Posted on 11/29/2005 1:19:18 PM PST by hubbubhubbub
"All the perplexities, confusion and distresses in America arise not from defects in the Constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation." [1]
Abstract
Ignorantia juris non excusat (ignorance of the law does not excuse) is a well established principle dating back thousands of years. Roman and English law, precursors of the American system of jurisprudence, both recognized the maxim.
Be it not forgotten – justice excuses not the law. The laws of the land are to be made in pursuance of the Constitution. The Constitution has precedent. Any law not in pursuance of the Constitution is null and void, as if it never occurred. So the court has ruled.
"And there is virgin Justice, the daughter of Zeus, who is honored and reverenced among the gods who dwell on Olympus, and whenever anyone hurts her with lying slander, she sits beside her father, Zeus the son of Cronos, and tells him of men's wicked heart, until the people pay for the mad folly of their princes who, evilly minded, pervert judgement and give sentence crookedly." [2]
No man is above the law – not even the King. No law is above the Constitution – not even the King’s. All men are created equal. All men are judged accordingly. He without sin cast the first stone.
The ignorance of coin, credit, and circulation is unfortunately, a widespread occurrence – causing perplexities, confusion, and distress, all tearing at the social fabric of our nation. But who is guilty of these defects – who has caused them to be?
Is it the fault of the common man that he cannot understand the complexities of a monetary system that moved Lord Keynes to say that not one man in a million understands money?
No, the common man is not at fault, the blame lies elsewhere: it rests with those who have purposefully made the monetary policy so bizarre that even its keepers have a hard time understanding the delusion they have created.
John Kenneth Galbraith clearly understood the illusionary nature of the elite’s monetary economists when he stated that they:
“use complexity to disguise or to evade the truth, rather than to reveal it.” [3]
Fractional Reserves
The most dishonest monetary illusion is the shadow cast by fractional reserve lending.
"Because of 'fractional' reserve system, banks, as a whole, can expand our money supply several times, by making loans and investments." [4]
Let’s take a closer look at the sword of State the magi use to create their tricks of prestidigitation – the scepter of fractional reserves.
What is meant by fractional reserves? It would seem that reserves are reduced to a fraction, but a fraction of what? Perhaps we should seek the wise counsel of the Federal Reserve, as this is their raison d’etre.
Required Reserve Balances
“Required reserve balances are balances that a depository institution must hold with the Federal Reserve to satisfy its reserve requirement. Reserve requirements are imposed on all depository institutions – which include commercial banks, savings banks, savings and loan associations, and credit unions – as well as U.S. branches and agencies of foreign banks and other domestic banking entities that engage in international transactions.
Since the early 1990s, reserve requirements have been applied only to transaction deposits, which include demand deposits and interest-bearing accounts that offer unlimited checking privileges. An institution’s reserve requirement is a fraction of such deposits; the fraction – the required reserve ratio – is set by the Board of Governors within limits prescribed in the Federal Reserve Act.” [5]
According to the above, the Board of Governors set required reserve balances within limits as prescribed by the Federal Reserve Act that depository institutions must hold on account.
The required reserve ratio is clearly stated to be a fraction of demand deposits and interest-bearing accounts that offer unlimited checking privileges.
Notice the wording “since the early 1990s, reserve requirements have been applied only to transaction deposits”, as such language demonstrates that previous to the early 1990’s reserve requirements were applied to a larger composite – according to the usage of the word “only.”
Which in fact is true, as reserve requirements have been reduced several times since the Fed took control in 1913? A closer look at reserve requirements is in order.
Reserve Requirements
The Federal Reserve has the following to say in regards to reserve requirements:
“Reserve requirements have long been a part of our nation’s banking history. Depository institutions maintain a fraction of certain liabilities in reserve in specified assets. The Federal Reserve can adjust reserve requirements by changing required reserve ratios, the liabilities to which the ratios apply, or both.” [6]
Once again, we see the use of the word “fraction” when discussing reserve requirements, however, we now have the further clarification of reserves in “specified assets.” Obviously, these “specified assets” are critically important, as they are the reserves of our monetary system.
“A depository institution satisfies its reserve requirement by its holdings of vault cash (currency in its vault) and, if vault cash is insufficient to meet the requirement, by the balance maintained directly with a Federal Reserve Bank or indirectly with a pass-through correspondent bank (which in turn hold the balances in its account at the Federal Reserve).” [7]
Now we see that depository institutions satisfy their reserve requirements by holding cash (currency) in their vaults, or if short, they get some help from the Fed or a correspondent bank. The next logical question is: how much cash are they required to have on reserve in their vaults.
From the same Fed publication, we find the following table:
(table didn't come across)
As can be seen from the above chart there isn’t a heck of a lot of reserves on reserve. Three of the five categories listed in the chart have zero (0) reserve requirements. One of the five categories has three (3%) percent reserves, and the remaining category has approximately ten (10%) percent reserve requirements.
So, what are the ramifications of the above listed reserve requirements? From the Fed’s publication, we find the following:
Autonomous Factors
“The supply of balances can vary substantially from day to day because of movements in other items on the Federal Reserve’s balance sheet. These so-called autonomous factors are generally outside the Federal Reserve’s direct day-to-day control.
The largest autonomous factor is Federal Reserve notes. When a depository institution needs currency, it places an order with a Federal Reserve Bank. When the Federal Reserve fills the order, it debits the account of the depository institution at the Federal Reserve, and total Federal Reserve balances decline.
The amount of currency demanded tends to grow over time, in part reflecting increases in nominal spending as the economy grows. Consequently, an increasing volume of balances would be extinguished, and the federal funds rate would rise, if the Federal Reserve did not offset the contraction in balances by purchasing securities. Indeed, the expansion of Federal Reserve notes is the primary reason that the Federal Reserve’s holdings of securities grow over time.” [8]
Federal Reserve notes are those little green pieces of paper we all carry around in our wallet or purse and refer to as cash. A dollar bill is a Federal Reserve note, as are fives, tens, twenties, fifties, and one hundred dollar bills.
From where does the Fed get the Federal Reserve Notes? Good question. Let’s try and find the answer.
Notice in the above quote the last sentence, which reads, “Indeed, the expansion of Federal Reserve notes is the primary reason that the Federal Reserve’s holdings of securities grow over time.”
With the Fed’s holding of securities entering the picture, we now have two questions to answer: Federal Reserve notes come from where; and what securities is the Fed holding due to the expansion of Federal Reserve notes?
The Treasury
The Treasury has a role to play in this monetary game of musical chairs. The Fed has this to say regarding the Treasury:
“Another important factor is the balance in the U.S. Treasury’s account at the Federal Reserve. The Treasury draws on this account to make payments by check or direct deposit for all types of federal spending. When these payments clear, the Treasury’s account is reduced and the account of the depository institution for the person or entity that receives the funds is increased. The Treasury is not a depository institution, so a payment by the Treasury to the public (for example, a Social Security payment) raises the volume of Federal Reserve balances available to depository institutions.” [9]
From this we see that the Treasury has an account at the Federal Reserve, and that the Treasury draws on the account to make payments by check and direct deposit. Where did the Treasury’s account at the Fed come from? Rather than finding answers, we are discovering more questions.
Open Market Operations
“Open market operations are the most powerful and often-used tool for controlling the funds rate. These operations, which are arranged nearly every business day, are designed to bring the supply of Federal Reserve balances in line with the demand for those balances at the FOMC’s target rate.” [10]
The more we look, the greater our task becomes. That is good, as often times its not just the answers that matter, but asking the right questions as well. We are getting warmer by the minute.
“In theory, the Federal Reserve could conduct open market operations by purchasing or selling any type of asset. In practice, however, most assets cannot be traded readily enough to accommodate open market operations. For open market operations to work effectively, the Federal Reserve must be able to buy and sell quickly, at its own convenience, in whatever volume may be needed to keep the federal funds rate at the target level. These conditions require that the instrument it buys or sells be traded in a broad, highly active market that can accommodate the transactions without distortions or disruptions to the market itself. The market for U.S. Treasury securities satisfies these conditions.” [11]
United States Treasury securities are the main market the Fed uses to conduct open market operations. As the money supply continually grows, the buying of Treasury securities by the Fed occurs more often then selling.
Summary To Date
Fractional Reserves refers to monetary reserves required to be on deposit in banks. The reserve requirements go from zero, to 3%, to 10%. Federal Reserve notes (cash) are the predominant reserve deposit. When banks need cash, they go to the Fed. The Fed holds U.S. government securities in its accounts. The U.S. Treasury has an account at the Fed. The Fed conducts open market operation of buying or selling Treasury securities. The remaining questions before us are:
Where does the Fed get the ever-increasing supply of Federal Reserve notes? Where did the Treasury account at the Fed come from? Where The Money Comes From
Trillions of dollars are said to be everywhere. I remember as a kid that a million was a big number. Today billions of dollars are tossed around from computer to computer without the blink of an eye. Trillions are now the topic de jour.
Budgets, deficits, and international money flows are all described using trillions or parts thereof. We have come a long way. The financial wizards circle high above the common man. But perhaps the way so chosen is the wrong way, for the good of all of the people – not just the elite few who control the strings of the purse, and profit thereby.
Let’s go within the Temple of the Wizards of Finance, to see what arts the conjuring is done by, to see what potions and spells are cast within fortune’s cauldron, and what strange brew precipitates there from.
The Beginning
On that fateful day when Federal Reserve Notes were first issued, it is obvious that a huge number of dollar bills had to be printed. Now, the printing press is pretty much obsolete; the only money that actually gets printed is used to replace old and worn Federal Reserve notes already in circulation. In vogue today is electronic money – fast food style.
The process actually begins with the Treasury Department printing a piece of paper called a bond, which is done electronically. Treasury bonds are debt obligations (liability) of the government to repay a loan - with interest.
The Treasury sells bonds to the public. The bonds the public does not buy, the Treasury deposits with the Federal Reserve. When the Fed accepts the bond from the Treasury, it lists the bond on its books as an asset.
The Fed assumes the government will make good on its promise to pay back the loan. This is based on the belief that the government’s power to tax the people is sufficient collateral.
Because the Fed now has an asset that it didn't have before receiving the Treasury bond, the Fed can now create a liability that is offset by its new asset.
The liability that the Fed creates is a Federal Reserve check. It gives the Treasury the check in payment for the Treasury bond.
THERE IS NO EXISTING MONEY IN THE FED'S ACCOUNT TO COVER THIS CHECK.
The Federal Reserve check is endorsed by the Treasury and is deposited in one of the government's accounts at the Federal Reserve. The government can use the deposits to write checks against, to pay for government expenses.
This is the first new money flow to enter the system. Various government contractors, vendors, etc. receive these checks as payment for services rendered, and they take the checks and deposit them in their commercial banks.
The Second Step
This is when the wizards of finance perform their greatest feats of magic. The deposits in the commercial banks take on a sort of split personality or dementia, brought on by a preponderance of delusional thinking.
On the one hand, the deposits are the bank’s liabilities, as they owe the total sums to their depositors.
However, because of FRACTIONAL RESERVE lending, the bankers get to lend out 9 times what they have on deposit.
The commercial banks get to list the deposits as RESERVES.
In other words, FRACTIONAL RESERVE lending allows the commercial banks to create 9 times more money then they have on reserve. The banks lend money they don’t have, and:
They get to charge interest on it.
As the newly issued money is put to work by borrowers, they then spend it and the receiver then deposits it in their bank account, and the bank starts the reserve lending policy all over again. This is why the
Money supply must expand by the amount of interest owed on the debt.
If it didn't, the debt would not be able to be serviced. There is no money created without creating debt, they are one and the same. Wealth is not created by creating money by fiat – only debt. As the Fed has admitted:
"Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU." [12]
Conclusion
Fractional reserve lending invokes the moral hazard of fidelity of contract. Banks have on deposit (reserve) at most 10% of the “money supply.”
This means that if more than 10% of depositors go to the bank at one time to withdraw “our” money – there isn’t any money to withdraw beyond the 10% reserves.
Which means that 90% of the money supply is non-existent, nothing more than a fleeting illusion.
The bank’s solvency stands on the faith that no more than 10% of depositors will want their money at the same time. This means that although
Banks may appear to be solvent – they are without question illiquid.
Fractional reserve lending insures and guarantees that banks cannot possibly be liquid.
Banking is the only type of business that is allowed to function this way. If any other business used a similar modus operandi it would be subject to censor, arrest, court, and possibly imprisonment. Banks cannot fulfill all of their contracts if demand occurred at the same time. Thus, the banks are illiquid.
Why the double standard? Why the dishonesty? Why are they afraid of gold and silver money as the Constitution mandates? Because it would make them tow the line or go bankrupt. Less they forget - be ever mindful - even Zeus cannot deny Destiny.
Coming Soon – Open Letter To Congress Seeking Redress For The Return To Honest Money
[1] John Adams in a letter to Thomas Jefferson [2] Hesiod, Works and Days [3] John Kenneth Galbraith Money: Whence It Came, Where It Went [4] Federal Reserve Bank, New York The Story of Banks, p.5. [5] The Federal Reserve System Purposes and Functions The Implementation of Monetary Policy [6] Same as above [7] Same [8] Same [9] Same [10] Same [11] Same [12] Federal reserve Bank of New York, I Bet You Thought, p.19
The Fed need play no role in debt formation. And generally it does not. Debt is sold in the market and the money to buy it should not come from the Fed but from private buyers. Its role in the floating of federal debt is negligible.
I am not particularly worried about the National debt. It is not described accurately in any case since there is no real balance sheet which sums assets and liabilities. All we see are accounts of the liabilities. There is no accounting for the enormous resources owned by the fedgov.
So when a billion dollar aircraft carrier is bought by the Navy our debt is presumed to rise by a billion. If such a purchase was made by a private corporation there would be a billion dollar asset which would balance that debt thus the net would remain the same.
The world wars were not the products of capitalist conspiracies. WWI resulted from the blundering diplomacy of the era particularly that of Germany and Russia. There is nothing particularly sinister about international corporations profiting from it either.
Populist, Granger and Progressive political parties had fought the Eastern bankers for decades trying to obtain a Central Bank. It was the powerful financiers who resisted it for almost 40 yrs because such an institution would reduce their power and make government control of financial markets more effective and easier.
Only after the Panic of 1907 did they become convinced that without such an institution controlling such financial collapses would be impossible without a titanic figure like J.P. Morgan. They understood that once he died (around 1914) there would be no one with the ability to marshall the bankers' forces against such panics which were not unusual and which were inevitable under the Gold standard.
It's more like $27k/person. (= $8,097,704,867,901.38 ÷ 299,400people). It's up about $296 since last year.
You like to complain about debt, and I like to brag about wealth. So while we're doing this per capita thing, our wealth is $53,220,000,000,000 ÷ 299,400 people. What do you call the current family wealth of $177,761+ wealth per person? FWIW, that's up $6,533 since last year.
I don't know about you, but I like to gain $6,533 in wealth even when I pick up $296 in extra debt. The way I figure, it leaves me $6,237 profit.
And "19731776 to today" doesn't count, because this example is far from over. One might as well say "so far so good" after leaping off of a cliff.
Explain how it first expanded in order that it could later shrink. That should provide the answer to your first question:
So I guess there is no need for the Federal Reserve to ever increase the money supply? I guess an increase in credit can do the trick?
I never expressed the idea that "there is no need for the Federal Reserve to ever increase the money supply", but then perhaps you didn't recognize it was a strawman argument you had set up.
Of course "credit can do the trick". Most "money" under the gold regime wasn't backed with specie. A run on the banking system was always a threat. Credit money was a large portion of currency and bank balances under the gold regime. It was credit money that vanished in the early '30s as the rural banks collapsed.
Ludwig von Mises' book on money is titled "The Theory of Money and Credit" rather than the "The Theory of Gold as Money", because credit money was a major factor of the monetary system when he wrote the book. Grant's book "Money of the Mind" is another excellent book on the nature of money and banking, from the gold era to the modern regime. Surely as erudite and knowledgeable fellow as yourself is familiar with all this- perhaps you could share with us some books you find helpful in understanding money.
OMG the Republic is ending? Now where is that gold dealers number?
I never denied that credit increased the money supply.
I never expressed the idea that "there is no need for the Federal Reserve to ever increase the money supply", but then perhaps you didn't recognize it was a strawman argument you had set up.
Like the strawman about me denying credit increases money supply?
Of course "credit can do the trick".
So if credit can do the trick why does the Fed still increase the money supply? How much actual money does a $12.6 trillion dollar economy need?
It already ended.
It was Darth Bernanke's fault.
Well then all thsi si just bunk????
"The matter of a uniform discount rate was discussed and settled at Jekyll Island."--Paul M. Warburg1
On the night of November 22, 1910, a group of newspaper reporters stood disconsolately in the railway station at Hoboken, New Jersey. They had just watched a delegation of the nation's leading financiers leave the station on a secret mission. It would be years before they discovered what that mission was, and even then they would not understand that the history of the United States underwent a drastic change after that night in Hoboken.
The delegation had left in a sealed railway car, with blinds drawn, for an undisclosed destination. They were led by Senator Nelson Aldrich, head of the National Monetary Commission. President Theodore Roosevelt had signed into law the bill creating the National Monetary Commission in 1908, after the tragic Panic of 1907 had resulted in a public outcry that the nation's monetary system be stabilized. Aldrich had led the members of the Commission on a two-year tour of Europe, spending some three hundred thousand dollars of public money. He had not yet made a report on the results of this trip, nor had he offered any plan for banking reform.
Accompanying Senator Aldrich at the Hoboken station were his private secretary, Shelton; A. Piatt Andrew, Assistant Secretary of the Treasury, and Special Assistant of the National Monetary Commission; Frank Vanderlip, president of the National City Bank of New York, Henry P. Davison, senior partner of J.P. Morgan Company, and generally regarded as Morgan's personal emissary; and Charles D. Norton, president of the Morgan-dominated First National Bank of New York. Joining the group just before the train left the station were Benjamin Strong, also known as a lieutenant of J.P. Morgan; and Paul Warburg, a recent immigrant from Germany who had joined the banking house of Kuhn, Loeb
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1 Prof. Nathaniel Wright Stephenson, Paul Warburg's Memorandum, Nelson Aldrich A Leader in American Politics, Scribners, N.Y. 1930
and Company 1, New York as a partner earning five hundred thousand dollars a year.
Six years later, a financial writer named Bertie Charles Forbes (who later founded the Forbes Magazine; the present editor, Malcom Forbes, is his son), wrote:
"Picture a party of the nation's greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily hieing hundred of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned lest the servants learn
the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was
written . . . . The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New
York's ubiquitous reporters had been foiled . . . Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real
birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry . . . . Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality."2
The official biography of Senator Nelson Aldrich states:
"In the autumn of 1910, six men went out to shoot ducks, Aldrich, his secretary Shelton, Andrews, Davison, Vanderlip and Warburg. Reporters were waiting at the Brunswick (Georgia) station. Mr. Davison went out and talked to them. The reporters dispersed and the secret of the strange journey was not divulged. Mr. Aldrich asked him how he had managed it and he did not volunteer the information."3
Davison had an excellent reputation as the person who could conciliate warring factions, a role he had performed for J.P. Morgan during the settling of the Money Panic of 1907. Another Morgan partner, T.W. Lamont, says:
"Henry P. Davison served as arbitrator of the Jekyll Island expedition."4
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2 "CURRENT OPINION", December, 1916, p. 382.
3 Nathaniel Wright Stephenson, Nelson W. Aldrich, A Leader in American Politics, Scribners, N.Y. 1930, Chap. XXIV "Jekyll Island"
4 T.W. Lamont, Henry P. Davison, Harper, 1933
From these references, it is possible to piece together the story. Aldrich's private car, which had left Hoboken station with its shades drawn, had taken the financiers to Jekyll Island, Georgia. Some years earlier, a very exclusive group of millionaires, led by J.P. Morgan, had purchased the island as a winter retreat. They called themselves the Jekyll Island Hunt Club, and, at first, the island was used only for hunting expeditions, until the millionaires realized that its pleasant climate offered a warm retreat from the rigors of winters in New York, and began to build splendid mansions, which they called "cottages", for their families' winter vacations. The club building itself, being quite isolated, was sometimes in demand for stag parties and other pursuits unrelated to hunting. On such occasions, the club members who were not invited to these specific outings were asked not to appear there for a certain number of days. Before Nelson Aldrich's party had left New York, the club's members had been notified that the club would be occupied for the next two weeks.
The Jekyll Island Club was chosen as the place to draft the plan for control of the money and credit of the people of the United States, not only because of its isolation, but also because it was the private preserve of the people who were drafting the plan. The New York Times later noted, on May 3, 1931, in commenting on the death of George F. Baker, one of J.P. Morgan's closest associates, that "Jekyll Island Club has lost one of its most distinguished members. One-sixth of the total wealth of the world was represented by the members of the Jekyll Island Club." Membership was by inheritance only.
The Aldrich group had no interest in hunting. Jekyll Island was chosen for the site of the preparation of the central bank because it offered complete privacy, and because there was not a journalist within fifty miles. Such was the need for secrecy that the members of the party agreed, before arriving at Jekyll Island, that no last names would be used at any time during their two week stay. The group later referred to themselves as the First Name Club, as the last names of Warburg, Strong, Vanderlip and the others were prohibited during their stay. The customary attendants had been given two week vacations from the club, and new servants brought in from the mainland for this occasion who did not know the names of any of those present. Even if they had been interrogated after the Aldrich party went back to New York, they could not have given the names. This arrangement proved to be so satisfactory that the members, limited to those who had actually been present at Jekyll Island, later had a number of informal get-togethers in New York.
Why all this secrecy? Why this thousand mile trip in a closed railway car to a remote hunting club? Ostensibly, it was to carry out a program of public service, to prepare banking reform which would be a boon to the people of the United States, which had been ordered by the National
3
Monetary Commission. The participants were no strangers to public benefactions. Usually, their names were inscribed on brass plaques, or on the exteriors of buildings which they had donated. This was not the procedure which they followed at Jekyll Island. No brass plaque was ever erected to mark the selfless actions of those who met at their private hunt club in 1910 to improve the lot of every citizen of the United States.
In fact, no benefaction took place at Jekyll Island. The Aldrich group journeyed there in private to write the banking and currency legislation which the National Monetary Commission had been ordered to prepare in public. At stake was the future control of the money and credit of the United States. If any genuine monetary reform had been prepared and presented to Congress, it would have ended the power of the elitist one world money creators. Jekyll Island ensured that a central bank would be established in the United States which would give these bankers everything they had always wanted.
As the most technically proficient of those present, Paul Warburg was charged with doing most of the drafting of the plan. His work would then be discussed and gone over by the rest of the group. Senator Nelson Aldrich was there to see that the completed plan would come out in a form which he could get passed by Congress, and the other bankers were there to include whatever details would be needed to be certain that they got everything they wanted, in a finished draft composed during a onetime stay. After they returned to New York, there could be no second get together to rework their plan. They could not hope to obtain such secrecy for their work on a second journey.
The Jekyll Island group remained at the club for nine days, working furiously to complete their task. Despite the common interests of those present, the work did not proceed without friction. Senator Aldrich, always a domineering person, considered himself the chosen leader of the group, and could not help ordering everyone else about. Aldrich also felt somewhat out of place as the only member who was not a professional banker. He had had substantial banking interests throughout his career, but only as a person who profited from his ownership of bank stock. He knew little about the technical aspects of financial operations. His opposite number, Paul Warburg, believed that every question raised by the group demanded, not merely an answer, but a lecture. He rarely lost an opportunity to give the members a long discourse designed to impress them with the extent of his knowledge of banking. This was resented by the others, and often drew barbed remarks from Aldrich. The natural diplomacy of Henry P. Davison proved to be the catalyst which kept them at their work. Warburg's thick alien accent grated on them, and constantly reminded them that they had to accept his presence if a central bank plan was to be devised which would guarantee them their future profits. Warburg made little effort to smooth over their prejudices, and contested them on every possible occasion on technical banking questions, which he considered his private preserve.
"In all conspiracies there must be great secrecy."5
The "monetary reform" plan prepared at Jekyll Island was to be presented to Congress as the completed work of the National Monetary Commission. It was imperative that the real authors of the bill remain hidden. So great was popular resentment against bankers since the Panic of 1907 that no Congressman would dare to vote for a bill bearing the Wall Street taint, no matter who had contributed to his campaign expenses. The Jekyll Island plan was a central bank plan, and in this country there was a long tradition of struggle against inflicting a central bank on the American people. It had begun with Thomas Jefferson's fight against Alexander Hamilton's scheme for the First Bank of the United States, backed by James Rothschild. It had continued with President Andrew Jackson's successful war against Alexander Hamilton's scheme for the Second Bank of the United States, in which Nicholas Biddle was acting as the agent for James Rothschild of Paris. The result of that struggle was the creation of the Independent Sub-Treasury System, which supposedly had served to keep the funds of the United States out of the hands of the financiers. A study of the panics of 1873, 1893, and 1907 indicates that these panics were the result of the international bankers' operations in London. The public was demanding in 1908 that Congress enact legislation to prevent the recurrence of artificially induced money panics. Such monetary reform now seemed inevitable. It was to head off and control such reform that the National Monetary Commission had been set up with Nelson Aldrich at its head, since he was majority leader of the Senate.
The main problem, as Paul Warburg informed his colleagues, was to avoid the name "Central Bank". For that reason, he had decided upon the designation of "Federal Reserve System". This would deceive the people into thinking it was not a central bank. However, the Jekyll Island plan would be a central bank plan, fulfilling the main functions of a central bank; it would be owned by private individuals who would profit from ownership of shares. As a bank of issue, it would control the nation's money and credit.
In the chapter on Jekyll Island in his biography of Aldrich, Stephenson writes of the conference:
"How was the Reserve Bank to be controlled? It must be controlled by Congress. The government
was to be represented in the board of directors, it was to have full knowledge of all the Bank's,
affairs, but a majority
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5 Clarendon, Hist. Reb. 1647
of the directors were to be chosen, directly or indirectly, by the banks of the association."6
Thus the proposed Federal Reserve Bank was to be "controlled by Congress" and answerable to the government, but the majority of the directors were to be chosen, "directly or indirectly" by the banks of the association. In the final refinement of Warburg's plan, the Federal Reserve Board of Governors would be appointed by the President of the United States, but the real work of the Board would be controlled by a Federal Advisory Council, meeting with the Governors. The Council would be chosen by the directors of the twelve Federal Reserve Banks, and would remain unknown to the public.
The next consideration was to conceal the fact that the proposed "Federal Reserve System" would be dominated by the masters of the New York money market. The Congressmen from the South and the West could not survive if they voted for a Wall Street plan. Farmers and small businessmen in those areas had suffered most from the money panics. There had been great popular resentment against the Eastern bankers, which during the nineteenth century became a political movement known as "populism". The private papers of Nicholas Biddle, not released until more than a century after his death, show that quite early on the Eastern bankers were fully aware of the widespread public opposition to them.
Paul Warburg advanced at Jekyll Island the primary deception which would prevent the citizens from recognizing that his plan set up a central bank. This was the regional reserve system. He proposed a system of four (later twelve) branch reserve banks located in different sections of the country. Few people outside the banking world would realize that the existing concentration of the nation's money and credit structure in New York made the proposal of a regional reserve system a delusion.
Another proposal advanced by Paul Warburg at Jekyll Island was the manner of selection of administrators for the proposed regional reserve system. Senator Nelson Aldrich had insisted that the officials should be appointive, not elected, and that Congress should have no role in their selection. His Capitol Hill experience had taught him that congressional opinion would often be inimical to the Wall Street interests, as Congressmen from the West and South might wish to demonstrate to their constituents that they were protecting them against the Eastern bankers.
Warburg responded that the administrators of the proposed central banks should be subject to executive approval by the President. This patent removal of the system from Congressional control meant that the
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6 Nathaniel Wright Stephenson, Nelson W. Aldrich, A Leader in American Politics, Scribners, N.Y. 1930, Chap. XXIV "Jekyll Island" p. 379
6
Federal Reserve proposal was unconstitutional from its inception, because the Federal Reserve System was to be a bank of issue. Article 1, Sec. 8, Par. 5 of the Constitution expressly charges Congress with "the power to coin money and regulate the value thereof.". Warburg's plan would deprive Congress of its sovereignty, and the systems of checks and balances of power set up by Thomas Jefferson in the Constitution would now be destroyed. Administrators of the proposed system would control the nation's money and credit, and would themselves be approved by the executive department of the government. The judicial department (the Supreme Court, etc.) was already virtually controlled by the executive department through presidential appointment to the bench.
Paul Warburg later wrote a massive exposition of his plan, The Federal Reserve System, Its Origin and Growth7 of some 1750 pages, but the name "Jekyll Island" appears nowhere in this text. He does state (Vol. 1, p. 58):
"But then the conference closed, after a week of earnest deliberation, the rough draft of what later became the Aldrich Bill had been agreed upon, and a plan had been outlined which provided for a 'National Reserve Association,' meaning a central reserve organization with an elastic note issue based on gold and commercial paper."
On page 60, Warburg writes, "The results of the conference were entirely confidential. Even the fact there had been a meeting was not permitted to become public." He adds in a footnote, "Though eighteen [sic] years have since gone by, I do not feel free to give a description of this most interesting conference concerning which Senator Aldrich pledged all participants to secrecy."
B.C. Forbes' revelation8 of the secret expedition to Jekyll Island, had had surprisingly little impact. It did not appear in print until two years after the Federal Reserve Act had been passed by Congress, hence it was never read during the period when it could have had an effect, that
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7 Paul Warburg, The Federal Reserve System, Its Origin and Growth, Volume I, p. 58, Macmillan, New York, 1930
8 CURRENT OPINION, December, 1916, p. 382
7
is, during the Congressional debate on the bill. Forbes' story was also dismissed, by those "in the know," as preposterous, and a mere invention. Stephenson mentions this on page 484 of his book about Aldrich.9
"This curious episode of Jekyll Island has been generally regarded as a myth. B.C. Forbes got some information from one of the reporters. It told in vague outline the Jekyll Island story, but made no impression and was generally regarded as a mere yarn."
The coverup of the Jekyll Island conference proceeded along two lines, both of which were successful. The first, as Stephenson mentions, was to dismiss the entire story as a romantic concoction which never actually took place. Although there were brief references to Jekyll Island in later books concerning the Federal Reserve System, these also attracted little public attention. As we have noted, Warburg's massive and supposedly definite work on the Federal Reserve System does not mention Jekyll Island at all, although he does admit that a conference took place. In none of his voluminous speeches or writings do the words "Jekyll Island" appear, with a single notable exception. He agreed to Professor Stephenson's request that he prepare a brief statement for the Aldrich biography. This appears on page 485 as part of "The Warburg Memorandum". In this excerpt, Warburg writes, "The matter of a uniform discount rate was discussed and settled at Jekyll Island."..............http://www.cephas-library.com/nwo/federal_reserve_chapter_1.html
Excuse the funky footnotes please - you'll get the jist
What say you please????
Von Mise's book is interesting and I found a copy a few years ago in a garage sale. But it is not without its critics and not considered to be entirely valid. However one should put it in context. Central Europe was vulnerable to much political and economic chaos after the Austro-Hungarian empire was destroyed by world war I. Thus, the monetary lessons derived from the region are not truly applicable to the world during normal times.
Like Keynes' masterwork it was trying to comprehend problems specific to a particular time.
There are some interesting historical points in the post but also some glaring mistakes larded over with good old fashioned conspiracy theory. Every "fact" should be double-checked before buying this.
I earlier referenced the LATE conversion of the Eastern bankers to a Central Bank after fighting it for decades. I mentioned the role of the Panic of 1907 in changing their minds. So far so good.
It makes perfect sense to have this conference in secrecy given the nature of the media and its love of fanning hysteria. Having a pack of reporters milling around Jeckel Island would have been counterproductive.
But it was NOT created by the Rothschields.
The Second Bank of the United States was NOT created by Hamilton since he had been dead for a decade when it was chartered.
It was NOT unconstitutional as Hamilton clearly proved in his remarkable and brilliant essay on the National Bank. And as Washington agreed. That Bank had worked beyond all expectations.
Any financial or economic remarks by Jefferson show total ignorance of modern capitalist development and can be taken no more seriously than his remarks on racial differences.
Public opposition to banks and central banks is similiar to the opposition to the war in Iraq, based entirely upon ignorance and falsehoods.
Somehow the author "forgot" the Panic following Jackson's refusal to re-charter the Second Bank and the decades long depression (the worst in our history until the Great Depression) which followed it. And how were the International Bankers (read Jews) after the lapse of the 2d NB able to control the US money supply when there was NO central bank here and we were on a bimetal money system? In actuality the panics were the reason farmers and small businessmen in the 1870s and 80s) started demanding a central bank and the mining of more silver.
Congress had the power to establish the means of money creation. The Constitution does not prescribe the METHOD it would use. Did you think it meant the Congressmen would run a printing press in the basement of the Capitol?
There was a long history of opposition to banks in this country but mainly by cranks, crackpots and political opportunists who easily bamboozled the ignorant. Class envy and warfare were the reasons behind this opposition.
Most hilarious of all is the contention that Jefferson set up checks and balances in the Constitution. IN FACT, Jefferson had NOTHING to do with the Constitution's creation since he was chasing women around Paris during the Constitutional Convention and did not return to the US until after it was ratified and Washington was elected. Now that was a real howler and an indication that you had better examine EVERYTHING this author says about ANYTHING.
I guess we'll just mark you down as grudgingly admitting you are wrong and I'm right, since you cannot answer it.
(Again for the lurkers who are following this.)
Then SURELY you can point to ONE example in all of recorded history, where the vast issue of unbacked fiat money has not eventually led to tears, ruin and usually revolution? Just one?
The United States of America. Now what do I win? I hope it's some gold!!!
'Credit' money has a technical meaning when used in discussing a gold regime. I had assumed you knew that. Specie is the gold, 'money' the metal backed currency, and 'credit money' or 'bank money' the unbacked portion of the money supply. 'U.S. Notes', the greenback issue, were an example of credit money. Bank book entries were credit money, unless they were covered by the bank's reserves. In the gold era specie was only the monetary base, high powered money, it wasn't the sum of all money in circulation. In some cases Treasury bonds played a similar role to gold. In today's unbacked regime all money issued by the Fed is credit money, in the jargon of monetary theory.
So, your question "So if credit can do the trick why does the Fed still increase the money supply? " is a bit confused, and perhaps you have conflated credit as we commonly use the term with its technical sense.
In point of fact the Fed doesn't increase the money supply in the current regime, it simply alters the mix of currency vs bonds. Treasury bonds are the largest factor of the money supply, usually overlooked by the public but always included in the money supply figures. Congress sets the limit on the money supply when it authorizes the amount of Treasury debt.
Von Mises was writing from the "Austrian School" viewpoint, and it's interesting to contrast it with Milton Friedman and the "Monetarist School". The Austrians blame the business cycle on credit expansions, and the monetarists think credit expansion is just fine within limits. At least some of them do, I'm not sure I can always figure out what any economist means.
When I read Mises "Theory" it seemed to me that the book had been written in two sections, a few years apart. One about 1919, if I recall, and the other after the German inflation had built up a head of steam. It seemed to me he was more ardent about keeping a lid on the money supply as the book progressed. But I'm not going to go back and take a look, I'll leave that for someone more adventurous. I prefer Ray Bradbury these days over obscure banking texts.
Yes that is an accurate description of the book. It also verifies my belief that it was written during a particularly chaotic time when Von Mises world was falling apart or had fallen apart. I believe his brother had been killed performing some heroic act in the Austrian army.
Has anyone introduced the question of F.D.I.C. insurance, which covers, or is supposed to cover, losses/shortages in any bank that's a part of the Federal Reserve system? That's another financial fiction.
Keynes' "masterwork"????
Isn't he the SOB the UK got rid of and then saw their economy recover years ahead of ours, while he was given policy voice by FDR's "Braintrust" that only exacerbated the Great Depression?
Hasn't Keynes' BS been thoroughly repudiated already?
Haven't we learned that Govts screw up economies more than they've ever helped? Isn't the very cost of Govt and it's interventions of short sighted politically expedience with no thought to long term unintended consequences the reason we have a Ponzi scheme Socialist Security system that has acted like a Dem re-election slush fund since it's inception? And clearly the worst deal there ever was for most Americans with a ROR just short of negative?
The Theory of Money, Interest and Employment is Keynes most famous and praised work. Britain never "got rid of" him and he played a major role as an advisor until his death. Britain's economy went into depression years prior to ours and never recovered until the war expenditures began.
What passes for Keynesianism is not really what he prescribed. He believed in increasing gov expenditures during recession and reducing them during expansion. The latter part of this prescription is ignored.
I have no particular affinity to Keynes but do believe that unless one actually has read what he wrote it is not appropriate to just base your criticism on what you THINK he said.
And "NO" responsible governments do not screw up economics more than they help. Often governmental action is necessary even to have a capitalist economy. Capitalists have always depended upon government to protect them and expedite their activity. Without the Rule of Law there is no capitalism.
And the reason we have SS is because the capitalist economy collapsed leaving millions destitute something that could not be ignored or waved away with reassurances that everything would work out ok. In fact, Keynes wrote his book trying to explain what was happening and why the Classical Theory was not working out the way it was supposed to and bringing recovery. Some of his analysis was completely correct. One example is that the automatic adjustment of wages and prices assumed by the Classical Theory was prevented from working because the agreements with Unions would not allow wages to fall and making those adjustments even for non-Unionists was almost impossible.
He had many insights of equal validity. Just because one disagrees with Keynes does not mean he was not brilliant. He was the most influential economist in the world for thirty years hence should be understood by any presuming to speak about economics.
That was great...good post
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