Saturday, May 11, 2013
The Regrettable History of the Federal Reserve
The Federal Reserve is the country's most powerful financial institution. Yet, most Americans have little, if any, knowledge about what the Federal Reserve System is, or what it does.
The Fed, as it is commonly referred to, was conceived in secrecy in 1910 by a group of powerful bankers. The group then used their power, wealth and influence to get the Federal Reserve System codified into law by Congress three years later.
On December 22, 1913 the Federal Reserve Act, the bill creating the Federal Reserve System, was passed by Congress. It was then signed into law by President Wilson the very next day. At that moment, a banking cartel was empowered by law and given the exclusive franchise to create our nation's money supply.
What may surprise many people is that the Federal Reserve isn't federal at all. It is not part of the federal government. Rather, it is a private corporation with stockholders. It should be of little surprise that the Fed's seat of power is New York, home of the giant Wall St. banks that have run it from the beginning.
In 1910, a group of New York bankers, along with some key Washington politicians, met in secret on Jekyll Island off the coast of Georgia to hammer out the terms for what would become America's central bank.
Senator Nelson Aldrich, the Republican whip in the Senate, was among the group. Aldrich was the father-in-law of John D. Rockefeller, Jr. and later became the grandfather of Nelson Rockefeller, our former vice-president.
Aldrich was joined by Assistant Secretary of the Treasury Abraham Andrew, who later became a Congressman.
And there were the five powerful and influential bankers in attendance.
Frank Vanderlip was there. He was the President of the National City Bank of New York, which was the largest of all the banks in America, representing the financial interests of William Rockefeller and the international investment firm of Kuhn, Loeb & Company.
Henry Davison was there, the senior partner of the J. P. Morgan Company. Charles Norton was also there; he was the President of the First National Bank of New York which was another one of the giants. Benjamin Strong was at the meeting; he was the head of J. P. Morgan's Banker's Trust Company. Three years later, Strong would become the first head of the Federal Reserve System.
Finally, there was Paul Warburg, who was probably the most important person at the meeting because of his knowledge of banking as it was practiced in Europe.
Warburg, one of the wealthiest men in the world, was born in Germany and eventually became a naturalized American citizen. He was a partner in Kuhn, Loeb & Company and was a representative of the Rothschild banking dynasty in England and France. His brother, Max Warburg, with whom he maintained a very close working relationship throughout his entire career, was the head of the Warburg banking consortium in Germany and the Netherlands.
These seven men sat around a table on Jekyll Island and created the Federal Reserve System, which has now been in existence for 100 years. Represented at the meeting were the Morgans, the Rockefellers, the Rothschilds and the Warburgs. Though they were all competitors, they formed an alliance on on Jekyll Island — a banking cartel.
To be clear, a cartel is a coalition or cooperative arrangement between parties intended to promote a mutual interest. The purpose is to reduce or eliminate competition between themselves to maintain high prices, enhance profit margins, and secure their market share.
Why did they meet in secrecy? Writing in the Saturday Evening Post on February 9, 1935, banker Frank Vanderlip gave this reasoning:
"If it were to be exposed publicly that our particular group had gotten together and written a banking bill, that bill would have no chance whatever of passage by Congress."
Apparently, the bankers knew the public would be shocked to learn that the Federal Reserve is not, in fact, federal. It is a system of 12 private banks and its name was chosen by the bankers that created it to persuade the public that it is part of the government. But it is not. In fact, the Federal Reserve has private shareholders.
The board of directors and chairman of the Federal Reserve System are appointed by the US President. So the Fed is a hybrid; it is a private corporation that has been empowered by the government to determine monetary policy. But once the president chooses the directors and the chairman, he has no further control. The Fed was designed to be autonomous. It has authority over itself. It can set interest rates and create money out of nothing, according to its own discretion.
Aside from the fact that the Federal Reserve isn't federal, it also has no reserves. The Fed simply creates money out of thin air and then loans it out at interest — at a rate dictated by the Fed. Setting interest rates and regulating the money supply are both functions of monetary policy, which is solely determined by the Fed.
The Fed routinely increases the money supply in an effort to spur a low, stable rate of inflation. As a general rule, the Fed seeks an inflation rate of 2 percent annually. However, at that rate, the dollar would lose 20 percent of its value in the span of a decade.
The Fed claims that inflation spurs economic growth and prosperity. However, inflation devalues the purchasing power of money, which hurts everyone. Inflation is detrimental to savers, to people who work for a living, and to those on fixed incomes, such a seniors.
Since money continually loses value, inflation compels people to spend money rather than save it. The Fed would argue that this stimulates the economy. At times when the rate of inflation is higher than interest rates (such as now), people and corporations are encouraged to take on more debt and spend money before its purchasing power erodes further. But this just encourages debt bubbles, malinvestment and imprudent spending.
Then, when the economy subsequently crashes, the Fed prints even more money as a means of solving the problem it created in the first place by printing too much money.
Even when a corporation has enough of its own capital to pay for a new project, instead of borrowing from a bank, the Fed's extraordinarily low interest rates can compel the corporation to borrow. Cheap money can be very enticing. Banks don't like private capital formation; they want to lend money. It's their business after all.
When it comes to lending, there's no better customer than the government itself.
That's the reason a group of ultra-powerful bankers persuaded Congress to codify their scheme into law; they were able to form a banking cartel that is empowered by the government. US law protects the banking cartel and Congress uses it for its own interests; namely, to fund deficit spending.
As history repeatedly shows, one sure-fire way to promote deficit spending is through warfare. Central banking got its start in Europe, where powerful bankers first persuaded the continent's kings to grant them legal sanction for their activities. The European central banks quickly became the primary funders for the continent's frequent and widespread wars.
Warfare provides a need for immense borrowing and therefore provides banking corporations with huge profits in the form of interest income. It's said that bankers are on both sides of every war. That way, they never lose.
The government primarily raises money for its budget through taxes. But year after year, decade after decade, Congress spends more than it receives. So, it turns to the bond market to raise the difference and meet its desired spending level.
Individuals, financial institutions and foreign governments lend money to the US government by purchasing Treasury bonds, notes and bills. But when there aren't enough buyers, the Federal Reserve simply creates money out of thin air so that it can buy government debt. This is called "monetizing the debt."
Through this means, the government can access any amount of money without having to justify raising taxes, the sort of thing that rarely wins elections.
The Fed also buys government bonds from the banks with its freshly created money. The banks then loan this conjured money to businesses and individuals and collect interest on it. It's a pretty sweet deal.
The problem is that all of this freshly created money flowing into the economy dilutes and devalues all of the existing money in our wallets, purses and bank accounts. This is the process of inflation, which is reflected as rising prices. But prices aren't really rising; the value of our money is falling.
When money is simply created out of thin air, it leads to continually diminished purchasing power for everyone. Prices keep going up because the value of money keeps going down. The Fed has created trillions of dollars in just the last few years.
Here's some food for thought: a dollar in 1913 buys about nine cents worth of goods today. That's what the Fed has done to our money.
The ones who gain from this process are the banks that collect interest on the Fed's funny money. The Big Banks are also in a position to gain because they have full purchasing power the instant this fresh money is created. As soon as they spend it, or loan it to businesses and individuals — in other words, as soon as this money enters the economy — it becomes diluted.
Inflation can be thought of as a tax. Little by little, you surrender your money. And since there are no write-offs, exemptions or deductions, inflation falls most heavily on the poor, those on fixed incomes and retirees.
When trillions of dollars are being created by the Fed (as is the case today), all that money must be channeled into the economy. To create demand for all this new money, the Fed lowers interest rates, encouraging businesses and individuals to borrow. All new money is loaned into existence. That's how the Big Banks are in a position to gain; they collect interest on money created out of nothing.
In an inflationary environment, everyone is encouraged to borrow and spend as quickly as possible before money loses more buying power. Borrowers can then pay off their loans with depreciated money, which seems like a winning proposition. But the underlying reality is that their money has been steadily, continually losing value. There's no good way to spin that.
All of this monetary manipulation, or stimulation, leads to a business cycle in which booms are inevitably followed by busts. In those downturns, servicing all the debt undertaken during the booms becomes difficult to impossible. The housing bust is a perfect example of this.
During these busts, or crashes, people end up losing assets to the banks that lent them money created out of nothing in the first place. It's an incredible racket.
At this point, you may be asking, Don't banks make loans with deposited money? Yes, but there isn't nearly enough savings in the US to support our borrowing. For decades, we've borrowed more than we've saved. But the Fed doesn't worry about that anyway. When Fed officials make up their minds to create more money and inject it into the economy, the amount of existing savings hardly enters their calculations.
The group of bankers that created the Fed — along with their political backers who enabled them — used economic stability as their reasoning for creating the Federal Reserve System.
The reality is that, far from creating economic stability, the Fed has a long history of creating instability. The Fed is the reason for our boom and bust cycles, our economic expansions and contractions, our continual recessions. Nor has the Fed prevented bank failures, which was one of the reasons given for its creation. The FDIC closed 465 failed banks from 2008 to 2012 alone.
Since its inception in 1913, the Federal Reserve System has presided over the crashes of 1921 and 1929, the Great Depression of 1929-1939 and recessions in 1945, 1949, 1953, 1958, 1960-'61, 1969-'70, 1973-'75, 1980, 1981-'82, 1990-'91, 2001 and 2007-'09. That's a total of 12 recessions from 1945 to 2009.
The country still hasn't fully recovered from the Great Recession, which ended, officially at least, in June 2009.
During these crashes, the banks invariably get into trouble when borrowers are unable to service their loans. In these instances, the Big Banks turn to the government for a bailout. The small, local and regional banks are allowed to go belly up, or are bought out by their competitors. But the Big Banks are deemed "too big to fail" and are bailed out at taxpayer expense.
The thinking is that these Big Banks are systemically linked and therefore critical to the nation's economy. We're told that chaos would ensue of the natural process of capitalism (survival of the fittest) were to play itself out. So, instead we have a socialized system in which the taxpayers are forced to pick up the tab for the Big Banks' egregious behavior. We've witnessed this on a grand scale since the Wall St. crash in 2008.
Profits are privatized; losses are socialized.
The Fed's policies aren't just bad for America; they're detrimental to the world. Since the dollar is the world's reserve currency (meaning that it is used to settle trade accounts around the globe), trillions of dollars are held overseas by foreigners and their governments. The Fed also trades currencies with other nations, sending even more dollars overseas.
So, when the Fed inflates our currency and devalues the dollar, people around the world — even in the poorest of nations — suffer for it. But since so many of the dollars already in existence are overseas, this saves Americans from the worst effects of inflation. All of the US currency outside the country doesn't dilute the money supply as much as it would if all our money stayed here at home.
If, or when, that money starts returning to the US in large sums — buying American real estate, products and/or services — the inflationary effects will be enormous.
Ultimately, there is nothing good that comes of the Federal Reserve and its actions. There is no labor involved in the creation of money. It's as easy a few simple keystrokes on a Federal Reserve computer. The Big Banks are getting this fresh money at virtually zero interest and then loaning it to the public. They are profiting from invented, or conjured, money.
The Big Banks use their gains, in turn, to acquire power, politicians, media outlets and the like. In essence, they are buying influence — if not outright control — of our country.
Our nation derives no value from the Fed. To the contrary, it is undermining this country in a myriad of ways.