The Beginning & The End of the Federal Reserve
“I place economy among the first and most important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt.”
-Thomas Jefferson
One of the worst institutions to ever be concocted by the US Federal Government is the Federal Reserve System, which became the United States’ central bank in 1913. The idea for the central banking system in the US came about in a meeting in Jekyll Island, Georgia in the autumn of 1910. The idea was to change the US banking system from one of almost Lasseiz Faire to one of directly centralized statist banking. The highly influential banks in America at the time, most notably, JP Morgan and Company, were attempting to combat the highly competitive market by establishing a series of cartels that would have reign over several areas of the United States economy. JP Morgan and Co. tried to establish voluntarily monopolized industries through a series of mergers. They attempted to increase production and profits cut sales through quotas and therefore raise rates. This however was fought off by the market tensions and the competition that was applied by both internal partners and new external business. The free market had successfully destroyed these banks’ attempt at voluntary monopolization.
The only way for these banks to ensure their place in the economy and commandeer high profits would be to employ the use of government force.
“Monopoly had always been defined, in the popular parlance and among economists, as “grants of exclusive privilege” by the government. It was now simply redefined as “big business or business competitive practices, such as price-cutting, so that regulatory commissions, from the Interstate Commerce Commission to the Federal Trade Commission to state insurance commissions, were lobbied for and staffed by big-business men from the regulated industry, all done in the name of curbing “big business monopoly” on the free market. In that way, the regulatory commissions could subsidize, restrict, and cartelize in the name of “opposing monopoly,” as well as promoting the general welfare and national security.”[1]
In order to combat a feared monopoly from the private sector corporate giants, which had already been proven to fail, the US government set up a true monopoly through its use of coercion and under the veil of promoting economic freedom. The intellectuals behind this plan were in need of the government to break them off a bigger piece of the profit than they were getting, because the free market hadn’t allowed for their cartelization. The state was able to formulate rules and regulations that would appropriate jobs and money to certain fields. The idea was to cooperate for the mutual benefit of all. We saw previous pushes like this in American history, most notably after the advent of the civil war. The biggest extension of the government hand into the private sector during the civil war occurred in the field of economics and the banking system. Tangible assets and free market banking had been established in the 1840s and 1850s and then done away with during the Lincoln administration. Through the veil of war, Republicans were able to pass a series of anti- liberty and anti-free market initiatives. “The alliance of big business and big government with the Republican Party drove through an income tax, heavy excise taxes on such sinful products as tobacco and alcohol, high protective tariffs, and huge land grants and other subsidies to transcontinental railroads.”[2] Inflationary banks were then given precedent to trade exclusively with other banks, whereas before the free market had deemed them unfit and unbeneficial. This establishment of a Wall Street and government marriage had led to the overbearing control of the banking system and the money supply. However, as is the case in many marriages, one side became increasingly unhappy with the other.
The centralization of the banking and money supply was being limited and undermined, by the remaining fragments of competition left in the market. In addition there was no central bank to act as overseer and control inflation. This would be needed to bail out the banks if they were to see hard times. State banks, who were free of many of the legal requirements that national banks underwent, went through a period of tremendous growth in the 1880s and 1890s. They were a main source of opposition to the national banks. “The complaints of the big banks were summed up in one word: “inelasticity.” The national banking system, they charged, did not provide for the proper “elasticity” of the money supply; that is, the banks were not able to expand money and credit as much as they wished, particularly in times of recession. In short, the national banking system did not provide sufficient room for inflationary expansions of credit by the nation’s banks.”[3] The notion of big banks being efficient and able in a half private-half monopolized arena takes a humungous hit. The JP Morgan group which controlled everything from investment banking to manufacturing to railroads was the counterpart to the Rockefeller group which started with oil but eventually took over commercial real estate and banking. These two giants of the monopolized industries had a common incentive. The need for a centralized bank.
If we look forward a few years, Congress passes the Gold Standard Act of March 1900. Currency reformers rejoiced. A new standard had been set and the cries for a more elastic currency had been silenced. This was the start of the movement towards banking reform. No sooner did the act for the gold standard pass then did the cries for more reform come forth. A banking system akin to that of the “glorious” systems of Britain and France was to be sought after. A close friend to the secretary of treasury and top professor of finance at the esteemed Wharton School of business, Professor Joseph Johnson declared the US as the worst banking system in the world. He declared the US system as having far too much economic liberty and decentralization. He believed that whenever there were internal tremors in the system they would be exaggerated and lead to mass disruption.
The years that directly followed 1900 were the true beginning of the push towards a federal reserve system. In addition, these years were the origin of the gold standard which was imposed upon the world after World War II after the Bretton Woods conference. Furthermore the call for a gold standard with a central bank which would be an industrious way to install and handle international inflationary currencies. The replacement of the gold-backed currency would allow for great elasticity. In 1906 a speech was given by Jacob Schiff who was the head of the Wall Street investment bank Kuhn, Loeb and Co. in front of the NY Chamber of Commerce. He stated that an “elastic currency” for the nation was therefore imperative, and urged the New York chamber’s committee on finance to draw up a comprehensive plan for a modern banking.”[4] The commission called for the elimination of an inelastic currency and for the creation of a central bank under the complete control of the US government. The leaders of the reform argued that a central bank would generate much larger profit and keep the economy under much better control.
A recession that occurred in October of 1907 spurred a huge movement o rally around the call for a central bank. “Very quickly after the panic, banker and business opinion consolidated on behalf of a central bank, an institution that could regulate the economy and serve as a lender of last resort to bail banks out of trouble.”[5] The answer to this call became easier because of the synthesis of academic elites and the 1% in the economy. Leading businessmen, attorneys, academics, and financiers came together to promote the central bank idea. “The banking reformers moved to escalate their agitation by creating a virtual government-bank-press complex to drive through a central bank. On September 22, 1909, the Wall Street Journal took the lead in this development by beginning a notable, front-page, 14-part series on “A Central Bank of Issue.”[6] This piece was highly influential nationwide. What was unknown was that they were written by the head of the US government’s National Monetary Commission, Charles A. Conant. Conant was known in the past as a propagandist who stirred the pot and promoted the central banking system since the offset of the Wall Street/ government pseudo-marriage. His piece included the argument to make the currency more elastic. He also called to protect banking reserves by purposely manipulating both the rate of discount and the international flow of gold. He was one of the first people to coin the term “bail out” when speaking of situations with individual banks. Even in all of this Conant added a particular twist, “the importance of regulating interest rates and the flow of capital in a world marked by surplus capital.” [7] Government debt would, for Conant, “provide the important function of sopping up surplus capital; that is, providing profitable outlets for savings by financing government expenditures.”[8] This push by Conant succeeded in rallying the rest of the nation’s press and its followers behind the abominable idea of a central bank.
In November of 1910, a conference was called by Senator Aldrich with a handful of partners from New Jersey to the Jekyll Island Club in Georgia. The owner of the club was none other than JP Morgan himself. The story released to the news however, spoke of a hunting trip that a few buddies had taken to blow off some steam. The members of the trip however had other intentions. “The conferees worked for a solid week at Jekyll Island to hammer out the draft of the Federal Reserve bill. In addition to Aldrich, the conferees included Henry P. Davison, Morgan partner; Paul Warburg, whose address in the spring had greatly impressed Aldrich; Frank A. Vanderlip, vice president of the National City Bank of New York; and finally, A. Piatt Andrew, head of the NMC staff, who had recently been made assistant secretary of the Treasury by President Taft. After a week of meetings, the six men had forged a plan for a central bank, which eventually became the Aldrich Bill.”[9] The bill was then presented in January 1911. However, the problem was that democrats had swept the midterm elections. Aldrich decided after a year of exhaustion not to run for re-election the following term. A new task of converting democrats, educating the public, and using new propaganda was at hand.
The final phase of drafting the Federal Reserve System was done in January of 1911. By November of 1911 the full American Bankers Association endorsed what was Aldrich Plan. The newly formed banking community was now completely behind the push for a central bank. The Aldrich plan, much to the surprise of the drafters, died a quick death upon the proposal in January of 1912. Reformers took this as a chance to drop the Republican name Aldrich form the bill and pass the bill as a proposed Democratic idea. “Fortunately for the reformers, this process of transformation was eased greatly in early 1912, when H. Parker Willis was appointed administrative assistant to Carter Glass, the Democrat from Virginia who now headed the House Banking and Currency Committee.”[10] The movement during 1912 and 1913 are highly unimportant to the grand scheme of the formation the Federal Reserve. The only important note is that the bankers wanted to Federal Reserve board to be appointed by the bankers themselves. To the politicians, this was unfeasible. They much preferred to have Congress and the President appoint the members, counterbalanced by the bankers electing members of the regional Federal Reserve banks with an advisory board to the national Federal Reserve. There was in fact very little difference between the Aldrich and Glass bills. The goals of the monopolization reform had achieved what they set out for, the creation of a national central bank that was controlled by the coercion and force of the United States government.
Every innovative country beginning in the 20th century has had a central bank. What this means is that governments can spend vastly more on all their favorite projects. The first favorite project of all governments is making war. As Marine general Smedley Butler once wrote, “war is the health of the state.” Central banking and the vast amount of money that is made available to governments to finance and fight wars means you have none of the normal discussions that would usually take place before such conflict. In the past congress would have open examinations on the method of payment for the war. Today that is never even considered. The Federal Reserve can print the government as much money as it would like. The fact that the Federal Reserve is in cahoots with the banking system and they are the key in private sector special interests. This accompanied with the military industrial complex as warned by President Eisenhower, all benefit from the vast creation of money especially companies that get to make more war ready materials(bombs, planes, missiles). These allow the government to bomb whole cities, destroy whole countries, and dominate other governments. The central bank has allowed the United States to take warfare to a whole new level, world wars and the use of atomic weapons. Through the use of central banking, nothing is off the table.
“The Fed is designed to be isolated from political influence. It consists of 19 key individuals that are not elected but instead are appointed. This includes 12 Federal Reserve Bank presidents, which are appointed by their respective regional Bank boards to five-year terms. This also includes the Board of Governors that consists of 7 members that are appointed by the President of the United States to 14-year terms that are staggered every two years. Included within the Board of Governors are the Chairman and Vice Chairman of the Federal Reserve, both of which are also appointed by the President to 4-year terms in these leadership roles. The idea behind isolating these individuals from political influence is that they will act only with the best interests of the U.S. economy and its financial system in mind. At least that is the idea.”[11]
The Federal Reserve is set up to be efficiently free from government control. The idea is to keep politicians away from influencing decision making. However this seldom is ever the case. This is due in part that the central bank is accountable to the government. So while they are supposed to be a separate entity, they still answer to those on Capitol Hill and in the White House. Arthur Burns who was President Nixon’s chairman of the Federal Reserve ironically once said in a press conference upon his dismissal from office, “The Federal Reserve must answer to the president, otherwise we’d lose our independence.”[12] The Federal Reserve would not be able to print their own money for their own budget without the approval of the president. The average Federal Reserve governor makes $179,700. The internal board inside the Fed decides this, however the President has the final say. If they were to disregard the President’s wishes, they would all take a serious financial hit.
The Fed exists to inflate. It is in reality a giant printing press which creates new money out of thin air with nothing to back it. The more the Fed prints money the more powerful and institution it is. Combine this with the need for money to fund the warfare state the United States has become, and you see the reason why politicians, bankers, and Fed employees are against auditing the Federal Reserve. Central banks and fiat currency allow for unbridled currency printing.
If you want more peace and less destruction and government overreach in the world, the only answer is to end the Federal Reserve. Something that can restrain or render the central bank obsolete, such as going back to the gold standard, allowing competitive currencies, abolishing legal tender laws, or anything that restrains the government’s abilities to create money out of nowhere. In addition to stopping the governments overreach, you would have the ability to end the business cycle. The procession and depressions that occur are caused mainly by the Fed’s creation of new money and what it does to the interest rate. If you are concerned about economic progress, economic prosperity, and peace instead of endless war, we need to reign in or end the Federal Reserve. After the ending of the Fed the scope of war would be seen to dwindle tremendously. You would still have money hungry politicians, companies that benefit from war, agencies in charge of war, and a populace influenced by the media. However, world war and mass destruction would be much more difficult without a central bank.
To effectively end the Fed, the first thing that would have to be done is the repeal of the 1913 Federal Reserve Act. It is actually quite easy. The Board of Governors of The Fed is a government agency. If it was to be abolished, it’s rights would move to the US Treasury Dept. The Fed banks are all privately owned. The free market would then decide which banks cease to exist and which banks survive. Congress has already done something similar to this in its refusal to renew the charter of the Banks of the US in 1811 and its refusal to renew the charter of the second Bank of the US in 1836. It might seem a tall order to end the Fed especially after highlighting the powers at be and their incentive for keeping the centralized bank. “But as criticism spreads, there will be more voters who figure out what the FED is and has always been: a government-created cartel of the banks. It operates for the benefit of the largest banks.” [13]
In order for the United States to continue to function, something would have to take its place. Former Congressman Ron Paul was one to offer his recommendation which was to return to the gold standard. The amount of money the US holds, would then be solidly backed in a gold supply and dramatically decrease any individual or agencies ability to pump US Dollars into the economy. Even when the gold standard existed parallel to the Fed, President Roosevelt and President Nixon did what they could to end the gold standard. “But the central bank faces a problem. To maintain the boom, the FED must inflate. To cease inflating would allow the credit bubble to implode on a scale far more devastating than what happened in 2008. The FED has placed us all on the back of the tiger.”[14]
The best prediction that can be laid forth for policy initiative is none at all, however. What it will take for the fed to end is time. If the Federal Reserve continues along the path it is on it will have to keep its record of inflation. If it continues along this path, it will destroy its base, namely the monetary system. On the flipside, if it ceases to inflate and in turn relinquishes Treasury debt, it will create a Depression not seen since 1929. The Federal Reserve is on a crash collision course with disaster. If we don’t have an open discussion and a meaningful discourse as citizens of this country, the Fed will sink and we’ll be the captains of the ship.
REFERENCES
[1] Rothbard, N. Murray. “The Origins of the Federal Reserve.” Mises Institute. N.p., n.d. Web. 18 Mar. 2015.
[2] ibid
[3] On the national banking system background and on the increasing
unhappiness of the big banks, Murray N. Rothbard, “The Federal
Reserve as a Cartelization Device: The Early Years, 1913–1920,” in
Money in Crisis, Barry Siegel, ed. (San Francisco: Pacific Institute,
1984), pp. 89;
[4] On Schiff’s speech, Bankers Magazine 72 (January 1906): 114–15.
[5]Rothbard, N. Murray. “The Origins of the Federal Reserve.” Mises Institute. N.p., n.d. Web. 19 Mar. 2015.
[6]Rothbard, N Murray. “The Origins of the Federal Reserve.” Mises Institute. N.p., n.d. Web. 19 Mar. 2015.
[7] Wall Street Journal, 16 September 1909, p. 1. Cited in Livingston,
Origins, p. 191.
[8] Wall Street Journal, 16 September 1909, p. 1. Cited in Livingston,
Origins, p. 191.
[9]Rothbard, N. Murray. “The Origins of the Federal Reserve.” Mises Institute. N.p., n.d. Web. 19 Mar. 2015.
[10]Rothbard, N. Murray. “The Origins of the Federal Reserve.” Mises Institute. N.p., n.d. Web. 19 Mar. 2015.
[11] “Problem with the Fed.” Seekingalpha.com. N.p., n.d. Web.
[12] “Has the Fed Compromised Its Independence? (And Otherwise Messed Up?) | Naked Capitalism.” Naked Capitalism. N.p., 17 June 2008. Web. 19 Mar. 2015.
[13] North, Gary. “How To End the Federal Reserve System – GoldSeek.com.” How To End the Federal Reserve System – GoldSeek.com. N.p., n.d. Web. 19 Mar. 2015.
[14] North, Gary. “How To End the Federal Reserve System – GoldSeek.com.” How To End the Federal Reserve System – GoldSeek.com. N.p., n.d. Web. 19 Mar. 2015.