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The period between the Civil War and the enactment of the federal Reserve System was one of great economic volatility and no small measure of chaos.
The National Banking Acts of 1863-65 established a system of federally chartered banks which were given significant privilege and power over the monetary system. They were granted a monopoly in the issuance of bank notes, and the government agreed to accept those notes for the payment of taxes and duties. They were allowed to back this money up to ninety per cent with government bonds instead of gold.
And they were guaranteed that every bank in the system would have to accept the notes of every other bank at face value, regardless of how shaky their position.
The net effect was that the banking system of the United States after the Civil War, far from being free and unregulated as some historians have claimed, was literally a halfway house to central banking.
Personal checks gradually had become accepted in commerce just as readily as bank notes, and the banks obliged their customers by entering into their passbooks just ms many little numbers as they cared to "borrow."
As Groseclose observed:
The prevailing philosophy of that time was aptly expressed by Jay Cooke, the famous financier who had marketed the huge Civil War loans of the federal government and who now was raising $100 million for the Northern Pacific Railroad.
Cooke had published a pamphlet which was aptly summarized by its own title: How Our National Debt May Be a National Blessing - The Debt is Public Wealth, Political Union, Protection of Industry, Secure Basis for National Currency.
As it turned out, however, the chilling and curdling came, not from the musty hard-coin theories of the past, but from the glittering easy-money theories of the present.
The Northern Pacific went bankrupt and, as the mountain of imaginary money invested in it collapsed back into nothing, Cooke's giant investment firm disappeared along with it, triggering the panic of 1873 as it went.
Matthew Josephson writes:
The largest and most pious bank in the Western world had fallen with the effect of a thunderclap. Soon allied brokers and national banks and 5,000 commercial houses followed it into the abyss of bankruptcy.
All day long, in
Wall Street, one suspension after another was announced; railroads failed;
leading stocks lost 30 to 40 points, or half their value, within the hour;
immeasurable waves of fear altered the movement of greed; the exchanges were
closed; the stampede, the "greatest" crisis in American history, was on.
AND STILL MORE BOOMS AND BUSTS
Each of them was characterized by inadequate bank reserves and the suspension of specie payment.
Congress reacted, not by requiring an increase in reserves which would have improved the safety margin, but by allowing a decrease. In June of 1874, legislation was passed which permitted the banks to back their notes entirely with government bonds.
That, of course, meant more fiat money for Congress, but it also meant that bank notes no longer had any specie backing at all, not even ten per cent. This released over $20 million from bank reserves which then could be used as the basis for pyramiding even more checkbook money into the economy.
This thinned out the reserves held in the cities, and the whole system became more vulnerable. Actually that part of the legend is true, but apparently no one is expected to ask questions about the rest of the story.
Several of them come to mind.
The myth falls apart under the weight of these questions.
The bottom line was that, in spite of an elaborate scheme to pool the [minuscule reserves of country banks into larger regional banks where they could be rushed from town to town like a keg of coins on the old frontier, it still didn't work.
The loaves and
fishes stubbornly refused to multiply.
MORGAN PROSPERS WHEN OTHERS FAIL
But there was one large vessel that, somehow, bobbed up and down with the surges quite well and could be seen throughout the storm salvaging the abandoned cargoes of those that were in distress. This vessel brought back to port untold riches that once had been the property of others but now belonged to the master of the salvage ship in accordance with rules of the high sea.
The captain's name was J.P. Morgan.
The Morgan firm also was the official U.S. trade agent for Britain. In violation of international treaty, it handled the purchase and shipping to England of all war material, including the enormous cargo of munitions aboard the Lusitania when she went down.
He routinely was rejected by the large investment houses of London but, eventually, his persistence paid off.
Stanley Jackson, in his biography of Morgan, says of Peabody:
He also continued backing American securities with his personal funds. Buying at almost giveaway levels, he later reaped a rich harvest. He unloaded most of the Chesapeake and Ohio Canal bonds and won acclaim back home for returning his $60,000 commission intact to Maryland's meager treasury.
JUNIUS MORGAN SELECTED BY PEABODY
This began In extended period of business and social contact that eventually ended in 1854 when Junius moved his family to London and became a full partner in the firm which, eventually became known as Peabody, Morgan & Company.
In 1864, Peabody finally retired and completely turned
the business over to Junius who immediately changed the firm's name to J.S.
Morgan and Company.
The first move was to find employment for him in 1857 at the New York investment firm of Duncan, Sherman & Company. Seven years later, Junius acquired a competitor New York firm and set his son up as a partner in Dabney, Morgan & Company, which became the New York branch of the London firm.
In 1871, with the addition of a third partner, Anthony Drexel from Philadelphia, the firm became Drexel, Morgan & Company. In 1895, following the death of Drexel, there was a final change of name to J.P. Morgan & Company.
A branch in Paris became known as Morgan, Harjes & Company.
AMERICANIZING THE NEW YORK BRANCH
This would allow the New York branch to represent the American side with less suspicion of being essentially the same firm. By that time, his son, J.P. Morgan, Jr. - known as Jack by his friends - had already been brought into the firm as a partner, and he was to play an important role in the creation of that image.
Biographer John Forbes tells us:
Morgan was sent to London to do two specific things.
The first was to learn at first hand how the British carried on a banking business under a central banking system dominated by the Bank of England. Morgan, Sr., anticipated the establishment of the Federal Reserve System in the United States and wanted someone who would eventually have authority in the Morgan firms to know how such a system worked.
The second was quietly to look about the City and select British partners to convert the elder Morgan's privately owned J.S. Morgan & Co. into a British concern.
The Morgan firm often worked closely with the House of Rothschild on large joint ventures, but that was - and still is - common practice among large investment houses.
In light of subsequent events,
however, it is appropriate to consider the possibility that an arrangement
had been worked out in which the Peabody/Morgan firm went one step further
and, on occasion, became a secret Rothschild agent.
CONCEALED ALLIANCE WITH ROTHSCHILD?
Eustace Mullins, for example, writes:
Mullins does not give a reference for the source of this story, and one cannot help being skeptical that such details could be proved. Nevertheless, a secret arrangement of this kind is not as absurd as it may sound.
There is no question that the Rothschilds were quite capable of such a clandestine relationship and, in fact, this is exactly the kind of deception for which they had become famous. Furthermore, there was ample reason for them to do so. A strong anti-Semitic and anti-Rothschild sentiment had grown up in Europe and the United States, and the family often found it to its advantage to work through agents rather than to deal directly.
Derek Wilson tells us:
That tenuous connection was precisely the role to be played by August Belmont in the United States, and the anti-Semitism he found there was undoubtedly the reason he changed his name from Schoenberg to Belmont upon landing in New York in 1837.
Prior to that, the Rothschild agent had been the firm of J.L. and S.I. Joseph & Company, about as American sounding as one can get. It was not long, however, before the Belmont-Rothschild connection became common knowledge, and the ploy ceased to be effective.
After an extended visit, he wrote home:
Some historians have expressed amazement over the fact that |he recommendation was never acted upon.
Wilson says:
Those with a more skeptical bent are tempted to wonder if the opportunity really mm lost or if it was merely taken in a more indirect fashion.
It is Significant that, precisely at this time, George Peabody was making a name for himself in London and had established a close relationship with Nathan Rothschild. Is it possible that the Peabody firm was given the nod from the Rothschild consortium to represent them in America?
And is it possible that the plan included allowing Belmont to operate as a known Rothschild agent while using Peabody & Company as an unknown agent, thus, providing their own competition?
Gabriel Kolko says:
Sereno Pratt pays:
And George Wheeler writes:
1. Derek Wilson, p. 182. 5. Wheeler, pp. 17-18,42.
RISE OF THE HOUSE OF MORGAN
It is no longer surprising, for example, that Peabody & Company was the sole American investment firm to receive a gigantic loan from the Bank of England during the U.S. panic of 1857, a loan which not only saved it from sinking, but made it possible to seize and salvage many other ships that were then capsized on Wall Street.
This is how it works:
Naturally, there is a price for this guarantee.
That price is stated as a percentage of the total bill and it is either added to the amount paid by the buyer or deducted from the amount received by the seller. Actually there is a fee paid at both ends of the transaction, one to the seller's bank which receives the acceptance and pays out the money, and one to the issuing bank which assumes the liability of guaranteeing payment.
The sale is said to be "discounted" by the amount paid to the banks.
And so it was that
Peabody & Company had been active in the business of discounting
acceptances, primarily between sellers in England and buyers in the United
States.
MORGAN AND THE PANIC OF 1857
Stanley Jackson provides the details:
Jackson continues the narrative:
With an almost unlimited access to cash and credit backed by the Bank of England, Peabody and Morgan were able to wade hip deep through the depreciated stocks and bonds that were sold to (them at sacrifice prices on Wall Street.
Within only a few years, when sanity had been restored to American markets, the assets of the firm had grown to gigantic proportions.
The Rothschilds must have believed that a successful Peabody firm ultimately
would be in their own best interest.
ANTI-SEMITISM WAS PROFITABLE
That, of course, included officials of the U.S. Treasury. It was particularly helpful during the 1896 rescue of the federal government from a decline in its gold reserves. Fearing that it would not be able to honor its promise to exchange paper money for gold coins, the government was forced to borrow $62 million in gold. The House of Rothschild was an obvious source for such a loan, but the Treasury wanted to avoid an anti-Semitic backlash.
Everything fell into place, however, when Morgan and Company became the primary lender, with Rothschild apparently demoted to the role of a mere participant.
Wheeler writes:
During these developments, Pierpont Morgan took no direct part in the salvage effort.
Up to this point it looked as if the aging financier - he would be fifty-eight in two months - would be merely one among many in this and whatever subsequent bond arrangements would be necessary.
It seemed as though he would move on into old age with little more to round out his obituary than his awkward attempt to profiteer on the sale of rifles at the start of the Civil War, his minor shorting of the Union in gold trading toward the close, and a bold but largely unsuccessful move in the 1880s to impose an eastern capitalist cease-fire on the country's warring railroads.
To deal with the Morgan group, therefore, as opposed to Kuhn Loeb, for example, was in some circles almost a point of national patriotism.
It was even more unbelievable when Jack Morgan died in 1943 and left an estate valued at only $16 million.
A small amount had been transferred to members of their families prior to their deaths, but that did not account for the vast fortunes which they visibly controlled during their lives. Surely, there had been a bookkeeping sleight-of-hand. On the other hand, it may have been true. When Alphonse Rothschild died in Paris in 1905, it was revealed that his estate contained $60 million in American securities.
Regardless of one's interpretation of the nature of the relationship between the Houses of Morgan and Rothschild, the fact remains that it was close, it was ongoing, and it was profitable to both. If Morgan truly did harbor feelings of anti-Semitism, neither lie nor the Rothschilds ever allowed them to get in the way of their business.
Out the drama of creating the
Federal Reserve System, we shall pick up the storyline eleven years after
that event had already taken place.
ENGLAND FACES A DILEMMA
She had abandoned the gold standard early in the war in order to remove all limits from the creation of fiat money, and the result had been extreme inflation. But now she wanted to regain her former position of power and prestige in the world's financial markets and [decided that, to accomplish this, it would be necessary to return to the gold standard.
It was decided, further, to set the exchange value of the pound sterling (the British monetary unit) at exactly $4.86 in U.S. currency, which was approximately what it had been before the war began.
But, even that was much to be desired over no backing whatsoever for three reasons.
The decision to return to a fractional gold standard, therefore, while it left much to be desired, was still a step in the right direction.
But there were two serious problems with the plan. The first was that the exchange value of gold can never be decided by political decree. It will always be determined by the interplay of supply and demand within the marketplace. Trying to fix the number of dollars which people will be willing to exchange for a pound sterling was like trying to legislate how many baseball cards a schoolboy will give for a purple agate.
The international currency market is like a huge auction. If the auctioneer sets the opening bid too high, there will be no takers - which is exactly what happened to the pound.
Politicians were quite willing to allow prices of commodities to move downward, but they did not have the courage to take any action which would reduce either welfare benefits or wages.
To the contrary, they continued to bid for votes with promises of still more socialism and easy credit.
Prices continued to rise.
ENGLAND IN DEPRESSION
With exports in decline, the amount of money corning into the country also declined. England became a debtor nation, which means that her payments to other countries were larger than her income from those countries.
She couldn't counterfeit because payments for these imports had to be settled in gold, which meant that, as her national savings were spent, her gold supply moved out of the country. The handwriting was on the wall. If this process continued, the nation soon would be broke.
It was a situation, incidentally, which was amazingly parallel to what has plagued the United States since the end of Word War II, and for mostly the same reasons.
The result was that the price Britishers had to pay for imported goods was rooming higher while the price she received for the export of her own goods was becoming lower. The British economy was, not only badly anemic, it was experiencing a monetary hangover from the vast inflation of World War I.
In other words, it was undergoing a painful but, in the long run, healthy recovery and a return to reality.
The first was to use the Financial Committee of the League of Nations - which England dominated - to require all the other European nations to follow similar inflationary monetary policies. They were also required to establish what was called the "gold exchange standard," a scheme whereby all countries based their currency, not on gold, but on the pound sterling.
In that way, they could all inflate together without causing a disruptive flow of gold from one to the other, and England would act as the regulator and guarantor of the system. In other words, England used the power of her position within the League of Nations to establish the Bank of England as a master central bank for all the other central banks of Europe.
It was the prototype for what the Cabal now is
doing with Federal Reserve and the World Bank within the framework of the
United Nations.
PROBLEM OF AMERICAN PROSPERITY
She also had a fractional gold standard, but the stockpile of gold was very
large and still growing. As long as America continued to exist as the
producer of so many commodities that England needed for import, and as long
as the value of the dollar continued to be high, the anemia of the pound
sterling would continue.
Perform a monetary transfusion from a healthy patient to the unhealthy one. All the London financiers had to do was find a large and robust specimen who, without asking too many questions, would be willing to become the donor.
The specimen selected, of course, was Uncle Sam himself. It was the prototype of the transfer mechanism, previously described, which has been the life support keeping alwe the moribund Communist and Socialist countries since World War II.
The most direct method, of course, is to make an outright gift, such as the bizarre American ritual called foreign aid. Another is to make a gift disguised as something else, such as needlessly stationing military bases abroad for the sole purpose of bolstering the foreign economy, or granting a loan to a foreign government at below market rates or - worse - with the full expectation that the loan will never be repaid.
But the third way is the most ingenious of them all: to have one nation deliberately inflate its currency at a rate greater than the other nation so that real purchasing power, in terms of international trade, moves from the more inflating to the less inflating nation.
This is a method truly worthy of the monetary scientists. It is so subtle and so sophisticated that not one in a thousand would even think of it, much less object to it. It was, therefore, the ideal method chosen in 1925 to benefit England at the expense of America.
As Professor Rothbard observed:
At the inception of the Federal Reserve System, there had been a brief struggle for power but, within a few years, the contest was decisively won by the head of the New York Bank, Benjamin Strong.
Strong, it will be recalled, previously had been head of Morgan's Bankers Trust Company and was one of the seven participants at the secret meeting on Jekyll Island.
Professor Quigley reminds us that,
Strong was the ideal choice for the cartel.
Not the least of his qualifications was his alliance with the financial powers of London. When Montagu Norman was made the Governor of the Bank of England in 1920, there began a close personal relationship between the two central bankers which lasted until Strong's sudden death in 1928.
Quigley says:
Norman had a devoted colleague in Benjamin Strong.
In the 1920s, they were determined to use the financial power of Britain and of the United States to force all the major countries of the world to go on the gold standard [with an artificial value set for the benefit of England] and to operate it through central banks free from all political control, with all questions of international finance to be settled by agreements by such central banks without interference from governments.
Lester Chandler tells us:
The Bank of England provided Strong with an office and a private secretary during his visits, and the two men kept in close contact with each other through the weekly exchange of private cables.
All of these meetings and communiqués were kept in strict secrecy. When their frequent visits drew inquiries from the press, the standard reply was that they were just friends getting together for recreation or informal chats.
By 1926, the heads of the central banks of France and Germany were occasionally included in their meetings which, according to Norman's biographer, were
SECRET MEETING OF 1927
Galbraith sets the scene:
The principle, or in any case the ultimately important, subject of discussion was the persistently weak reserve position of the Bank of England.
This, the bankers thought, could be helped if the Federal Reserve System would ease interest rates, encourage lending. Holders of gold would then seek the higher returns from keeping their metal in London. And, in time, higher prices in the United States would ease the competitive position of British industry and labor.
That is precisely what he and Norman had planned to do all along and, in fact, he had already begun to implement the plan. The purpose of inviting the Germans and the French to the meeting was to enlist their agreement to create inflation in their countries as well.
Schacht and Rist would have no part of it and left the meeting early, leaving Strong and Norman to work out the final details between them.
1. Galbraith, pp. 174-75.
In a letter written in May of 1924 to Secretary of the Treasury Andrew Mellon, he discussed the necessity of lowering American interest rates as a step toward money expansion with the objective of raising American prices relative to those in Great Britain.
He acknowledged that the goal was to protect England from having to cut back on wages, profits, and welfare.
He said:
BRINGING DOWN THE DOLLAR
There were two great surges of monetary expansion. The first came with the monetization of $492 million in bonds plus almost twice as much in banker's acceptances. The second burst of inflation came in the latter half of 1927, immediately following the secret meeting between Strong, Norman, Schacht, and Rist.
It involved the funding of $225 million in government bonds plus $220 million in banker's acceptances, for a total increase in bank reserves of $445 million.
At the same time, the rediscount rate to member banks (the interest rate they pay to borrow from the Fed) was lowered from 4 to 3.5 per cent, making it easier for those banks to acquire additional "reserves" out of which they could create even more fiat dollars-The amount created on top of that by the commercial banks is about five and a-half times the amount created by the Fed, which means a total money flood in excess of $10 billion in just six years.
Furthermore, as inflation began to eat its way into the purchasing power of the dollar, the prices of American-made goods (began to rise in world markets making them less competitive; U.S. exports began to decline; unemployment began to rise; low interest rates and easy credit led to speculation in the securities markets; and the system lunged full speed ahead toward the Great Crash of 1929. But that part of the story must wait for another chapter.
By 1929, he had become disillusioned with the cartel and, in an article published in The North American Review, he wrote:
One of them raised the question whether the low discount rates of the System were not likely to encourage speculation.
There can be little doubt that the banker in question was J.P. (Jack) Morgan, Jr.
It was Jack who was imbued with English tradition from the earliest age, whose financial empire had its roots In London, whose family business was saved by the Bank of England, who spent six months out of every year of his later life as a resident of England, who had openly insisted that his junior partners demonstrate a "loyalty to Britain," and who had directed the Council on Foreign Relations, the American branch of a secret society dedicated to the supremacy of British tradition and political power.
It is only with that background that one can fully appreciate the willingness to sacrifice American interests.
Indeed,
In spite of the growing signs of crisis in the American economy, Morgan's protégé, Benjamin Strong, was nonetheless pleased with his accomplishment.
In a letter written in 1929 to Parker Gilbert, who was the American Agent for Reparations, he said:
THE BRITISH-AMERICAN UNION
The strategy has remained unchanged since the formation of Cecil Rhodes' society and its offspring, the Round Table Groups. It is to merge the English-speaking nations into a single political entity, while at the same time creating similar groupings for other geopolitical regions. After this is accomplished, all of these groupings are to be amalgamated into a global government, the so-called Parliament of Man.
And guess who is planning to control that government from behind the scenes.
This was the result of the creation of fiat money by a banking system which, far from being free and competitive, was a half-way house to central banking. Throughout the chaos, one banking firm, the House of Morgan, was able to prosper out of the failure of others.
Morgan had close ties with the financial structure and culture of England and was, in fact, more British than American. Events suggest the possibility that Morgan and Company was in concealed partnership with the House of Rothschild throughout most of this period.
This was accomplished by deliberately creating inflation in the U.S. which caused an outflow of gold, a loss of foreign markets, unemployment, and speculation in the stock market, all of which were factors that propelled America into the crash of 1929 and the great depression of the 30s.
Furthermore, the key players in this
action were men who were part of the network of a secret society established
by Cecil Rhodes for the expansion of the British empire.
We have travelled to many points on a large circle of time and now are re-approaching the journey to Jekyll Island where this book began.
At that point, we jumped ahead in time to examine how J.P. Morgan and other leading American financiers were closely aligned with British interests. We also saw how, in the 1920s, the American dollar was deliberately weakened by Morgan agents within the Federal Reserve System in order to prop up the sagging British economy.
Let us return now to
the point of departure and allow our cast to resume playing out that most
important prior scene: the actual creation of the Federal Reserve System
itself.
HALF-WAY HOUSE TO CENTRAL BANKING
As we have seen, however, these destructive cycles were the direct result of the creation and then extinguishing of fiat money through a system of federally chartered national banks - dominated by a handful of firms on Wall Street - which constituted a half-way house to central banking. None of these banks were truly free of state control nor were they competitive in the traditional sense of the word.
They were in fact subsidized by the government and had many monopolistic privileges. From the perspective of bankers on Wall Street, however, there was a great deal more to be desired. For one thing, America still did not have a "lender of last resort."
That is banker language for a full-blown central bank with the power to create unlimited amounts of fiat money which can be rushed to the aid of any individual bank that is under siege by its depositors wanting their money back. Having a lender of last resort is the only way a bank can create money out of nothing and still be protected from a potential "run" by its customers.
In other words, it is the means by which the public is forced to pay a hidden tax of inflation to cover the shortfall of fractional-reserve banking.
That is why the so-called virtue of a lender of last resort is taught with great reverence today in virtually all academic institutions offering degrees in banking and finance. It is one of the means by which the system perpetuates itself.
There was a growing dread that the next collapse might be more than even they could handle.
As the population expanded south and westward, much of the nation's banking moved likewise, and the new banks were becoming an increasing source of competition to the New York power center. By 1896, the number of non-national banks had grown to sixty-one per cent, and they already held fifty-four per cent of the country's total banking deposits.
By 1913, the year in which the Federal Reserve Act was passed, those numbers had swelled to seventy-one per cent non-national banks holding fifty-seven per cent of the nation's deposits. Something had to be done to stop this movement.
That would
make loans to businessmen so attractive they would have little choice but to
return to the bankers' stable.
TRUSTS AND CARTELS REPLACE COMPETITION
The concept of trusts and cartels had dawned in America laid, to those who already had made it to the top, joint ventures, market sharing, price fixing, and mergers were far more profitable than free-enterprise competition.
Ron Chernow explains:
Why didn't banks just merge instead of carrying out the charade of swapping shares and board members?
Most were private partnerships or closely held banks and could have done so. The answer harked back to traditional American antipathy against concentrated financial power. The Morgan-First National-National City trio feared public retribution if it openly declared its allegiance.
Thus was born the concept of a cartel, a "community of interest" among businessmen in the same field, a mechanism for coming together as partners at a high level and to reduce or eliminate altogether the harsh necessity of competition.
The procedure called for the passage of laws disguised as measures to protect the consumer but which actually worked to ensure the elimination of competition.
Henry P. Davison, who was a Morgan partner, put it bluntly when he told a Congressional committee in 1912:
John D. Rockefeller was even more to the point in one of his often repeated comments:
This trend was not unique to the banking industry.
Ron Paul and Lewis Lehrman provide the historical perspective:
The challenge no longer was how to overcome one's adversaries, but how to keep new ones from entering the field.
When John D. used his enormous profits from Standard Oil to take control of the Chase National Bank, and his brother, William, bought the National City Bank of New York, Wall Street had yet one more gladiator in the financial arena.
Morgan found that he had no choice except to allow the Rockefellers into the club but, now that they were in, they all agreed that the influx of competitors had to be stopped. And that was to be the hidden purpose of federal legislation and government control.
Gabriel Kolko explains:
Writing in the year 1919, from the perspective of an inside view of Wall Street at that time, John Moody completes the picture:
1. Paul and Lehrman, p. 119. [ Kolko, Triumph, pp. 143-44.
THE ALDRICH-VREELAND ACT
It became clear that two changes had to be made: all remnants of banking competition now had to be totally eliminated and replaced by a national cartel; and far greater sums of fiat money had to be made available to the banks to protect them from future runs by depositors.
There was now no question that Congress would have to be brought in as a partner in order to use the power of government to accomplish these objectives.
Kolko continues:
In 1908, Congress passed the Aldrich-Vreeland Act which, basically, accomplished two objectives. First, it authorized the national banks to issue an emergency currency, called script, to substitute for regular money when they found themselves unable to pay their depositors. Script had been used by the bank clearing houses during the panic of 1907 with partial success, but it had been a bold experiment with no legal foundation.
Now Congress made it quite legal and, as Galbraith observed,
The second and perhaps most important feature of the Act was to create a National Monetary Commission to study the problems of American banking and then make recommendations to Congress on how to stabilize the monetary system.
The commission consisted of nine senators and nine representatives. The Vice-chairman was Representative Edward Vreeland, a banker from the Buffalo area. The chairman, of course, was Senator Nelson Aldrich. From the start, it was obvious that the Commission was a sham. Aldrich conducted virtually a one-man show.
The so-called fact-finding body held no official meetings for almost two years while Aldrich toured Europe consulting with the top central bankers of ;England, France, and Germany. Three-hundred thousand tax dollars were spent on these junkets, and the only tangible product of the Commission's work was thirty-eight massive volumes of the history of European banking.
None of the members of the Commission were ever consulted regarding the official recommendations issued by Aldrich in their name. Actually, these were the work of Aldrich and six men who were not even members of the Commission, and their report was drafted, not in a bare Congressional conference room in Washington, but in a plush private hunting resort in Georgia.
THE JEKYLL ISLAND PLAN
It was decided that the first two objectives could be achieved simply by drafting the proper technical language into a cartel agreement and then re-working the vocabulary into legislative phraseology.
The third and fourth could be achieved by including in that legislation the establishment of a lender of last resort; in other words, a true central bank with the ability to create unlimited amounts of fiat money.
These were mostly technical matters and, although there was some disagreement on a few minor points, generally they were content to follow the advice of Paul Warburg, the man who had the most experience in these matters and who was regarded as the group's theoretician. The fifth objective was the critical one, and there was much discussion on how to achieve it.
A CENTRAL BANK BY ANY OTHER NAME
Even though the concept of government protectionism was rapidly gaining acceptance in business, academic, and political circles, the idea of cartels, trusts, and restraint of free competition was still quite alien to the average voter. And within the halls of Congress, any forthright proposal for either a cartel or a central bank would have been soundly defeated.
Congressman Everis Hayes of California warned:
Senator John Shafroth of Colorado declared:
The monetary scientists on Jekyll Island decided, therefore, to devise a name for their new creature which would avoid the word bank altogether and which would conjure the image of the federal government itself.
And to create the deception that there would be no concentration of power in the large New York banks, the original plan calling for a central bank was replaced by a proposal for a network of regional institutions which supposedly would share and diffuse that power.
Galbraith explains further:
Frank Vanderlip tells us the regional concept was merely window dressing and that the network was always intended to operate as one central bank.
He said:
If not using the word bank was essential to the Jekyll Island plan, avoiding
the word cartel was even more so. Yet, the cartel nature of the proposed
central bank was obvious to any astute observer. In an address before the
American Bankers Association,
He said:
Two years later, in a speech before that same group of bankers, A. Barton Hepburn of Chase National Bank was even more candid.
He said:
It would be difficult to find a better definition of the word cartel than that.
Professor Edwin Seligman, a member of the international banking family of J&W Seligman, and head of the Department of Economics at Columbia University, explains and praises the plan:
THE ALDRICH BILL
Although it was co-authored by Congressman Vreeland, it immediately became known as the Aldrich Bill. Vreeland, by his own admission, had little to do with it either, but his willingness to be a team player in the game of national deception was of great value.
Writing in the August 25, 1910, issue of The Independent, which incidentally was owned by Aldrich himself and was anything but independent, Vreeland said:
What an amazing statement. It is brilliantly insidious because of the half truths it contains. It is true that monopolies cannot - or at least do not - operate at four and one-half per cent interest.
But it is untrue that the Federal Reserve banks were to be held to that lowly rate. It is true that four per cent was the stated amount they would earn on the stock purchased in the System, but it is also true that the real profits were to be made, not from stock dividends, but from the harvesting of interest payments on fiat money.
To this was to be added the profits made possible from operating on smaller safety margins yet still being protected from bankruptcy. Furthermore, being on the inside of the nation's central bank would make them privy to the important money-making data and decisions long before their competitors.
The profits that could be derived from such an advantage would be equal to or even greater than those from the Mandrake Mechanism. It is true that the Federal Reserve was to be a private institution, but it is certainly not true that this was to mark the disappearance of the government from the banking business. In fact, it was just the opposite, because it marked the appearance of the government as a partner with private bankers and as the enforcer of their cartel agreement.
Government would now become more deeply involved than ever before in our history.
The dissimilarities were in those provisions which gave the Creature more privilege and power than the older central bank. The most important of these was the right to create the official money of the United States. For the first time in our history, the paper notes of a banking institution became legal tender, not only for public debts, but for private ones as well.
Henceforth, anyone refusing to accept these notes would be sent to prison. The words "The United States of America" were to appear on the face of every note along with the great seal of the United States Treasury. And, of course, the signature of the Treasurer himself would be printed in a conspicuous location.
All of this was designed to convince the public that the new
institution was surely an agency of the government itself.
TURNING THE OPPOSITION AGAINST ITSELF
This was the critical part of the plan and it required the utmost finesse. The task actually was made easier by the fact that there was a great deal of genuine opposition to the concentration of financial power on Wall Street. Two of the most outspoken critics at that time were Wisconsin Senator Robert LaFollette and Minnesota Congressman Charles Lindbergh.
Hardly a week passed without one of them delivering a scathing speech against what they called "the money trust" which was responsible, they said, for deliberately creating economic booms and busts in order to reap the profits of salvaging foreclosed homes, farms and businesses.
If anyone doubted that such a trust really existed, their skepticism was abruptly terminated when LaFollette publicly charged that the entire country was controlled by just fifty men. The monetary scientists were not dismayed nor did they even bother to deny it.
In fact, when George F. Baker, who was a partner of J.P. Morgan, was asked by reporters for his reaction to LaFollette's claim, he replied that it was totally absurd. He knew from personal knowledge, he said, that the number was not more than eight!
The strategy was simple:
Once the political climate was hot enough, then the Aldrich Bill could be put forward, supposedly as the answer to that need.
THE PUJO COMMITTEE
It was a subcommittee of the House Committee on Banking and Currency and it was given the awesome responsibility of conducting the famous "Money Trust" investigation of 1912.
Its chairman was Arsene Pujo of Louisiana who, true to form, was regarded by many as a spokesman for the "Oil Trust" The hearings dragged on for eight months producing volumes of dry statistics and self-serving testimony of the great Wall Street bankers themselves. At no time were the financiers asked any questions about their affairs with foreign investment houses. Nor were they asked about their response to competition from new banks.
There were no questions about their plan to protect the speculative banks from currency drains; or their motive for wanting artificially low interest rates; or their formula for passing on their losses to the taxpayer. The public was given the impression that Congress was really prying off the lid of scandal and corruption, but the reality was more like a fireside chat between old friends.
No matter what vagaries or absurdities fell from the bankers' lips, it was accepted without contest.
Kolko has touched upon an interesting point.
Almost no one put any significance to the fact that some of the biggest bankers on Wall Street were the first marchers to lead the parade for banking reform. The most conspicuous among these was Paul Warburg of Kuhn, Loeb & Company who, for seven years prior to passage of the Federal Reserve Act, travelled around the country doing nothing but giving "reform" speeches and writing scholarly articles for the media, including an eleven-part series for The New York Times.
Spokesmen from the houses of Morgan and Rockefeller joined in and made regular appearances before professional and political bodies echoing the call for reform.
Yet no one paid any attention to the unmistakable odor
of fish.
ENLISTING THE HELP OF ACADEMIA
They served the function of putting forth the basic arguments and the technical details which I were to be the starting point for the work of others who could not be accused of having self-serving motives. To carry the message to the voters, it was decided that representatives from the world of academia should be enlisted to provide the necessary aura of respectability and intellectual objectivity.
For that purpose, the banks contributed a sum of $5 million to a special "educational" fund, and much of that money found its way into the environs of three universities:
It was precisely at this time that the study of "economics" was becoming a new and acceptable field, and it was not difficult to find talented but slightly hungry professors who, in return for a grant or la prestigious appointment, were eager to expound the virtues of lie Jekyll Island plan.
Not only was such academic pursuit financially rewarding, it also provided national recognition for them as pioneers in the new field of economics.
Galbraith says:
The principal accomplishment of the bank's educational fund was to create an organization called the National Citizens' League.
Although it was entirely financed and controlled by the banks tinder the personal guidance of Paul Warburg, it presented itself merely as a group of concerned citizens seeking banking reform.
1. Galbraith, p. 121.
The function of the organization was to disseminate hundreds of thousands of "educational" pamphlets, to organize letter-writing campaigns to Congressmen, to supply quotable material to the news media, and in other ways to create the illusion of grass-roots support for the Jekyll Island plan.
The man chosen to head up that effort was an economics professor by the name of J. Laurence Laughlin.
Kolko says that,
Did his appointment bring intellectual objectivity to the new organization?
Stephenson answers:
To which Congressman Lindbergh adds this reminder:
1. Stephenson, pp. 38&-89.
It doesn't work that way. The professor undoubtedly believed in the virtue of the Jekyll Island plan, and the evidence is that he pursued his assignment with enthusiastic sincerity. But there is no doubt that he was selected for his new post precisely because he did support the concept of a partnership between banking and government as a healthy substitute for "destructive" competition.
In other words, if he didn't honestly agree with John D. that
competition was a sin, he probably never even would have been given a
professorship in the first place.
WILSON AND WALL STREET
It will be recalled from a previous chapter that Wilson's name had been put into nomination for President at the Democratic national convention largely due to the influence of Col. Edward Mandell House. But that was 1912.
Ten years prior to that, he was relatively unknown. In 1902 he had been elected as the president of Princeton University, a position he could not have held without the concurrence of the University's benefactors among Wall Street bankers. He was particularly close with Andrew Carnegie and had become a trustee of the Carnegie Foundation.
Both men had been Wilson's classmates at Princeton University. When Wilson returned to Princeton as a professor in 1890, Dodge and McCormick were, by reason of their wealth, University trustees, and they took it upon themselves to personally advance his career.
Ferdinand Lundberg, in America's Sixty Families, says this:
A grateful Wilson often had spoken in glowing terms about the rise of vast corporations and had praised J.P. Morgan as a great American leader. He also had come to acceptable conclusions about the value of a controlled economy.
H.S. Kenan tells us the rest of the story:
OPPOSITION TO THE ALDRICH BILL
Warburg, being the master psychologist he was, wanted it to be called the National Reserve Bill or the Federal Reserve Bill, something which would conjure up the dual images of government and reserves, both of which were calculated to be subconsciously appealing. Aldrich, on the other hand, acting out of personal ego, insisted that his name be attached to the bill.
Warburg pointed out that the Aldrich name was associated in the minds of the public with Wall Street interests, and that would be an unnecessary obstacle to achieving their goal. Aldrich said that, since he had been the chairman of the National Monetary Commission which was created specifically to make recommendations for banking reform, people would be confused if his name were not associated with the bill.
The debate, we are told, was long and heated. But, in the end, the politician's ego won out over the banker's logic.
On December 15, 1911, Congressman Lindbergh rose before the House of Representatives and took careful aim:
1. H.S. Kenan The Federal Reserve Bank (Los Angeles: Noontide Press, 1966),p. 105 2. Quoted by H.S. Kenan, p. 118.
It was, in fact, a half-way house to central banking. Wall Street, however, wanted more government participation. The New York bankers particularly wanted a "lender of last resort" to create unlimited amounts of fiat money for their use in the event they were exposed to bank runs or currency drains. They also wanted to force all banks to follow the same inadequate reserve policies so that more cautious ones would not draw down the reserves of the others.
An additional objective was to limit the growth of new banks in the South and West.
But to keep these cartel combines from flying apart, a means of discipline was heeded to force the participants to abide by the agreements. The federal government was brought in as a partner to serve that function.
A structure of 12 regional institutions was conceived as a further ploy to create the illusion of decentralization, but the mechanism was designed from the beginning to operate as a central bank closely modeled after the Bank of England.
The groundwork had been done, however, and the time had arrived to change labels and political parties.
The measure
would now undergo minor cosmetic surgery and reappear under the sponsorship
of a politician whose name would be associated in the public mind with
anti-Wall Street sentiments.
The election of 1912 was a textbook example of power politics and voter deception.
The Republican President, William Howard Taft, was up for reelection. Like most Republicans of that era, his political power was based upon the support of big-business and banking interests in the industrial regions.
He had been elected to his first term in the expectation that he would continue the protectionist policies of his predecessor, Teddy Roosevelt, particularly in the expansion of cartel markets for sugar, coffee, and fruit [from Latin America. Once in office, however, he grew more restrained in these measures and earned the animosity of many powerful Republicans.
The ultimate breach occurred when Taft refused to support the Aldrich Plan. He objected, not because it [would create a central bank which would impose government control over the economy, but because it would not offer enough government control. He recognized that the Jekyll Island formula Would place the bankers into the driver's seat with only nominal participation by the government.
He did not object to the ancient Partnership between monetary and political scientists, he merely wanted a greater share for the political side. The bankers were not adverse to negotiating the balance of power nor were they unwilling to make compromises, but what they really needed at this juncture was a man in the White House who, instead of being lukewarm on the plan, could be counted on to become its champion and who would use his influence as President to garner support from the fence straddlers in Congress.
From that moment forward, Taft was marked for political extinction.
Wilson had been put
forth as the Democratic challenger, but his dry personality and aloof
mannerisms had failed to arouse sufficient voter interest to make him a
serious contender.
THE BULL MOOSE CANDIDATE
When that effort failed, he was then persuaded to run against Taft as the "Bull Moose" candidate on the Progressive Party ticket. It is unclear what motivated him to accept such a proposition, but there is no doubt regarding the intent of his backers. They did not expect Roosevelt to win, but, as a former Republican President, they knew he would split the Party and, by pulling away votes from Taft, put Wilson into the White House.
The Republican Party was well financed, largely from the same individuals who now wanted to see the defeat of its own candidate. It would not be possible to cut off this funding without causing too many questions. The solution, therefore, was to provide the financial resources for all three candidates, with special attention to the needs of Wilson and Roosevelt.
Ron Chernow says:
But one does not have to be a conspiracy buff to recognize the evidence of foul play.
Ferdinand Lundberg tells us:
Morgan & Company was not the only banking firm on Wall Street to endorse a three-way election as a means of defeating Taft.
Within the firm of Kuhn, Loeb & Company, Felix
Warburg was Dutifully putting money into the Republican campaign as
expected, but his brother, Paul Warburg and Jacob
Schiff were backing Wilson, while yet another partner, Otto Kahn, supported
Roosevelt. Other prominent Republicans who contributed to the Democratic
campaign that year were Bernard Baruch, Henry Morgenthau, and Thomas Fortune
Ryan.2
In McAdoo's words,
Ferdinand Lundberg describes Dodge as,
Continuing, he says:
And so it came to pass that the monetary scientists carefully selected their candidate and set about to clear the way for his victory. The maneuver was brilliant.
Who would suspect that Wall Street would support a Democrat, especially when the Party platform contained this plank:
What irony it was.
The Party of the working man, the Party of Thomas Jefferson - formed only a few generations earlier for the specific purpose of opposing a central bank - was now cheering a new leader who was a political captive of Wall Street bankers and who had agreed to the hidden agenda of establishing the Federal Reserve System.
As George Harvey later boasted, the financiers,
William McAdoo, Wilson's national campaign vice chairman, destined to become Secretary of the Treasury, saw what was happening from a ringside seat He said:
THE MONEY TRUST THEY LOVE TO HATE
In spite of his well-publicized stance of opposing big business, his true convictions were quite acceptable to Wall Street.
As Chernow observed:
It is not surprising, therefore, as Warburg noted in January, 1912 - ten months before the election - that Teddy had been "fairly won over to a favorable consideration of the Aldrich Plan."
1.- McAdoo, pp. 165-66. K- Chernow, pp, 106-12. f. Warburg, Vol. I, p. 78.
Roosevelt bellowed that the,
And he quoted over and over again the Bull Moose (Progressive Party) platform which said:
Meanwhile, at the other end of town, Wilson declared:
Throughout the campaign, Taft was portrayed as the champion of big business and Wall Street banks - which, of course, he was.
But so were Roosevelt and Wilson, The primary difference was that Taft, judged by his actual performance in office, was known to be such, whereas his opponents could only be judged by their words.
As Colonel House confided to author George Viereck years later,
Now that the Creature had moved into the White House, passage of the Jekyll Island plan went into its final phase.
The last bastion of opposition in Congress consisted of the Populist wing of the Democratic Party under the leadership of William Jennings Bryan. The problem with this group was that they had taken their campaign platform seriously. They really were opposed to the Money Trust.
While it may have been a simple matter to pull the wool over the eyes of voters, it would not be so easy to fool this group of experienced politicians.
What was needed now was an entirely new bill that, on the surface, would appear to contain changes of sufficient magnitude to allow the Bryan wing to change its position. The essential features of the plan, however, must not be Abandoned. And, to coordinate this final strategy, the services of someone with great political skill would be essential.
Fortunately for the planners, there was exactly such a man residing at the White house. It was not the President of the United States.
It was Edward Mandell House.
THE ROLE OF COLONEL HOUSE
It will be recalled from previous chapters that, perhaps more than any other person in America, he had helped maneuver the United States into World War I on the side of a desperate Britain and, by so doing, had also rescued the massive loans to Britain and France made by the Morgan interests.
Not only had he been responsible tor Wilson's nomination at the Democratic convention, but had become the President's constant companion, his personal adviser, and in many respects his political superior. It was through House that Wilson was made aware of the wishes of the Money Trust, and It was House who guided the President in every aspect of foreign and economic policy.
An admiring biographer, Arthur Smith, writing in the year 1918, says that House,
A more recent biographer, George Viereck, was not exaggerating when he described House as,
Continuing, he said:
When the Federal Reserve legislation at last assumed definite shape, House was the intermediary between the White House and the financiers. Daily entries in the personal journal of Colonel House reveal the extent to which his office had become the command post for the Jekyll Island team.
The following sample notations are typical:
As far as the banking issue was concerned, Colonel House was the President of the United States, and all interested parties knew it.
Wilson made no pretense at knowledge of banking theory.
He said:
To which Charles Seymour adds:
DEATH OF THE ALDRICH PLAN
Professor Laughlin had come to agree with Warburg regarding the inadvisability of Slaving Aldrich's name attached to any banking bill, especially now that the Democrats were in control of both Congress and the White House, and he was anxious to give it a new identity.
Writing in the periodical Banking Reform, which was the official publication of the National Citizens' League, Laughlin said:
The League was now free, he said, to,
It did not take long for the Democrats to bring forth their own ^proposal. In fact, that process had begun even before the election of 1912.
One of the most outspoken critics of the Aldrich plan was the Democratic Chairman of the House Banking and Currency Committee, Congressman Carter Glass from Virginia. And it was Glass who was given the responsibility of developing the new plan.
By his own admission, however, he had virtually no technical knowledge of banking. To provide that expertise and to actually write the bill, he hired an economics teacher from Washington and Lee University, Henry Parker Willis. We should not be surprised to learn that Willis had been a former student and protégé of Professor Laughlin and had been retained by the National Citizens' League as a technical writer.
Explaining the significance of this relationship, Kolko says:
THE GLASS-OWEN BILL EMERGES
All of which was correct.
What the country needed, Glass said, was an entirely fresh approach, a genuine reform bill which was not written by agents of the Money Trust and which would truly meet the needs of the common man. That, too, was quite correct. Then he brought forth his own bill, drafted by Willis fend inspired by Laughlin, which in every important detail was merely the old corpse of the Aldrich Bill pulled from its casket, freshly perfumed, and dressed in a new suit.
Although there were initially some minor differences between Glass and Owen on the proper degree of government control over banking, Owen was basically of identical mind to Willis and Laughlin. While serving in the Senate, he also was the president of a bank in Oklahoma. Like Aldrich, he had made several trips to Europe to study the central banks of England and Germany, and these were the models for his legislation.
Warburg, in an attempt to quell their fears and, at the same time, strengthen his private boast that he had been the real author, published a side-by-side comparison of the Aldrich and Glass proposals. The analysis showed that, not only were the two bills in agreement on all essential provisions, but they even contained entire sections that were identical in their wording.
He wrote:
It was important for the success of the Glass Bill to create the Impression it was in response to the views of a broad cross section of the financial community- To this end.
Glass and his committee staged public hearings for the announced purpose of giving everyone a chance for input to the process. It was, of course, a sham. The first draft of the Bill had already been completed in secret several months before the hearings were held. And, as was customary in such matters, Congressman Lindbergh and other witnesses opposing the Jekyll Island plan were not allowed to speak.
1. Warburg Vol. I, p798. 1 fttf. p.412
The hearings were widely reported in the press, and the public was given the impression that the favorable testimony was truly representative of expert opinion.
Kolko summarizes:
BANKERS BECOME DIVIDED
The bankers themselves were also targeted - at least the lesser ones who were not part of the Wall Street power center. As early as February, 1911, a group of twenty-two of the country's most powerful bankers met for three days behind closed doors in Atlantic City to work out a strategy for getting the smaller banks to support the concept of using the government to authorize and maintain their own cartel.
The objective frankly discussed among those present was that the proposed cartel would bring the smaller banks under control of the larger ones, but that this fact had to be obscured when presenting it to them for endorsement.
1. Lindbergh, p. 129.
Representing a group of Western bankers, he testified at the hearings of the Glass subcommittee, mentioned previously, and described the hoax:
It is interesting that during Frame's testimony, Congressman Glass refrained from commenting on the unfairness of allowing only one side of an issue to be heard in a public forum. He could [hardly afford to. That is exactly what he was then doing with his own agenda.
No opportunity was overlooked to make a statement to the press - or anyone else of public prominence - expressing their eternal animosity to this monstrous legislation. Vanderlip warned against the evils of fiat money and rampant inflation. Aldrich charged that the Glass-Owen Bill was inimical to sound banking and good government.
Vanderlip predicted speculation and instability in the stock market.
Aldrich sourly complained that the bill was
"revolutionary in its character" (implying Bolshevistic) and "will be the
first and most important step toward changing our form of government from a democracy to an autocracy.
THE PRETENSE IS DROPPED
There were eleven hundred bankers and businessmen present, and Vanderlip was under pressure to make a good showing before this impressive group.
The debate was going badly for him and, in a moment of desperation, he finally dropped the pretense.
Twenty-two years later, when the need for pretense had long passed, Vanderlip was even more candid.
Writing in the Saturday Evening Post, he said:
In his autobiography, Treasury Secretary William McAdoo offers this view:
That is the key to this entire episode: mass psychology.
Since Aldrich was recognized as associated with the Morgan interests and Vanderlip was President of Rockefeller's National City Bank, the public was skillfully led to believe that the "Money Trust" was mortally afraid of the proposed Federal Reserve Act.
The Nation was the only prominent publication to point out that every one of the horrors described by Aldrich and Vanderlip could have been equally ascribed to the Aldrich Bill as well. But this lone voice was easily drowned by the great cacophony of deception and propaganda.
2. McAdoo, pp. 213,225-26.
The basic strategy was to focus debate on such relatively unimportant items as the number of regional banks, the structure of the governing board, and the process by which that board was to be selected. When truly crucial matters could not be avoided, the response was to agree to almost anything but to write the provisions in vague language. In that way, the back door would be left ajar for later implementation of the original intent. The goal was to get the bill passed and perfect it later.
Willis was quick to agree. In a letter to his former professor, he wrote:
Glass echoed the sentiment.
Directing his remarks at those smaller banks which were resisting domination by the New York banks, he said:
BRYAN MAKES AN ULTIMATUM
As Charles Seymour observed:
Bryan had said that he would not support any bill that resulted in private money being issued by private banks.
The money supply, he insisted, must be government issue. When he finally saw an actual draft of the bill in midsummer of 1913, he was dismayed to find that, not only was the money to be privately issued, but the entire governing body of the central bank was to be composed of private bankers. His ultimatum was not long in corning.
He hotly demanded,
Colonel House and the other monetary scientists were reasonably sure that these provisions eventually would be required for final approval of the bill but, being master strategists, they deliberately withheld them from early drafts so they could be used as bargaining points and added later as concessions in a show of compromise.
Furthermore, since practically no one
really understood the technical aspects of the measure, they knew it would
be easy to fool their opponents by creating the appearance of compromise
when, in actual operation, the originally intended features would remain.
AN AMAZING REVELATION
From this source we learn that, after Bryan had delivered his ultimatum, Glass was summoned to the White House and told by Wilson that the decision had been made to make the Federal Reserve notes obligations of the United States government.
To which the President replied:
Years later, Paul Warburg would explain further:
Warburg's explanation should be carefully analyzed. It is an incredibly important statement.
The man who masterminded the Federal Reserve System is telling us that Federal Reserve notes constitute privately issued money with the taxpayers standing by to cover the potential losses of those banks which issue it. One of the more controversial assertions of this book is that the objectives set forth at the Jekyll Island meeting included the shifting of the cartel's losses from the owners of the banks to the taxpayers.
Warburg himself has confirmed it.
In addition to the governing board of regional bankers previously proposed, there now would be a central regulatory commission, to be called the Federal Reserve Board, appointed by the President with the advice and consent of the Senate. Thus, the public was to be protected through a sharing of power, a melding of interests, a system of checks and balances.
In this way, said Wilson,
The arrangement was heralded as a bold, new experiment in representative government.
In reality, it was but the return of the ancient partnership between the monetary and political scientists. The only thing new was that power was now to be shared openly in plain view of the public. But, of course, there would not be much to see. All the deliberations and most of the decisions were to happen behind closed doors.
Furthermore, the division of power and responsibility between these groups was left deliberately vague. Without a detailed line of command or even a clear concept of function, it was inevitable that, as with the drafting of the bill itself, real power would gravitate into the hands of those with technical knowledge and Wall Street connections.
To the monetary scientists drafting the bill and engineering the compromises, the eventual concentration of effective control into their hands was never in serious doubt.
And, as we shall see in
the next chapter, subsequent events have proved the soundness of that
strategy.
BRYAN ENDORSES THE BILL
Now that he was on the team, he declared:
With the conversion of Bryan, there was no longer any doubt about the final outcome.
The Federal Reserve Act was released from the joint House and Senate conference committee on December 22, 1913, just as Congress was preoccupied with departure for the Christmas recess and in no mood for debate. It quickly passed by a vote of 282 to 60 in the House and 43 to 23 in the Senate. The President signed it into law the next day.
SUMMARY
This marked him for political extinction.
The Money Trust wanted a President who would aggressively promote the bill, and the man selected was Woodrow Wilson who had already publicly declared his allegiance. Wilson's nomination at the Democratic national convention was secured by Colonel House, a close associate of Morgan and Warburg.
To make sure that Taft did not win his bid for reelection, the Money Trust encouraged the former Republican President, Teddy Roosevelt, to run on the Progressive ticket. The result, as planned, was that Roosevelt pulled away Republican support from Taft, and Wilson won the election with less than a ^majority vote.
Wilson and Roosevelt campaigned vigorously against the evils of the Money Trust while, all along, being dependent upon that same Trust for campaign funding.
Aldrich, Vanderlip, and others identified with Wall Street put on a pretense of opposing the Glass-Owen Bill to convince Congress and the public that big bankers were fearful of it. The final bill was written with many sound features which were included to make it palatable during Congressional debate but [which were predesigned to be dropped in later years.
To win the support of the Populists under the leadership of William Jennings Bryan, the Jekyll Island team also engineered what appeared to be compromises but which in actual operation were, as Wilson called them, mere "shadows" while the "substance" remained. In short, Congress was outflanked, outfoxed, and outclassed by a deceptive, but brilliant, psycho-political attack.
The result is that, on December 23,1913,
America once again had a central bank.
The story is told of a New England farmer with a small pond in his pasture.
Each summer, a group of wild ducks would frequent that pond but, try as he would, the farmer could never catch one. No matter how early in the morning he approached, or how carefully he constructed a blind, or what kind of duck call he tried, somehow those crafty birds sensed the danger and managed to be hut of range.
Of course, when fall arrived, the ducks headed South, fend the farmer's craving for a duck dinner only intensified.
Early in the spring, he started scattering corn along the edge of the pond. The ducks liked the corn and, since it was always there, they soon gave up dipping and foraging for food of their own. After a while, they became used to the farmer and began to trust him. They could see he was their benefactor and they now walked close to him with no sense of fear. Life was so easy, they forgot how to fly. But that was unimportant, because they were now so fat they couldn't have gotten off the water even if they had tried.
Some details were omitted entirely. That was a tactical move to avoid debate over fine points and to allow flexibility for future interpretation. The goal was to get the bill passed and perfect it later. Since then, the Act has been amended 195 times, expanding the power and scope of the System to the point where, today, it would be almost unrecognizable to the Congressmen and Senators who voted for it.
To make it appear that the new System would put an end to the New York "money trust," as it was called, the public was told that the Federal Reserve would not represent any one group or one region. Instead, it would have its power diffused over twelve regional Federal Reserve Banks, and none would be able to dominate.
As Galbraith pointed out, however, the regional design was,
But that was not what the planners had in mind for the long haul.
They were outclassed by the heads of the regional branches
of the System who were bankers with bankers experience.
1. Galbraith, p. 130.
RETURN OF THE NEW YORK "MONEY TRUST"
Strong had the contacts and the experience. It will be recalled that he was one of the seven who drafted the cartel's structure at Jekyll Island. He had been head of J.P. Morgan's Bankers Trust Company and was closely associated with Edward Mandell House.
He had become a personal friend of Montagu Norman, head of the Bank of England, and of Charles Rist, head of the Bank of France. Not least of all, he was head of the New York branch of the System which represented the nation's largest banks, the "money trust" itself.
From the outset, the national board and the regional branches were dominated by the New York branch. Strong ruled as an autocrat, determining Fed policy often without even consulting with the Federal Reserve Board in Washington.
The concentration of power into the hands of the very "money trust" the Fed was supposed to defeat, is described by Ferdinand Lundberg, author of America's Sixty Families:
BAILING OUT EUROPE
Much of that money found its way to the associates of J.P. Morgan as interest payments on war bonds and as fees for supplying munitions and other war materials.
That is not surprising inasmuch as a large portion of Europe's war costs had been transferred to the American taxpayers.
Both operations were directed by Benjamin Strong and executed by the Federal Reserve. It was not hyperbole when President Herbert Hoover described Strong as "a mental annex to Europe."
In 1966 he wrote:
After his appointment to the Fed, Greenspan became silent on these issues
and did nothing to anger the Creature he now served.
1. Galbraith, p, 180.
AGENTS OF A HIGHER POWER
How is it possible for a man who enjoys the best that his nation can offer - security, wealth, prestige's - to conspire to plunder his fellow citizens in order to assist politicians of other governments to continue plundering theirs?
The first part of the answer was illustrated in earlier sections of this book. International money managers may be citizens of a particular country but, to many of them, that is a meaningless accident of birth. They consider themselves to be citizens of the world first. They speak of affection for all mankind, but their highest loyalty is to themselves and their profession.
It must be remembered that the men who pulled the financial levers on this doomsday machine, the governors of the Bank of England and the Federal Reserve, were themselves tied to strings which were pulled by others above them.
Their minds were not obsessed with concepts of nationalism or even internationalism. Their loyalties were to men.
Professor Quigley reminds us:
So, we are not dealing with the actions of men who perceive themselves as betraying their nation, but technicians who are loyal lo the monetary scientists and the political scientists who raised them up. Of the two groups, the financiers are dominant.
Politicians come and go, but those who wield the power of money remain to pick their successors.
FARMERS BECOME DUCK DINNER
Farmers had put part of that money into war bonds, but
much of it had been placed into savings accounts at banks within the farming
communities, which is to say, mostly in the Midwest and South. That was
unacceptable to the
It was,
The country banks then would find themselves holding non-performing loans and foreclosed property which they could not sell without tremendous losses. In the end, both the farmers and the banks would be wiped out. The banks were the target. Too bad about the farmers.
The details of how this panic was created were explained in 1939 by Senator Robert Owen, Chairman of the Senate Banking and Currency Committee. Owen, a banker himself, had been a coauthor of the Federal Reserve Act, a role he later regretted.
Owen said:
The contraction of credit had a disastrous effect on the nation as a whole, not just farmers.
But the farmers were more deeply Involved, because the recently created Federal Farm Loan Board had lured them with easy credit - like ducks at the pond - into extreme debt ratios.
Furthermore, the large-city banks which were members of the System were given support by the Fed during the (summer of 1920 to enable them to extend credit to manufacturers and merchants. That allowed many of them to ride out the slump. There was no such support for the farmers or the country banks which, by 1921, were falling like dominoes. History books refer to [this event as the Agricultural Depression of 1920-21.
A better name would have
been Country-Duck Dinner in New York.
BUILDING THE MANDRAKE MECHANISM
Of the three, the purchase and sale of debt-related securities in the open market is the one that provides the greatest effect on the money supply, the purchase of securities by the Fed (with checks that have no money to back them) creates money; the sale of those securities extinguishes money.
Although the Fed is authorized to buy and sell almost any kind of security that exists in the world, it is obligated to show preference for bonds and notes of the federal government, that is the way the monetary scientists discharge the commitment [to create money for their partners, the political scientists. Without that service, the partnership would dissolve, and Congress would abolish the Fed.
The reserve ratio under the old National Bank Act had been 25%. Under the Federal Reserve Act of 1913, it was reduced to 18% for the large New York banks, a drop of 28%. In 1917, just four years later, the reserve requirements for Central Reserve-City Banks were further dropped from 18% to 13% (with slightly lesser reductions for smaller banks).
That was an additional 28% cut.1
Here is how that works:
WHEN BANKS BORROW FROM THE FED
When banks go to the Fed's discount window to obtain a loan, they are expected to put up collateral. This can be almost any debt contract held by the bank, including government bonds, but it commonly consists of commercial loans. The Fed then grants credit to the bank in an amount equal to those contracts. In essence, this allows the bank to convert its old loans into new "reserves."
Every dollar of those new reserves then can be used as the basis for lending nine more dollars in checkbook money!
That process is commonly called "discounting commercial paper."
It was one of the means by which the Fed was able to flood the nation with new money prior to the Great Dam Rupture of 1929.
There is no way to force the banks to participate. Furthermore, the banks themselves are dependent upon the whims of their customers who, for reasons known only to themselves, may not want to borrow as much as the bank wants to lend. If the customers stop borrowing, then the banks have no new loans to convert into further reserves.
With the discount window, banks have to be enticed to borrow money which later must be repaid, and sometimes they are reluctant to do that. But with the open market, all the Fed has to do is write a fiat check to pay for the securities. When that check is cashed, the new money it created moves directly into the economy without any concurrence required from the recalcitrant banks.
Surprising as it may be, on the eve of the depression, America was getting out of debt. As a consequence, there were few government bonds for the Fed to buy. Without government bonds, the open-market engine was constantly running out of gas.
It was called the "acceptance window," and it was through that imagery that the System purchased a unique type of debt-related security called bankers acceptances.
They usually involve international trade where delays of three to six months are common. They are a means by which a seller in one country can ship goods to an unknown buyer in another country with confidence that he will be paid upon delivery. That is accomplished through guarantees made by the banks of both buyer and seller.
First, the buyer's bank issues a letter of credit guaranteeing payment for the goods, even if the buyer should default. When the seller's bank recewes this, one of its officers writes the word "accepted" on the contract and pays the seller the amount of the sale.
The accepting bank, therefore, advances the money to the seller in expectation of receiving future payment from the buyer's bank.
For this service, both banks charge a fee expressed as a percentage of the contract. Thus, the buyer pays a little more than the amount of the sales contract, and the seller receives a little less.
The accepting banks have a choice of holding them until maturity or selling them. If they hold them, their profit will be realized when the underlying contract is eventually paid off and it will be equal to the amount of its "discount," which is banker language for its fee. Acceptances are said to be "rediscounted" when they are sold by the original discounter, the underwriter.
The advantage of doing that is that they do not have to wait three to six months for their profit. They can acquire immediate capital which can be invested to earn interest.
The difference represents the potential profit to the buyer. It is expressed as a percentage and is called the "rate" of discount - or, in this case, rediscount. But the rate given by the seller must be lower than what he expects to earn with the money he receives, otherwise he will be better off not selling.
A market, therefore, had to be created.
The Fed accomplished this by setting the discount rate on acceptances so low that underwriters would have been foolish not to take advantage of it. At a very low discount, they could acquire short-term funds which then could be invested at a higher rate of return. Thus, acceptances quickly became plentiful on the open market in the United States.
The Fed's goal was not to make a
profit on investment. It was to increase the nation's money supply.
WARBURG AND FRIENDS MAKE A LITTLE PROFIT
He was considered by all to have been the master theoretician who led the others in their deliberations. He was one of the most influential voices in the public debates that followed. He had been appointed is one of the first members of the Federal Reserve Board and later became its Vice Governor until outbreak of war, at which time he resigned because of publicity regarding his connections with German banking.
He was a director of American LG. Chemical Corp. and Agfa Ansco, Inc., firms that were controlled by I.G. Farben, the infamous German cartel that, only a few years later, would sponsor the rise to power of Adolph Hitler.
He was also a director of the CFR (Council on Foreign Relations). It should not be surprising, therefore, to learn that he was able to position himself at the center of the huge cash flow resulting from the Fed's purchase of acceptances.
But he was not without friends who also swam in the river of money. Men who controlled America's largest financial institutions became directors or officers of the various acceptance banks.
The list of companies that became part of the interlocking directorate included,
...to name just a few.
The world of acceptance banking was the private domain of the financial elite of Wall Street.
A significant portion of that was divided between,
Just how large and free-flowing was that river of acceptance money? In 1929, it was 1.7 trillion-dollars wide.
Throughout the 1920s, it was over half of all the new money created by the Federal Reserve - greater than all the other purchases on the open market plus all the loans to all the banks standing in line at the discount window.
And that is the
topic which impelled us to look at acceptances in the first place.
CONGRESS SUSPICIOUS BUT AFRAID TO TINKER
Politicians were not getting their share. It is possible that many of them failed to realize that, as partners in the scheme, they were entitled to a share. Nevertheless, they were dazzled by banker language and accounting tricks and were afraid to tinker with the System lest they accidentally push the wrong button.
Speaking of the Federal Reserve's manipulation of the value of the dollar, he wrote:
There was not much danger of that!
By then, American politicians had acquired a taste for the heady wine of war funding and stopped asking questions. World War I had created enormous demands for money, and the Fed provided it.
By the end of the war, Congressional hostility to the Federal
Reserve became history.
PAYING FOR WORLD WAR I
The treasury launched a massive publicity campaign for "Liberty loans" to reinforce that sentiment. These small-denomination bonds did not expand the money supply and did not cause inflation, because the money came from savings. It already existed.
However, many people who thought it was their patriotic duty to support the war effort went to their banks and borrowed money so they could buy bonds. The bank created most of that money out of nothing, drawing upon credits and bookkeeping entries from the Federal Reserve, so those purchases did inflate the money supply.
The same result could have been obtained more simply and less expensively by getting the money directly from the Fed, but the government encouraged the trend anyway, because of its psychological value in generating popular support for the war. When people make sacrifices for an endeavor, it reinforces their belief that it must be worthy.
Benjamin Strong's biographer, Lester Chandler, explains:
THE EMERGENCE OF GOVERNMENT DEBT
Up until World War I, annual federal expenses had been running about $750 million. By the end of the war, it was running $18 and-a-half billion, an increase of 2,466%. Approximately 70% of the cost of war had been financed by debt.
Murray Rothbard reminds us that, on the eve of depression in 1928, ten years after the end of war, the banking system held more government bonds than during the war itself. That means the government did not pay off those bonds when they came due. Instead, it rolled them over by offering new bonds to replace the Wd.
Why? Was it because Congress needed more money? No.
The bonds had become the basis for money in circulation and, if they had been redeemed, the money supply would have decreased. An increase in the money supply is viewed by politicians and central bankers as a threat to economic stability. Thus, the government [found itself unable to get out of debt even when it had the money to do so, a dilemma that continues to this day.
That would make it possible for there to be fewer total bonds in 1928 and yet the System could still hold more of them than previously. That would be the expected result of the Fed's growing role in the open market. As the publicly-held bonds matured, the Treasury rolled them over, and the Fed picked them up. Bonds purchased by the public do not increase the money supply whereas those purchased by banks do.
Therefore, conditions in 1928 would have been far more inflationary than during the war - even though the government was getting out of debt.
The motive for manipulating interest rates was to encourage borrowing [from abroad in the United States (where rates were low).
It also encouraged investment from the United States into Europe (where fates were higher). By making it possible to borrow American [dollars at one rate and invest them elsewhere at a higher rate, the red was deliberately moving money out of the United States, with Bold reserves following behind.
As President Kennedy had said in his 1963 address at the IMF, the outflow of American gold "did not come about by chance."
THE "DISCOVERY" OF THE OPEN MARKET
Martin Mayer, for example, in his book, The Bankers, writes:
This makes the story interesting, but it is difficult to believe that Benjamin Strong, Paul Warburg, Montagu Norman, and the other monetary scientists who were pulling the levers at that time were taken by surprise.
These men could not possibly have been ignorant of the effect of creating money out of nothing and pouring it into the economy. The open market was merely a different funnel. If there was any element of surprise, it likely was only in the ease with which the mechanism could be activated.
It is not important whether that part of the story is fact or fiction, except that it perpetuates the "accidental" view of history, the myth that no one is responsible for political or economic chaos: Things just happen. There was no master plan. No one is to blame. Everything is under control. Relax, pay your taxes, and go back to sleep!
Best of all, now that Congress was becoming dependent on the free corn, there was little chance it would find its wings and fly away. The more dependent it became, the more secure the System itself became.
But motives varied. Some merely needed income to cover their operating overhead, while others - notably the New York branch under Benjamin Strong - were more interested in sending American gold to England. Strong began immediately to gather control of all open-market operations into the hands of his own bank. In June of 1922, the "Open-Market Committee" was formed to coordinate activities among the regional Governors.
In April of the next year, however, the national board in Washington replaced the Governor's group with one of its own creation, the "Open-Market Investments Committee." Benjamin Strong was its chairman.
The powers of that group were enhanced ten years later by legislation which made it mandatory for the regional branches to follow the Open-Market Committee's directives, but that was a mere formality, for the die had been cast much earlier. From 1923 forward, the Fed's open-market operations have been carried out by the New York Federal Reserve Bank.
The money trust has always been in control.
DROWNING IN CREDIT
"Credit" is another of those wisely words that have different meanings to different people. In banker language, She expansion of credit means the banks have "excess reserves" bookkeeping entries) which can be multiplied by nine and earn interest for them - if only someone would be kind enough to borrow. It is money waiting to be created.
The message is:
In the 1920s, the greater share of bank credit was bestowed upon business firms, wealthy investors, and other high rollers, but the little man was not ignored.
In 1910, consumer credit accounted for only 10% of the nation's retail sales. By 1929, credit transactions were responsible for half of the $60 billion retail market.
In his Book, Money and Man, Elgin Groseclose says:
The impact of expanding credit was compounded by artificially low interest rates - the other side of the same coin - which were intended to help the governments of Europe.
But they also stimulated borrowing here at home. Since borrowing is what causes money to be created under fractional-reserve banking, the money supply in America began to expand. From 1921 through June of 1929, the quantity of dollars increased by 61.8%, substantially more than the increase in national product. During that same time, the amount of currency in circulation remained virtually unchanged.
That means the
expansion was comprised entirely of money substitutes, such as bonds and
loan contracts.
BOOMS AND BUSTS MADE WORSE
That had been the case throughout most of American history. Prior to the creation of the Federal Reserve, banking had been coddled and hobbled by government. Banks were chartered by government, protected by government, and regulated by government.
They had been forced to serve the political agendas of those in power. Consequently, the landscape was strewn with the tombstones of dead banks which had taken to their graves the life savings of their hapless depositors. But these were mostly regional tragedies that were offset by growth and prosperity in other areas. Even within the communities most severely affected, recovery was swift.
The corrective forces of the free market were more firmly straight-jacketed than ever. All banks in the entire country were in lock step with each other. What happened in one region is what happened in all regions. Banks were not allowed to die, so there could be no adjustments after their demise. Their illness was sustained and carried like a deadly virus to the others.
It increased the prestige of the doctor, but it did
not bode well for the patient.
THE ROLLER COASTER
For the investor, it was a roller-coaster ride to oblivion:
It was the final bubble.
SIXTH REASON TO ABOLISH THE FED
Yet, it has achieved just the opposite. Destabilization is dramatically clear in the years prior to the Crash, but the same cause-and-effect continues to this day. As long as men are given the power to tinker with the money supply, they will strive to circumvent the natural laws of supply and demand. No matter how high their intentions or pure their motives, they will cause disruptions in the natural flow.
When these disruptions are perceived, they will try to compensate by causing opposite disruptions.
But, long before they act, there will already be new forces at work which they cannot, in all their wisdom, perceive until they are already manifest. It is the height of egotistical folly for "experts" to think they can outsmart or do better than the combined, interactive decisions of hundreds of millions of people all acting in response to their own best judgment. Thus, the Fed is doomed to failure by its nature and its mission.
That is the sixth reason it should be abolished: It destabilizes the
economy.
TULIPOMANIA
When the root bulbs of these exotic blossoms were brought into Holland, they rapidly became a status symbol among the wealthy - much as race horses or rare breeds of dogs are today in our own society - and those with surplus funds found that an investment in tulips brought them significant social recognition.
Many otherwise prudent people found themselves Infected by the hysteria. They borrowed against their homes and invested their life savings to get in on the anticipated windfall. This bushed up prices even further and tended to create the fulfillment of its own prophecy. Contracts for the future delivery of tulip bulbs - a form of today's commodity market - became a dominant feature of Holland's stock market.
It was
recorded that, at one tale, a single Viceroy brought two lasts of wheat,
four lasts of rye, lour fat oxen, eight fat swine, twelve fat sheep, two
hogsheads of mine, four casks of butter, one-thousand pounds of cheese, a
bed [and mattress, a suit of clothes, and a silver drinking cup.
But they continued to speculate for fear of being too quick in their timing and losing out on profits yet to come. Everyone was confident they would sell out precisely at the top of the market. In any herd, however, there are always a few who will take the lead and, by 1636, all it took was one or two prominent merchants to sell out their stock. Overnight, there were no buyers whatsoever, at any price.
The tulip market vanished, and speculators by the thousands saw their dreams of easy wealth - and, in many cases, their life savings also - disappear with it. Tulipomania, as it was called at the time, had come to an end.
But, once it is in the mainstream of the economy, commercial banks can multiply that money by up to a factor of nine, and that is where the real inflationary action is. To protect that privilege is one of the reasons the banks formed this cartel in the first place. Nevertheless, the public still has the final say. If no one wants to borrow their money, the game is over.
Although men may be hesitant to go into debt for legitimate business ventures in times of economic uncertainty, they can be lured by easy credit to take a long shot. Dreams of instant wealth are powerful motivators. Gaming casinos, poker parlors, race tracks, lottery windows, and other forms of tulipomania are convincing evidence that the lust for gambling is embedded in genetic code.
The public
has always been interested in free corn.
TULIPS IN THE STOCK MARKET
Buyers did not care if their stocks were overpriced compared to the dividends they paid. Commonly traded issues were selling for 20 to 50 times their earnings; some traded at 100. Speculators acquired stock merely to hold for a while and then sell at a profit. It was the "Greater-Fool" strategy. No matter how high the price is today, there will be a greater fool tomorrow who will buy at an even higher price. For a while, that strategy seemed to work.
Although the average stock yielded a modest 3% annual dividend, speculators were willing to pay over 1.2% interest on their loans, meaning their stock had to appreciate about 9% per year just to break even.
But, In practice, about the only time brokers call their loans is when the market is tumbling.
Under those conditions, the stock cannot be Bold except at a loss: a total loss of the investor's margin; and a variable loss to the broker, depending on the severity of the price tall. To obtain even more leverage, investors sometimes use the stocks they already own as collateral for a margin loan on new stocks. Therefore, if they cannot cover a margin call on their new stocks, they will lose their old stocks as well.
Credit was abundant, loans
were cheap, profits were big.
BANKS BECOME SPECULATORS
Instead of serving as dependable clearing louses for money, they also had become players in the market. Loans to commercial enterprises for the production of goods and services - which normally are the backbone of sound banking practice - were losing ground to loans for speculating in the stock market and in urban real estate.
Between 1921 and 1929, while commercial loans remained constant, total bank loans increased from $24,121 million to $35,711 million. Loans on securities and real estate rose nearly $8 billion. Thus, about 70% of the increase during this period was in speculative investments. And that money was created by the banks.
The Fed undoubtedly had other objects in mind, but that did not cancel its responsibility. It was acutely aware of the psychological effect of easy credit and had consciously used that knowledge to manipulate public behavior on numerous occasions. Behavioral psychology is a necessary tool of the trade. So it could claim neither ignorance nor innocence.
In the unfolding of this tragedy, it was about as innocent as a
spider whose web "accidentally" caught the fly.
THE FINAL BUBBLE
The growth in the money supply began to slow down, and so did the rise in stock prices. It is conceivable that the soaring economy could have been brought in for a "soft landing" - except that there were other agendas to be considered. Professor Quigley had said that the central bankers were not substantive powers unto themselves but were as marionettes whose strings were pulled by others.
Just as the speculation spree appeared to be coming under control, those strings were yanked, and the Federal Reserve flip-flopped once again.
The Fed, in spite of its own public condemnation of excessive speculation, reversed itself at the brink of success and purchased over $300 million of banker's acceptances in the last half of 1928, which caused an increase in the money supply of almost $2 billion.
Professor Rothbard says:
Prior to the Fed's reversal of policy, stock prices had actually declined by five per cent. Now, they went through the roof, rising twenty per cent from July to December. The boom had returned in spades.
Montagu Norman travelled to the United States once again to confer privately with the officers of the Federal Reserve. He also met with Andrew Mellon, Secretary of the Treasury. There is no detailed public record of what transpired at these closed meetings, but we can be certain of three things: it was important; it concerned the economies of America and Great Britain; and it was thought best not to tell the public what was going on.
It is not unreasonable to surmise that the central bankers had come to the conclusion that the bubble - not only in America, but in Europe - was probably going to rupture very soon. Rather than fight it, as they had in the past, it was time to stand back and let it happen, clear out the speculators, and return the markets to reality.
As Galbraith put it:
Mellon was even more emphatic. Herbert Hoover described Mellon's views as follows:
If this had been the mindset between Mellon and Norman and the Federal Reserve Board, the purpose of their meetings would have been to make sure that, when the implosion happened, the central banks could coordinate their policies. Rather than be overwhelmed by it, they should direct it as best they can and turn it ultimately to their advantage.
Perhaps we shall never
know if that scenario is accurate, but the events that followed strongly
support such a view.
ADVANCE WARNING FOR MEMBERS ONLY
On February 6, the Federal Reserve issued an advisory to its member banks to liquidate their holdings in the stock market. The following month, Paul Warburg gave the same advice in the annual report to the stockholders of his International Acceptance Bank.
He explained the reason for that advice:
Paul Warburg was a partner with Kuhn, Loeb & Co. which maintained a list of preferred customers. These were fellow bankers, wealthy industrialists, prominent politicians, and high officials in foreign governments. A similar list was maintained at J.P.Morgan Co.
It was customary to Herbert Hoover described Mellon's views e these men advance notice on important stock issues and an opportunity to purchase them at two to fifteen points below their price to the public. That was one of the means by which investment bankers maintained influence over the affairs of the world.
The men on these lists were notified of the coming crash.
...the biographies of all the Wall Street giants at that time boast that these men were "wise" enough to get out of the stock market just before the Crash. And it is true.
Virtually all of the inner club was rescued. There is no record of any member of the interlocking directorate between the Federal Reserve, the major New York banks, and their prime customers having been caught by surprise.
Wisdom, apparently, was greatly affected by whose list one was on.
President Coolidge and Treasury Secretary Mellon had been vociferous in their public utterances that the economy was in better shape than ever. From his socialist perch in London, John Maynard Keynes exclaimed that the management of the dollar by the Federal Reserve Board was a "triumph" of man fever money.
And, from the plush offices of his New York Federal Reserve Bank, Benjamin Strong boasted:
The public was comforted, and the balloon continued to expand. It was now time to sharpen the pin.
On April 19, the Fed field an emergency meeting under cloak of great secrecy. The following day, the New York Times reported as follows:
Let us return briefly to Montagu Norman.
His biographer tells us that, after he became head of the Bank of England, his custom was to journey to the United States several times each year, although his arrival was seldom noted by the press. He travelled in disguise, wearing a long, black cloak and a large, broad-brimmed hat, and he used the pseudonym of Professor Skinner.
It was on one of those unpublicized trips that he ran into a young Australian by the name of W.C. Wentworth.
Sixty years later, Wentworth wrote a letter to The Australian, a newspaper in Sydney, and told of his encounter:
A fellow passenger was "Mr. Skinner," and a member of our team recognized him. He was Montagu Norman, returning to London, after a secret visit to the US Central Bank, travelling incognito.
On August 9, just a few weeks after that ship-board encounter, the Federal Reserve Board reversed its easy-credit policy and raised the discount rate to six per cent.
A few days later, the Bank of England raised its rate also. Bank reserves in both countries began to shrink and, along with them, so did the money supply. Simultaneously, the System began to sell securities in the open market, a maneuver that also contracts the money supply.
Call rates on margin loans had jumped to fifteen, then twenty per
cent The pin I had been inserted.
THE DUCK DINNER BEGINS
The roller coaster had dipped before. Surely it would shoot upward again. For five more weeks, the public bought heavily on the way down. More than a million shares were traded during that period. Then, on Thursday, October 24, like a giant school of fish suddenly turning direction in response to an unseen signal, thousands of investors stampeded to sell.
The ticker tape was hopelessly overloaded. Prices tumbled. Thirteen million shares exchanged hands. Everyone said the bottom had dropped out of the market. They were wrong. Five days later, it did.
Within twelve months, $40 billion had vanished. People who had counted their paper profits and thought they were rich suddenly found themselves to be very poor.
In the panic, prices had tumbled far below their natural levels.
Those who had the cash picked them up for a small fraction of their true worth. Giant holding companies were formed for that task, such as Marine Midland Corporation, the Lehman Corporation, and the Equity Corporation. J.P. Morgan set up the food trust called Standard Brands. Like the shark swallowing the mackerel, the big speculators devoured the small.
In fact, there is much to show that the monetary scientists tried mightily to avert it, and might have done so had not their higher-priority agendas gotten in the way. Yet, once they realized the inevitability of a collapse in the market, they were not bashful about using their privileged position to take full advantage of it.
In that sense, FDR's son-in-law, Curtis Dall, was right when he wrote,
NATURAL LAW NO. 5
FROM CRASH TO DEPRESSION
The Speculators had been ruined, but what they lost was money acquired without effort. There were some unfortunate souls who also lost their life savings, but only because they gambled those savings on call loans. Those who bought stock with money they actually possessed did not have to sell, and they did quite well in the long run.
For the most part, something-for-nothing had merely been converted back into nothing. The price of stocks had plummeted, but the companies behind them were still producing products, still employing people, and still paying dividends. No one lost his job just because the market fell. The tulips were gone, but the wheat crop remained.
The crash, as devastating as it was to the speculators, had little effect on the average American. Unemployment didn't become rampant until the depression years which came later and were caused by continued government restraint of the free market, the drop of prices in the stock market was really a long-overdue and healthy adjustment to the economy.
The stage was now set for recovery and sound economic growth, as always had happened in the past.
Herbert Hoover launched a multitude of government programs to bolster wage rates, prevent prices from dropping, prop up failing firms, stimulate construction, guarantee home loans, protect the depositors, rescue the banks, subsidize the farmers, and provide public works. FDR was swept into office by promising even more of the same under the slogan of a New Deal.
And the Federal Reserve launched a series of "banking reforms," all of which were measures to further extend its power over the money supply.
Unemployment began to spread.
By every economic measure, the economy was no better or worse in 1939 than it was in 1930 when the rescue began.
It wasn't until the outbreak of World War II, and the tooling up for war production that followed, that the depression was finally brought to an end. It was a dubious save. In almost every way, it was a repeat of the drama played out with World War I, even to the names of two of its most important players.
FDR and Churchill worked together behind the scenes to bring America into the conflict - Churchill wanting American assistance in a war England was losing and could not afford, FDR wanting a jolt to the economy for political reasons, and the financiers, gathered behind J.P. Morgan, wanting the profits of war. But that is another chapter, and this book is long enough.
However, within a few years of its inception, the System was controlled by the New York Reserve Bank under the leadership of Benjamin Strong whose name was synonymous with the Wall Street money trust.
By devaluing the dollar and depressing interest rates in America, investors would move their money to England where rates and values were higher. That strategy succeeded in helping Great Britain for a while, but it set in motion the forces that made the stock-market crash inevitable.
Rates on brokers' loans jumped to 20%.
On October 29, the stock market collapsed. Thousands of investors were wiped out in a single day. The insiders who were forewarned had converted their stocks into cash while prices were still high. They now became the buyers.
Some of the greatest fortunes in America were made in that fashion.
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