100 Years Ago: Why Bankers Created the Fed

The Mises Daily ^ | 12/23/2013 | Christopher Westley

[BfloGuy]

It is little wonder that early Democrats garnered such popular support and would demand Andrew Jackson end America’s experiment with central banking. Jackson called it “dangerous to the liberty of the American people because it represented a fantastic centralization of economic and political power under private control.”

It’s hard to believe that guy who said that is now on the $20 bill.

Jackson also warned that the Bank of the United States was “a vast electioneering engine” that could “control the Government and change its character.” These sentiments were echoed by Roger Taney, Jackson’s Treasury Secretary, who talked of the Bank's “corrupting influence” and ability to “influence elections.” (The Whigs would later get revenge on this future chief justice when Abraham Lincoln, in response to a written opinion with which he disagreed, issued his arrest warrant.)

But the courtship between the political classes and their cronies would continue in the decades following Lincoln’s assassination. Those politically well-connected groups that benefited from early central banking continued to benefit from government finance, especially off of “internal improvements,” which is the nineteenth-century term for pork. National banking would appear during the War Between the States, setting in place a banking system in which individual banks would be chartered by the federal government. The government itself would use regulations backed by a new armed U.S. Treasury police force to encourage the banks’ inflation and protect them from the market penalties that inflation would otherwise bring them, such as the loss of specie and the occurrence of bank runs.

The boom and bust cycle, explained by the Austrian School in such detail, became worse and worse in the period leading up to 1913. And with the rise of Progressive Era spending on war and welfare, and with the pressure on banks to inflate to finance this activity, the boom and bust cycles worsened even more. If there was one saving grace about this period it would be that banks were forced to internalize their losses. When banks faced runs on their currencies, private financiers would bail them out. But this arrangement didn’t last, so when the losses grew, those financiers would secretly organize to reintroduce central banking to America, thus engineering an urgent need for a new “lender of last resort.” The result was the Federal Reserve.

This was the implicit socialization of the banking industry in the United States. People called the Federal Reserve Act the Currency Bill, because it was to create a bureaucracy that would assume the currency-creating duties of member banks.

It was like the Patriot Act, in that both were centralizing bills that were written years in advance by people who were waiting for the appropriate political environment in which to introduce them. It was like our current health care bills, in which cartelized firms in private industry wrote chunks of the legislation behind closed doors long before they were introduced in Congress.

It was unnecessary. If banks were simply held to similar standards as other more efficient industries were held to — the rule of law at the very least — then far fewer fraudulent banks would ever come about. There were market institutions that would penalize those banks that over-issued currencies, brought about bank runs, and financial crises. As Mises would later write:

What is needed to prevent further credit expansion is to place the banking business under the general rules of commercial and civil laws compelling each individual and firm to fulfill all obligations in full compliance with the terms of contract.

The bill was passed fairly easily, in part because the Democrats had a larger majority in both Houses than they do today. There were significant differences that were resolved in conference, with one compromise resulting in the requirement that only 40 percent of the gold reserve back the new currency. So instead of a 1-to-1 relationship between gold and currency issued — a ratio that defined sound market banking since the time of Renaissance Italy — the new Federal Reserve notes would be inflated, by law, at a ratio of 1-to-2.5.

The bill that was first drawn up at Jekyll Island was signed by Woodrow Wilson in the Oval Office shortly after the Senate approved it. At one point during the signing ceremony, as he reached for a gold pen to finish signing the bill, he jokingly declared “I’m drawing on the gold reserve.”

Truer words were never spoken.

Central banks always result in feeding those forces that centralize and expand the nation-state. The Fed’s policies in the 1920s, so well documented by Rothbard, would provoke the Great Depression, which, in the end, wrenched political power from cities and state governments to the swampland in Washington. Today people take seriously the claim that there can be a viable federal solution to every problem thanks to the money printed up by the Fed, while each decade has seen a larger proportion of the population become dependent on its inflation.

And yet Andrew Jackson’s beliefs about the perniciousness of the Second Bank of the United States are just as applicable to the Federal Reserve today.

Here’s to hoping we’ll see Jackson’s hawkish nose and unkempt hair on a gold-backed, privately issued currency in the not–too-distant future.

[PieterCasparzen]

Interesting assessment. Out of curiosity co you have any links to read?

Many leading universities we see today were founded or significantly endowed by nwo with the result being nwo supervision of their boards, policies, research directions, etc. This is how global warming, etc., are pumped today. Professors get nowhere in their career unless they conform. The edicts to conform to come from the foundations. It's called influence at the highest level.

Univ of Chicago is a Rockefeller institution; London School of Economics is nwo, as are others in Europe. Founders / funders can easily be researched, but one has to understand the implications of person x doing the funding. You'll see historical accounts use lame excuses like "he was worried about his legacy", which is bs that can be detected by looking at the patterns of the person's whole life.

The gold concept is so simple people don't understand it; it's common sense and arithmetic. International trading / banking has always dealt in gold, it's a rare commodity, government can't snap it's fingers and magically make gold and they can't get it for free.

Rio Tinto easy to look up, as is Hoover. Check out Hoover's "Commission for the Relief of Belgium" which was used to supply Germany to prolong the war until the US could enter. Can read up on German and Belgian famines during the war - simple arithmetic that Germany could not have stayed in the war without help. Soldiers need to eat in order to fight. The trench "stalemate" kept things from ending too soon due to fighting. Hoover supervised the writing of the final report, so he could easily keep the real operation secret by either simple ommission or relabeling - and no one would ever know. Just because there is a final report which balances - does not necessarily mean that the report accurately reflects what happened. Whole railcars could easily have been diverted - and simply excluded from the moment the goods left the ships, kind of a 2 for your, 1 for me type of accounting at the offloading. Historical accounts were all written by academics - they all make him sound like a saint. The CRB wound up spending about a BILLION dollars according to the final report. That's 1914-1920 dollars.

I will provide a sample link that I found quite easily, to give you and idea of documents of higher quality, IMHO.

Note especially Document 581 at this link showing original correspondence of the above topic of our illustrious Mr. Hoover and his WWI activities:

http://net.lib.byu.edu/~rdh7/wwi/comment/CRB/CRB2-15b.htm

Hoover's a) direction to hide from the public the vast resources of the financiers that actually obviated the need for any public contributions and b) his appeal for raw materials for clothing as opposed to used or even new clothing. After only a year the Belgian children have no clothes ? And the Belgians under occupation will use these raw materials to manufacture clothing for the children ? Because they "want something to do" ? Forgive me, but I think I need to go knit myself a pair of hip waders, it's getting pretty deep here.

Obviously, trench warfare is hardest on an army's boots, and what was desperately needed on the German front lines was boots, and children's and women's boots simply would not do.

New world order thinks the sheeple are idiots - that they can tell moronicly stupid lies to them and trick them. NWO associates this type of lying with their own personal ability and audacity to promulgate such lies, and - in their mind - such ability and audacity are what implicitly give them the right to rule everyone else by those and any other means they see fit. Since they are willing to play God, in their minds they have the right to, and they actually do replace God in their minds, that is, from the sheeples' perspective. Quite simply, from NWO's perspective, if you're dumb enough to let them rule you, then you deserve to be ruled by them.

After WWI, Hoover was sent on a mission to collect documents from all over Europe to "preserve" them; they were sent to Hoover's "Hoover Library" at Stanford, which, of course, became the Hoover Institution, which houses all sorts of damning records, thus controlling access to them.

[PieterCasparzen]

As to poor bankers, what happened to them in the 1930's? Why did they go bust?

New world order (the big) bankers did very well. The Depression enabled the New Deal to pass, which generated enormous government spending.

International banking (new world order) is the lender to governments. Therefore, they love government spending. Government spending is one of the keys to controlling politicians. It requires the politician to obey the financier.

[PieterCasparzen]

If I own a business with $X million worth of assets, then there's not likely to be eroded by inflation over time. If anything, inflation works in my favor if the business finances its capital expenditures with long-term debt by effectively reducing the debt burden over time.

Don't forget, businesses, to varying degrees, can increase their prices in times of financial depressions.

Basic food, transportation, etc.; those things that people buy that are the last things they can do without.

If you own the local auto repair shop or butcher shop in the middle of a depression, you will relatively do well compared to your neighbors who work for factories that can do cost cutting by laying off employees, suspending raises, etc. Instead, as an employer yourself - you can do the same thing: lay off an employee so you can pay yourself. And you'll be able to increase your prices to the extent that your customers can afford to pay. Owning a business operation is to own an actual, real investment.

Another investment would be to own a bond that pays interest. But if the interest rate is 4% and the inflation rate is 6% you're obviously losing value while the situation persists. In the above business example, however, there is a possibility of increasing profitability to generate a 6% or more return on your equity investment in the business. Of course, the more businesses you own, the more diversified your portfolio, the better.

[Alberta's Child]

Back in the 50’s and 60’s a man could support a family with his salary/salt money but today it takes 2 working parents to support a family because of inflation. The middle class in America is vanishing because of this.

It's not inflation that is causing this. It's the often-unrealistic expectations that come with a rising standard of living.

If you need any evidence of that, just go back to the 1950s and 1960s and see what constituted a middle-class standard of living back then. You don't think a family could survive on one income today if they had the same standard of living that Americans had 50-60 years ago?

[Alberta's Child]

That’s not a good example, because in the case of taxation related to the value of the property the taxation is commensurate with the expenditures of the taxing authority — which will rise with inflation just as the value of the property rises with inflation.

[dfwgator]

Exactly. At most families had one car. The only entertainment “gadget” was a radio, as Televisions were just beginning to enter into the picture. Food was generally made from scratch, so food costs were a fraction of what people pay today for food.

[plainshame]

LOL!

[BfloGuy]

The Creature from Jekyl Island

When I first became interested in economics, I realized I didn't understand what the Fed was or did at all. I stumbled across "The Creature" by happenstance and I learned a lot more about the Fed than I expected to. Good read.

[editor-surveyor]

I disagree.

The entire scam of ad valorem taxation is unconstitutional, and conceived to confiscate property.

Services should be funded by a capitation, which is the only means provided in the constitution.

[Alberta's Child]

Right you are. And imagine how affordable health care would be if the most complicated medical procedure was an X-ray ... if cancer was always a death sentence ... and if people usually didn’t survive a heart attack or stroke.

[plainshame]

It seems like you want to argue with an inflation calculator which is insane.The numbers don’t lie.

[BfloGuy]

But a national bank is a fact of life because every nation needs access to quick money in case of emergency, especially war. And loans are better than taxes.

Central banks are certainly not necessary and loans are only preferable to the politicians because raising taxes would expose the true cost of war much as Obamacare premiums are exposing the true costs of socialism.

I agree with the article. The creation of a central bank is the height of cronyism.

[Alberta's Child]

All good points there. I don’t know if an ad valorem tax is unconstitutional if it is assessed at the local or state level, but I agree that this is not a good way to raise tax revenue. I’ve long said that the ideal method of property taxation would be based on physical characteristics of the property, not the value. In the case of residential real estate, the taxes should be assessed based on the size of the lot, the number of bedrooms in the house, the size of the structure, etc. These are the things that are usually the best indicators of the property owner’s impacts on public services.

[BfloGuy]

The only way out of the grip of financial elites is for government to produce it’s own money, with no requirement for going to them to borrow or buy precious metals.

You are just substituting one set of elites for another. Government has no business creating our money. That is socialism. The NWO starts with government's controlling the money supply.

And your comment about the Austrians calling for a New World Order is beyond silly.

The Austrians defend personal autonomy and liberty and have the philosophy to back it up.

[Alberta's Child]

I'm not saying inflation doesn't exist. I'm saying it doesn't have nearly the impact that you think it does.

A car is a perfect example. If you took the price of a new car today and compared it to the price of a new car in 1965, there's no question that the 2013 vehicle is much more expensive. My point is that this isn't really driven by inflation. The 2013 car is a much better car than the 1965 car -- and by such a wide margin that it is even ridiculous to compare the two. Even NASA spacecraft in 1965 didn't have the kind of technology that a typical mid-sized car on the road today has in it.

[editor-surveyor]

Local governments are bound by the constitution’s prohibition against deprivation of property. A crime must first be proven.

[BfloGuy]

The Federal Reserve is the only part of government that is actually doing what it's supposed to be doing.

The problem is that it should not have that mission at all. Government cannot successfully plan an economy of 300 people let alone 300 million. And the theory that debasing the currency can lead to prosperity is asinine on its face.

That it is the dominant school of thought is disturbing.

[BfloGuy]

Why do you post this KKK idiocy on FR?

Where does the KKK figure in that statement and if it's untrue, what is the real story? Not challenging you; just interested.

[iowamark]

If you don’t know, the nonsense about Lincoln trying to arrest Roger Taney, of “Dred Scott” fame, is part of KKK historiography.

[PieterCasparzen]

The only way out of the grip of financial elites is for government to produce it’s own money, with no requirement for going to them to borrow or buy precious metals.

You are just substituting one set of elites for another. Government has no business creating our money.

If people in the private sector are allowed to create money, they have no need to earn money.

That is socialism.

Government having and exercising the authority to create it's money is not a tenent of socialism; most nations have created their own money or have given private sector entities a monopoly on creating money. The US Consititution authorizes the US government to create its own money. Socialism, on the other hand, has to do with centralized planning of resource and production allocation, and actually is much more aligned with eventually (theoretically) not needing money at all.

The NWO starts with government's controlling the money supply.

It certainly is a key pillar of NWO strategy. Which is why a government needs to be "of, by and for the people", i.e., the citizens of a nation need to "take back" their government, that is, if a government is unduly influenced to serve the desires of a corrupt subset of the citizenry or foreign interests. If a government is not controlled by such interests, but truly is made up of citizen leaders are are truly carrying out the tasks they are responsible for in the best interest of the nation, then such a government will not a) create too much or too little money nor will it b) take upon itself to produce products or services, as they should be created by private individuals and businesses and then marketed and sold by them; it also c) will not therefore need to tax much, if at all, as it only would need to tax in situations where the common good required government expenditure on something, such as preparation for war, and this happened to be necessary at a time when the economy was perhaps growing at such a brisk pace that government money creation to pay for the war preparation would actually exacerbate the problem of overheating the economy (near zero unemployment, difficult to find new employees, requirement to import workers, goods, etc.); in such a case taxation might provide both the funds needed for war preparation and simultaneously help to slow down the overheated economy.

And your comment about the Austrians calling for a New World Order is beyond silly.

The Austrians defend personal autonomy and liberty and have the philosophy to back it up.

Defending personal autonomy, etc., yes, the Austrian school folks tend to support drug legalization, abandoning Christian morality, etc., which is a key part of NWO agenda. NWO has been in the drug and crime business for centuries.

The resumes and relationships of the leadership of the Austrian school places them thoroughly intertwined in the midst of NWO persons, institutions, businesses, etc. Mont Pelerin Society, etc., the whole thing was set up as the "conservative" side of NWO's economic "teams", but of course they've drifted now towards libertarian. Conservatives are beginning to catch on to what their establishment "conservative" circles have actually - in truth - always been, but it's difficult to abandon "heroes" that we have our heart strings tied to. What's becoming very eye-popping to long-time conservative rank-and-file, IMHO, are the ties that one can find between conservative politicians and some very powerful businesses - and some astonishing intelligence and criminal operations.