Originally drafted at a secret meeting of banking elites at Morgan's hunting lodge on Jekyll Island, Georgia in November, 1910, the Glass-Owen Bill, as it was finally called, overwhelmingly passed the House and Senate on December 22, 1913 and was signed into law by Wilson the following day. [Griffin, p. 468]
The Fed began operations in November, 1914, with Morgan men occupying key positions. The new law gave the bankers what they wanted: a monopoly of the note issue. Commercial banks could only issue demand deposits redeemable in Fed notes or nominally in gold. National banks were compelled to join the System but had the legal option of becoming state banks, which were not required to join though many state banks chose to do so in 1917 when federal regulations were relaxed. [Rothbard. p. 112]
Critically, gold coin and bullion were moved further away from the public when member banks shipped their gold to the Fed in exchange for reserves. [Rothbard, p. 119]
The inflationary potential of the system is revealed by its structure: The Fed inflated by pyramiding on its gold, member banks by pyramiding on its reserves at the Fed, and nonmembers by pyramiding on its deposits at member banks. Furthermore, after a few years the Fed began withdrawing fully-backed U.S. Treasury gold certificates from circulation and substituting Federal Reserve Notes instead. With Fed notes requiring only 40 percent backing of gold certificates, more gold was available on which to pyramid reserves.
Also, with the advent of the Fed, reserve requirements for demand deposits were cut approximately in half, moving from a 21.1 percent average under the National Banking System to 11.6 percent, then lower still to 9.8 percent in June, 1917, after the U.S. had joined the war. Reserve requirements for time deposits dropped from the same 21.1 percent average to 5 percent, then 3 percent in 1917. Commercial banks developed a policy of shifting borrowers into time deposits to inflate even further. [Rothbard, pp. 238-239]
Thus, the country now had a government-privileged central bank called the Federal Reserve. By hoarding gold as its pyramidal base, the Fed was weaning the public from the use of gold coins, which would make them easier to confiscate later on. Through the Fed, member banks would be inflating at a uniform rate to avoid trouble with redemption demands.
Did this new system bring the big bankers in line, as it was supposed to? Did the Federal Reserve Act provide "a circulating medium absolutely safe," as the Report of the Comptroller of the Currency of 1914 stated?
Did the people running the banking cartel, almost all of whom were Morgan men, create a better world for most Americans?
Drawing on data from the National Bureau of Economic Research, [Ron] Paul shows that at least 18 "mathematically impossible" recessions have occurred since the Fed's creation.
The "Great" War
The ones who profited from World War I had little in common with the men who fought it. The fighting was left mostly to young conscripts, many millions of whom were killed or wounded. The ones who profited knew their way around Washington.
If monetary control had resided with the market instead of government, the war would not have been fought. Or if it had started, it would've ended much sooner. Sound money had to die before men could die in such large numbers.
When war got underway in August, 1914 the European belligerents immediately stopped redeeming their currencies in gold and started issuing debt. Needing a lucrative market for their bonds, England and France selected the House of Morgan in the U.S. to act as their sales agent. The money acquired from bond sales reverted back to Morgan to purchase war materials, rewarding him with commissions on both the sales and the acquisitions. Furthermore, many of the companies with which Morgan did business were part of the vast Morgan domain. The pacifist Morgan, who said, "Nobody could hate war more than I do," was raking in huge profits keeping the Allied war machines cranking out death and destruction overseas.
As G. Edward Griffin writes, referencing Ron Chernow's work on the House of Morgan,
Morgan offices at 23 Wall Street were mobbed by brokers and manufacturers seeking to cut a deal. The bank had to post guards at every door and at the partners' homes as well. Each month, Morgan presided over purchases which were equal to the gross national product of the entire world just one generation before. [Griffin, p. 236]
"The United States became the arsenal of the Entente [Ralph Raico writes]. Bound now by financial as well as sentimental ties to England, much of American big business worked in one way or another for the Allied cause. . . The Wall Street Journal and other organs of the business elite were noisily pro-British at every turn . . . ."
For Wall Street, peace was not an option. With the possibility of Allied bonds going into default, investors would incur a loss amounting to $1.5 billion. Commissions would be lost as well as the profits from selling war materials. The Treasury could make direct grants to the Allies but only if the U.S. abandoned its "neutrality" and entered the war. [Griffin, p. 239] Following Wilson's address to Congress, it did so officially on April 6, 1917.
The Morgan cash flow was thus saved. The U.S. extended the Allies credits – which reverted back to Morgan to pay off loans – income taxes surged, especially on the wealthy, and the Fed inflated. Between 1915 and 1920 the money supply and prices roughly doubled. Federal deficits were running a billion dollars a month by 1918, exceeding the annual federal budget before the war. . . .
Trusting government instead of the market
On March 12, 1933 President Roosevelt delivered his first fireside chat and told the American people the new dollar, which they could no longer redeem for gold coin, was money they could trust. "This currency is not fiat currency," he insisted. "It is issued only on adequate security – and every good bank has an abundance of such security."
He told his audience their confidence in the "readjustment of our financial system" was the most important element in its success – even, he said, "more important than gold." "Have faith," he pleaded. Do "not be stampeded by rumors or guesses."
On April 5, 1933 he issued Executive Order 6102, in which he told Americans that a month hence they would be prosecuted as felons if they still had gold coins in their possession. . . .
Alan Greenspan noted that in the two decades following the abandonment of the gold standard in 1933,
the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent overissuance of money. [Dec. 19, 2002]In other words, with the dollar no longer defined as a weight of gold or other metal, the Fed's "monetary policy" depreciated its purchasing power by 91 percent in 60 years, from 1933-1993.
As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess.Central bankers merely "witnessed" the "half-century of chronic inflation" that followed their "monetary policy."
Sixty years ago Garet Garrett wrote:
There is a long history of monetary experience. It tells us that government is at heart a counterfeiter and therefore cannot be trusted to control money, and that this is true of both autocratic and popular government. The record has been cumulative since the invention of money. Nevertheless it is not believed. [my emphasis]It's as if "monetary delusions are, by some strange law of folly, recurring and incurable," he says. When sound money was in use its supply was limited - by nature and economic law, not by government planners. For that reason the state abolished it and stuck us with a money they can create at will. The state's money removes the idea of limited means, and since it's controlled by the state, it removes the idea of limiting the state. Given the federal influence on education, media, and just about everything, should we be surprised no one is on center stage calling the government a counterfeiter?
If there is to be a ruling elite, let them rise to their positions naturally, as entrepreneurs on a free market. Only in such an environment will those on top be on permanent probation, as it were, forever subject to the market's approval, because the customers who put them there always have the option of removing them when they fail to deliver.
The preceding, including links, is extracted from my new Kindle book, The Jolly Roger Dollar: An introduction to monetary piracy. Download a free sample.