significant secondary cause of the housing bubble was the government indirectly guaranteeing home loans through the quasi-private but government-sponsored organizations known as Fannie Mae and Freddie Mac. This induced bankers to approve home loans to millions of unqualified borrowers that were unlikely to make repayment. This behavior was not unique to the housing sector. The United States federal government routinely provides guarantees, both to banks and depositors, which encourage irresponsible behavior.
The Education Bubble
Low interest loans plus government guarantees and subsidies have also created a higher education bubble. How many how people spend nonproductive years and hundreds of thousands of dollars earning a degree of no value in the marketplace, since there are no jobs in the field they studied? Perhaps it should come as no surprise that CBS news on June 25, 2019 ran the headline, “Two Thirds of American Employees Regret Their College Degrees”.
The Dollar Bubble
The global supply of dollars is growing rapidly due to continued low interest rates and fractional reserve banking practices, which create new dollars out of thin air whenever new loans are taken out. Theoretically, this should correspond to a much faster drop in the dollar’s purchasing power.
However, demand for dollars is being propped up by its special status as the world reserve currency, which forces other nations to keep at least some dollars in reserve to trade with one another. The international banking system (called “SWIFT”) uses US dollars as the default medium of exchange for transactions having nothing to do with U.S. goods or services. Demand for the dollar is also propped up by the so-called “Petro-dollar” arrangement, whereby certain countries only accept U.S. dollars in exchange for their oil.
A number of nations have spoken out against the SWIFT and Petro-dollar systems over the decades. Some have tried to circumvent them. Interestingly, the United States military has repeatedly toppled regimes, officially for humanitarian or national security reasons, which attempted to link their oil to other currencies or circumvent the SWIFT banking system.
In spite of these unethical advantages, in less than forty years (beginning in the early 1980’s) the United States has gone from being the greatest lender nation to the greatest debtor nation in world history. It has also become history’s greatest thief. We fund our federal budgets first by selling bonds we can never realistically pay back. Then we simultaneously steal purchasing power from foreigners and our own citizens by printing new money. Habakkuk 2:6-8 certainly seems to apply to America’s situation:
“Woe to him who increases what is not his — for how long — and makes himself rich with loans? Will not your creditors rise up suddenly, and those who collect from you awaken? Indeed, you will become plunder for them. Because you have looted many nations, all the remainder of the peoples will loot you.”