The Federal Reserve

[|Bengal Migration|]

I was in the middle of replying to Homer's post in the "Israel may go it alone thread, when I went searching for a quote, and found this article which is a 1000x more comprehensive than what I was about to post. I emplore every single one of you who struggles to understand the world today to read this piece. You might come to understand why the world is the way it is today.

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[quote]ZNet | Economy

The Federal Reserve
by Stephen Lendman; June 29, 2006

Years ago I read William Greider's excellent book published in 1987 on how the US Federal Reserve System works. It was detailed and explicit and makes wonderful and informative reading, except for the solution he suggests to a huge problem. His was far too timid. This article proposes a much different one. Greider called his book Secrets of the Temple with a sub-title: How the Federal Reserve Runs the Country. A better sub-title might have been how the Fed (and other key central bankers) runs the world. This article attempts to summarize what it does, how it does it, for whose benefit and at whose expense. For those who don't know, prepare for some stunning information and commentary.

Let's be clear at the outset. The US Federal Reserve, Bank of England, Bank of Japan and the European Central Bank (for the 12 European countries that adopted the single euro currency in 1999) are institutions with enormous power far beyond what most people everywhere can imagine. These most dominant of all central banks, as well as most others, have a powerful influence on the financial conditions in virtually all countries including their own, of course, in an increasingly borderless financial world where a significant economic event in one nation can affect most others for better or worse.

One other powerful bank is also part of today's financial world. It needs mentioning because of its importance, even though it requires a separate article to explain how it works more fully. It's the secretive, inviolable and accountable to no one Bank of International Settlements (BIS) founded in 1930 and based in Basle, Switzerland. This bank most people never heard of is the central banker to its member central banks - a sort of banking "boss of bosses" equivalent to what apparently exists in the shadowy world of Mafia dons. Like most other central banks, including the Federal Reserve (explained below), it's privately owned by its members.

It's believed by some academicians and others who've studied the BIS that the ruling elite of financial capitalism established this bank of banks to be the apex of power to exercise authority over a world financial system owned and controlled by them. It's thought their plan was to use this bank to dominate the political system of every country and control the world economy in a feudalistic fashion. In a word, the thinking goes that these super-elite want to rule the world by controlling its money, and they set up this supranational all-powerful bank of banks to do it. As important as that is, that discussion remains for another time as the intent of this article is to focus solely on the US Federal Reserve.

The dominant central banks and BIS, together with most others, wield their influence in cartel-like alliance with each other to assure they all benefit more than they otherwise would without such a cozy arrangement. With their immense power it's no play on words to say these financial institutions do indeed rule the world. Because they're able to create money, they fund the needs of their governments, their militaries and all business activity that couldn't function without a ready supply of that most needed of all commodities. It's money, not love, that makes the world go round, and central bankers have the power to create or remove from circulation as much or little of it as they choose and for whatever purpose they have in mind. That kind of power can move mountains or destroy them.

No nation's central bank is more powerful today than the US Federal Reserve, but it wasn't always that way, and it now has competition for the top spot it hasn't known since WW II. The Fed, as it's called, has existed since it was first established by an act of Congress in 1913. But the Bank of England has been around since Britannia ruled the waves beginning in 1694 when King William III needed help funding the kind of escapade that takes lots of ready cash - war. Back then it was with France, and the king needed a friendly banker to print it up for him to help him fight it. He also needed financial help to facilitate trade and manage the country's debt that always mounts up when wars are fought. The Bank of England wasn't the first central bank, but it was the modern world's first privately owned one in a powerful country. It was called the Bank of England to keep the public from knowing that it, like our Federal Reserve, was and still is privately owned and not part of the government. It was also the model used in the formation of our own central bank and most others.

The Brits may have had a 219 year head start on the Fed, but central bankers are only as powerful as the countries they represent and their economies. Today the former dominant Brits must settle for a far lesser role as being just one of many junior partners to a US hegemon that emerged post WW II as the world's dominant economic power. It still is today, even though some credible experts believe this country may have seen and past its peak and is now in decline. Some go further and claim our decline has been accelerated by the disastrous policies of the Bush administration that irrationally believes waging war on the world without end is the way to rule it, promote endless economic growth and dominance, and thus preserve the nation's preeminent position as the reigning economic champion.

It's easy to challenge that view and think that champ has climbed into the ring a few times too many, has endless plans for more return engagements, and is likely to meet the same fate many a former human one did who didn't know when to quit and ended up with chronic brain damage known as dementia. The lesson from history is always the same. The price for reckless behavior is high, painful and inevitable. It's true for countries as well as individuals, but too often neither one sees it until it's too late. The biggest difference between the US today and other nations in the past that paid dearly for not yielding when their day had passed is that we have an all-powerful arsenal others never did. Should we decide to use it, there likely wouldn't be much left behind for a successor. Not a pleasant thought, but a very real one.

It All Began in 1910 On Jekll Island

It sounds like the title of a horror movie, but the real life events that happened at this privately owned island off the coast of Georgia in 1910 would have challenged even the Hollywood bad dream factory to come up with. It was here that seven very rich and powerful men met in secret for nine days and created the Federal Reserve System that came into being three years later on December 23, 1913 by an act of Congress. Since that time, the nation and world would never be the same, but only the rich and powerful were the beneficiaries. That was the whole idea, and it worked as planned.

The Federal Reserve Act that began it all must surely rank as one of the most disastrous and outrageous pieces of legislation to the public welfare ever to come out of any legislative body. It may have also have been and still is illegal according to Article 1, Section 8 of the Constitution which happens to be the inviolable law of the land. The article states that Congress shall have the power to coin (create) money and regulate the value thereof. In 1935, the US Supreme Court ruled the Congress cannot constitutionally delegate its power to another group or body. The Congress thus acted in violation of the Constitution it's sworn to uphold and in so doing created the Federal Reserve System that, as will be explained below, is a private for-profit corporation operating at the expense of the public welfare. By its action, our lawmakers committed fraud against the people of the country and so far have gotten away with it without the public even knowing about the harm done.

The shameful result is that what should have arrived stillborn is now the most dominant institution on earth, and all because of what began on a privately owned island with a scary name. But had the Congress acted responsibly, the act of Fed creation might never have happened. The legislation establishing it was so harmful to the public interest, it likely never would have passed if it hadn't been shepherded through a carefully prepared Congressional Conference Committee meeting scheduled for between 1:30 - 4:30 AM (when most members of Congress were asleep) on December 22, 1913. The Act was then voted on the next day and passed although many members of the body had left for the Christmas holidays and most others who stayed behind hadn't had time to read it or know its contents. Sound familiar? Still it passed (like a thief in the night) and was signed into law by an unwitting or complicit Woodrow Wilson who later admitted he made a terrible mistake saying "I unwittingly ruined my country." But it was too late for postmortems, and the American people have paid dearly ever since. It's about time the public understood that and began to demand an end to over 90 years of damage done.

It almost happened 43 years ago when one president decided to act on behalf of the people who elected him. That man was John Kennedy, who before his death planned to end the Federal Reserve System to eliminate the national debt a central bank creates by printing money and loaning it to the government. That debt has now risen to over $8,400,000,000,000 ($8.4 trillion) which every taxpayer must pay for and has done so in the amount of nearly $174,000,000,000 ($174 billion) in just the first three months of 2006. This debt service is now an annualized amount exceeding two-thirds of a trillion dollars. It's made the bankers rich (which was the whole idea) and the public poorer because we're taxed to pay the tab. It's no exaggeration to call this the greatest financial scam in world history and one that gets greater every day.

The debt was less onerous 40 years ago, but Kennedy understood its danger to the country and the burden it placed on the public. Thus, on June 4, 1963, he issued presidential order EO 11110 giving the president authority to issue currency. He then ordered the US Treasury to print over $4 billion worth of "United States Notes" to replace Federal Reserve Notes. He intended to replace them all when enough of the new currency was in circulation so he could end the Federal Reserve System and the control it gave the international bankers over the US government and the public. Just months after the Kennedy plan went into effect, he was assassinated in Dallas in what was surely a coup d'etat disguised to look otherwise and may well have been carried out at least in part to save the Fed System and concentration of power it created that was so profitable for the powerful bankers in the country. Those benefitting from it had good reason to be involved in the plot to save the special privilege they weren't willing to give up without a fight. It's a plausible explanation that may explain who may have been behind the assassination and for what reason. Whatever the truth is, the banking cartel was only in distress a short time. Once Lyndon Johnson took office, he rescinded Kennedy's presidential order and restored the cartel's former power. It's kept it ever since and is now, of course, more powerful than ever. Even presidents are unable to stop it and those who would try have a lesson from history to give them pause.

The predecessors of the possible Kennedy coup plotters were the men who met on Jekyll Island in 1910. They represented some of the richest and most powerful men in the world - the Morgans, Rockefellers, Rothschilds of Europe (who dominated all European banking by the mid-1800s and became and still may be the wealthiest and most powerful family of all) and others of great influence and power. Included was a US senator, a high ranking Treasury official, the president of the largest bank in the country at the time, a leading Wall Street figure and the man who would later become the first chairman of the Federal Reserve System. It was quite an assemblage, and they came to accomplish one thing. They wanted to change the ideology and course of American business that up to then was based on marketplace competition and replace it with monopoly. They also knew what Baron M.A. Rothschild understood when he once said: "Give me control over a nation's currency and I care not who makes its laws." They knew the wisdom of what's stated in Proverbs 22:7 as well: "The rich rule over the poor, and the borrower is servant to the lender."

This was the dawning of the age of powerful cartels when the seven financial titans meeting secretly in the island's clubhouse decided no longer to compete with each other and wanted the power to arrange it. They were already colluding informally but knew it would all work better under a legally sanctioned cartel. They wanted a banking cartel and got one that flourishes today below the public radar with the tool they wanted most - the ability to control the nation's money supply that gave them almost unlimited power. The cartel now works cooperatively with their governments and all other powerful transnational corporations in a dominant global alliance that allows them to control the world's markets, resources, cheap labor and our lives.

The Federal Reserve System Is Not A Government Agency - It's A Privately Owned Cartel of Powerful Banks Protected By Law

It's commonly but falsely believed the Federal Reserve System is a function of government and subject to its control. False. It's often referred to as a quasi-governmental, decentralized central bank, but that's just cover to disguise what, in fact, it really is: a privately held and operated cartel made to look like the government is in charge. The fact that it's headquartered in Washington in the formidable and impressive-looking Eccles building (named after a former Fed chairman) is just part of the clever subterfuge. Here's how it works:

The Fed is composed of a Board of Governors in Washington and 12 regional banks in major cities throughout the country (including in my own city of Chicago where anyone once but no longer could walk up to a teller's window and buy US Treasury securities). The system also includes many and various member banks including all national banks that are required to be part of the system. Other banks were also allowed to join and many did. The Federal Reserve began operating in November, 1914, almost one year after the Congressional act creating the system the previous year as explained above. It was mandated by law to have the greatest power of any institution in the country - the power to create and control the nation's money supply.

Most people know little or nothing about money and banking, likely never think about it, and have no idea how what the Fed and bankers do affect their lives. Before writing this article, I had little more than the modest knowledge I learned in a required course on the subject and basic accounting as part of my MBA curriculum 46 years ago. Those courses left out the most important parts of the story and never hinted at anything sinister about how the banking system works in fact. But no one should ever imagine banks were established or intended to be run for our benefit. They surely are not, and anyone suggesting they are should read on. They're about as beneficial to the public welfare as was the MX Peacekeeper ICBM (the clever language is impressive) intended to carry nuclear warheads back in the mid-80s that had the power to destroy all life on the planet and one day may do it in its old or updated form.

The Federal Reserve Act of 1913 (the law of the land) stipulates that the Federal Reserve Banks of each region are owned by the member banks in it. These Fed banks are privately owned corporations that make a great effort to hide the fact that they, in fact, own what the public largely thinks is part of the public treasury and government. It's easy to think that as Fed chairmen and seven of the twelve Governors are appointed by the President and approved by the Senate. As such, the FRB is a sort of quasi-government entity, but the fact is the System is a privately owned for profit enterprise just like any other business. It has stockholders like other public corporations that are paid 6% risk free interest every year on their equity holdings. The public doesn't know this, and it likely wouldn't be good PR if it found out. People might be even more upset if they learned some of the owners of our Federal Reserve are powerful foreign investors in the UK, France, Germany, The Netherlands and Italy. They're partners with giant US banks like JP Morgan Chase and Citibank as well as powerful Wall Street firms like Goldman Sachs in a new world order banking cartel that influences and affects business activity everywhere and our lives.

The issue of private ownership of the Federal Reserve Banks has been challenged several times in the federal courts to no avail. Each time the courts upheld the current system under which each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. One such case was Lewis v. United States that was decided by the 9th Circuit Court of Appeals that ruled the Reserve Banks are independent, privately owned and locally controlled corporations.

Our Founding Fathers Had Different Ideas Than the Powerful Men who Met on Jekll Island

Throughout our history, there was disagreement over who should control the power of the nation's money supply and the right to issue it. The Founding Fathers understood that the British Parliament was forced to levy unfair taxes on its American colonies and its own citizens because the Bank of England had run up so much debt the government needed revenue to reduce it. Benjamin Franklin, in fact, believed that was the real cause of the American Revolution. Most of the Founders also understood the danger that could result from bankers' accumulating too much wealth and power. James Madison, the main drafter of our Constitution, called them "Money Changers," referring to the Bible that said Jesus twice drove the Money Changers from the Temple in Jerusalem 2,000 years ago. Madison said:

"History records that the Money Changers have used every form of abuse, intrigue, deceit and violent means possible to maintain their control over governments by controlling money and its issuance."

Thomas Jefferson was just as strong in his condemnation when he said:

"I sincerely believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs."

Jefferson and Madison understood the dangers of commercial monopolies of all types and tried to assure they never would exist in the new nation. They, in fact, wanted two additional amendments added to the "Bill of Rights" in the Constitution but never got them. They believed to protect the liberty of the people the nation should have "freedom from monopolies in commerce" (what are now giant corporations including the big international banks and Wall Street investment firms) and "freedom from a permanent military," or standing armies. Try to imagine what the country would be like today if Jefferson and Madison had gotten their way - a country without giant predatory corporations exploiting everyone for profit and without a rampaging military waging war on the world, threatening to destroy it, and doing it so those corporate giants could earn even greater profits.

They never did, of course, and the people have paid dearly ever since including the great harm caused because the government relinquished its right to control the nation's money supply. It gave it away secretly with the public none the wiser, never knowing how greatly it's been harmed. It's been even worse since the 1980s because the power of the Fed grew under a friendly dumbass president, and the corporate media led cheerleading for it hid the effect. For them, no public demeaning of it, its giant member banks or Wall Street allies is allowed.

Things were especially out of hand during the tenure of Alan Greenspan - a Fed chairman no one should have found much reason to cheer either before he headed the Fed when he was a presidential advisor or during the time he did. It was only after his economic consulting firm failed that he went into government service likely because he needed a new line of work. There he managed to become a larger than life seer of central banking who was elevated to near sainthood by the business pundits who thought under his tenure the skies were only blue and the few clouds in sight always had silver linings. Now Alan is retired to the greener pastures of lucrative book contracts and speaking engagements, which shows when you do your job well for the rich and powerful (at the expense of the rest of us) who gave it to you, you'll be well rewarded in the end. It's likely the new Fed chairman has taken note and will dutifully try to follow in the tradition that preceded him.

But try imagining a different sort of Fed chairman, one who knew, believed in and practiced the words and wisdom of another American president of some note - Abraham Lincoln. In 1886 (this date is incorrect, it was 1862) Lincoln said the following: "The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarch, more insolent than autocracy and more selfish than a bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the bankers in the rear. Of the two, the one at the rear is my greatest foe."

Lincoln also appears to have said (although some dispute it): "I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country.....corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed." Imagine what Lincoln might say today.

Given Lincoln's sentiment about the bankers and money power of the country, it would seem to beg the obvious question: did it play a role in, or was it the reason for, his untimely death at the hands of John Wilkes Booth? The international bankers clearly disliked Lincoln after he managed to get the Congress to pass the Legal Tender Act in 1862 that empowered the US Treasury to issue paper money called "greenbacks." Lincoln needed this legislation after he declined to pay the bankers the usurious 24 - 36% interest rates they demanded on the loans he needed to fund his war with the South. With the new banking law, Lincoln was then able to print up the millions of dollars he needed which was debt and interest free. Clearly this was not what the greedy bankers wanted as they can only profit when they get their pound of flesh from financial transactions they control. Right after the war ended Lincoln was assassinated, and shortly thereafter the so-called Greenback law was rescinded, a new national banking act was passed, and all money became interesting-bearing again.

How the Federal Reserve System Works

The Federal Reserve System is the result of the Congress and President having agreed to privatize the nation's money system and relinquish the power that should have remained the government's exclusive right. That act was so outrageous the Fed had to be deliberately designed to look like a branch of the federal government to hide the fact that it's really an all-powerful privately owned banking cartel whose member banks (including all the national ones) share in the vast profits earned from having the most important of all franchises governments alone should have - the right to print money in any amount, control its supply and price, and benefit hugely by loaning it out for a profit including to the government itself that must pay interest on the money it should never have to if it simply printed its own. Think of what happened as the government having legalized the right to counterfeit the national currency for private gain. It's no exaggeration to claim this is the greatest ever of all financial scams causing incomprehensible harm with the public none the wiser. Here's how it works in simple terms:

The Fed was given the authority to conduct the nation's monetary policy with the power to control the supply and price of money. It has three ways to do it - through open market operations, the discount rate it charges member banks, and the reserve requirement percentage of member banks assets it requires them to hold and not loan out. The Board of Governors is responsible for handling the discount rate and reserve requirements while the Federal Open Market Committee (FOMC) is in charge of the open market operations of buying or selling bonds explained further below. Using these tools, the Fed is able to influence the supply and demand for money and thus directly control the federal funds short-term rate that's always fixed unless the Fed wishes to raise or lower it. Longer rates are controlled by the powerful institutional traders in the bond market.

The FOMC and How It Works

The Federal Open Market Committee is really key to the whole process of money creation or contraction. It consists of 12 members - seven members of the Board of Fed Governors, the president of the New York Fed Bank (the most important one of all) and four of the remaining 11 Reserve Bank presidents who serve one year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings a year to assess economic conditions and decide how loose or tight it wants monetary policy to be to further its stated goal of sustainable economic growth and price stability.

The FOMC literally has the power to create money out of nothing. It does it in a four step process:

Step 1 - The FOMC first approves the purchase of US government bonds on the open market.

Step 2 - The New York Fed bank buys them from sellers (financial markets always have an equal number of buyers and sellers).

Step 3 - The Fed pays for its purchases with electronic credits to the sellers' banks, which, in turn, credit the sellers' bank accounts. These credits are literally created out of nothing.

Step 4 - The banks receiving the credits can then use them as reserves to enable them to loan out as much as 10 times their amount (if their reserve requirement is 10%) through the magic (only banks have) of fractional reserve banking and, of course, collect interest on all of it. What a business, and it's all legal. Imagine how rich we might all be if we as private individuals could do the same thing. Borrow a million from the Fed and like magic it becomes 10 times as much, and we get to collect interest on all but the 10% of it we must hold in reserve. This is the magic of fractional reserve banking money creation and explains how powerful an economic stimulus it is when the Fed wants to enhance economic growth.

When the Fed wishes to contract the economy by reducing the money supply, it simply reverses the above process. Instead of buying bonds, it sells them so that money moves out of the buyers' bank accounts instead of into them. Bank loans must then be reduced by 10 times if the reserve requirement is 10%.

How the Fed Harms the Public Interest

The Federal Reserve System exists only to serve its owners and member banks and in doing so is hostile to the public interest. That's because it's a banking cartel with the power to restrict competition for greater profits gained at our expense. It goes from our pockets to theirs, and the public loses in at least four ways:

One - Through the invisible tax of inflation that results from the dilution of purchasing power caused by newly created money entering the system reducing the value of dollars already there. The Greenspan Fed was especially expansive, never was held to account for its excess and was able to pass a serious problem it created on to a future Fed chairman and society to deal with. The man we now lionize as a monetary magician began sensibly. From 1982, before he arrived in 1987, until 1992, the money supply increased on average by 8% a year. But from 1992 - 2002, the printing press worked overtime in sync with the deregulation and growth of global markets expanding the currency by more than 12% a year. It became even more extreme post 9/11 and since 2002 grew at a 15% rate. It now has more than doubled in less than a decade. It appears that the new Fed chairman has taken note and has begun reducing the rate of money expansion as he continues raising the federal funds rate to whatever level he has in mind.

Currency traders as well apparently have taken note of the rate of money supply expansion overall. Except for a respite in 2005, it's quite likely the dollar weakness since 2002 is the result of the excess amount of them created for the Bush administration's profligate spending to fund its endless wars and reckless tax cuts for the rich. The problem is further compounded as from 1964 to the present debt service has grown from 9% to 16.5% of the federal budget and rising; the current account deficit has gone from a 1% surplus to an almost 7% deficit; and federal indebtedness has grown by 40% just since 2001 and financed in large part by "the kindness of (foreign) strangers" that may be growing restive. Furthermore, since March, 2006, the Fed stopped publishing the M-3 aggregate of the total amount of dollars in circulation. With that transparency gone, big buyers of US Treasuries now have to calculate the value of the dollar based on speculation and uncertainty rather than hard data - not a way to inspire trust in the financial markets that function best in an atmosphere of openness and clarity.

Two - The public also loses because the banking cartel is able to practice usury - from it's power over a flexible currency to artificially move rates up or down to any level it chooses which many small lenders in a truly free and open market can't do. In addition, the cartel's market dominance forces most borrowers (especially smaller ones less able to issue their own debt instruments) to come to them for loans which it's then able to make using what should be the peoples' money available to them at the lowest possible cost from many highly government regulated small lenders competing for customers.

Three - Through the taxes, we, the public, must pay to cover the interest on the huge national debt (now over $8.4 trillion) accumulated from the money the Fed printed and loaned to the government. As mentioned earlier, that now totals an annualized amount exceeding two-thirds of a trillion dollars and increasing daily. It's made the bankers rich, ordinary people poorer, and the public none the wiser it's been fleeced big time.

Four - Compounding the above abuse, the cartel is able to get the public to bail out the system with more of its tax dollars. It happens whenever any of the too-big-to-fail banks need financial help to survive. The same is true for big corporations like Chrysler or Lockheed, large investment firms or hedge funds like Long-Term Capital Management or even countries like Mexico. It's also true when a single bank goes out of business and depositors must be compensated or more seriously in the wake of a systemic financial meltdown like the one that wiped out many savings and loan banks in the 1980s. Whether it's a single bank or many dozens at a time, public tax dollars are used to save the system or just pick up the tab to repay depositors insured against losses through government insurance protection up to a stipulated amount per account.

How Would Adam Smith Have Reacted to the Federal Reserve System

This concentration of banking cartel wealth and power is the opposite of what Adam Smith, the ideological godfather of free market capitalism, advocated in his writings including his seminal work The Wealth of Nations. Smith wrote about an "invisible hand" that he said worked best in a free market with many small businesses competing locally against each other. He strongly opposed the concentrated mercantilism of his day (what there was of it) which now would be the equivalent of today's giant transnational corporations and the banking cartel with the power to restrict competition, maintain higher prices than otherwise possible and earn greater profits as a result at the public's expense.

The kind of banking cartel that exists today is precisely what Smith would have condemned. But having a central bank is not in itself a bad thing provided the bank is government owned, controlled and operated for the public welfare. There's only a problem when through subterfuge the bank is set up to appear government owned and run but is, in fact, for private profit the way ours is and most others as well. And in the US, to make the arrangement work, a mostly publicly appointed governing authority runs the System acting as a shill for its private for-profit banking cartel members that wanted it in the first place and got a corrupted Congress to give it to them. To work, the cartel needs the cover it gets from its partnership with government, but it's through that arrangement that it harms the public interest for its own private gain.

And that goes to the heart of the problem: that the Congress elected to serve the people instead betrayed them by creating an all-powerful banking cartel and gave it the authority to practice fractional reserve banking with the power to get free money by creating it out of nothing. It then allowed its members a near-monopoly right to set the rates of interest they wish to charge borrowers. The whole process amounts to a legally sanctioned heist by the powerful banks working in league with government for its own gain. It's also part of a more extensive government arranged process to transfer wealth from the people to the pockets of large corporations and the rich and doing it while those being harmed are unaware it's even happening.

Another Way the Federal Reserve System Harms the Public

The Fed harms the public welfare in one other important way, and again most people are none the wiser about it. Supposedly the Federal Reserve System was established to stabilize the economy, smooth out the business cycle, maintain a healthy rate of sustainable growth while holding prices steady and benefitting everyone. So how well has it done its job? Since its creation in 1913, and with them in charge, we had the crashes of 1921 and the most important and remembered one in 1929. That was followed by The Great Depression that lasted until the onset of WW II that noted conservative economist Milton Friedman explained was caused and exacerbated because the Federal Reserve oddly decided to reduce the money supply at a time of economic contraction instead of increasing it. We then had recessions in 1953, 1957, 1969, 1975, 1981, 1990 and 2001. We also had inflation beginning in the 1960s which became quite severe through much of the 1970s and early 1980s. And we had a major banking crisis in the 1980s at which time more banks and savings and loan associations failed than ever before in our history. It happened in the wake of financial market deregulation when banks were allowed to pursue their own interests without government oversight to check their willingness to assume excess risk or stop them from trying to get away with deliberate fraud.

Along with the economic stability the Fed never achieved, we've also had soaring consumer debt; record high federal budget and trade deficits; a high level of personal bankruptcies and rising mortgage loan delinquencies; interest on a mounting national debt that's a large and rising percentage of the federal budget; the loss of our manufacturing base and it's high-paying jobs with good benefits because they're being exported to low wage countries; an economy in which services now account for nearly 80% of all business that provide mostly lower paying, less skilled jobs with few or no benefits; and a widening income and wealth gap that continues to harm lower and middle income earners to benefit the rich and well-off privileged few and a government that encourages it.

Sum it all up and the conclusion is clear. The one thing the Fed failed to accomplish above all else was what it was established to do in the first place. But it's much worse than that if we understand a cartel's real motives. It's not to serve the public interest. It's to abuse it because that's how it benefits most. It's able to do it with its legally sanctioned concentrated power and a friendly government in league with it as partners or facilitators. It's from that cozy hidden from view arrangement that it's able to get away with the grandest of grand thefts.

A Needed Solution to A Huge Problem

>From the information presented above, it's clear that the Federal Reserve System was established through stealth and deceit by a handful of corrupted politicians in service to their powerful banking and Wall Street allies. They did it to defraud the public and without them being any the wiser about what, in fact, had been done or how harmful it was to be to their welfare and interests. Those in the Congress and President Wilson (a man trained in the law, one-time practicing attorney, former esteemed academic and president of Princeton University) either knew or should have known that the act he and they approved establishing the Fed was in direct violation of the Constitution they were sworn to uphold. They didn't, they broke the law, and the public paid dearly for their crime ever since to this day.

So what recourse is left, and can people be mobilized to pursue it. There's only one sensible and just solution to undo the damage done to so many for so long - abolish the Federal Reserve System and restore the power it now has to the federal government working for the public welfare. Take it back from the powerful banking cartel working against it and never allow it to be in its hands again. That alone is the only way. The great German poet and playwright Bertolt Brecht would have agreed and once said it was "easier to rob by setting up a bank than by holding up (one)."

Freeing us from the these powerful "Money Changers" would have enormous benefits for everyone. It would establish a prudent policy of money creation that would minimize our most unfair tax - inflation which is caused by private for-profit bankers manipulating the nation's money supply to enhance their profits. It would stabilize the economy and smooth out the extremes in the business cycle exacerbated by the cartel working for its benefit and against ours. It would lower the cost of money for borrowers because it would end the monopoly power the cartel now has to set the rates it chooses by opening the market to more competition. It would reduce the growing and oppressive national debt freed eventually from the extra money supply growth needed to pay it off. It would lower the public's tax burden as less revenue would be needed for debt service. It would be a momentous step toward reducing and hopefully one day eliminating the overwhelming power of all predatory corporate giants preying on us so they can grow and prosper. It might even discourage wars which are only fought for wealth and power - never for glory or to make the world safe for democracy or other false motives. Without a powerful corporate banking cartel and other industry giants that feed on the human misery they create, there would be less of a reason to pursue any. Try to imagine that kind of world and a government working for the public welfare instead of harming it as it now must do in service to capital. That world is possible, and responsible people need to work for it as the one we now have has failed and must be changed before it's too late.

A View of the World Created by the Interests of Capital and Our Government That Supports It

It's the ugly, corrupted world of neoliberal "free market" capitalism controlled by giant corporations; that benefits the privileged few alone causing great human misery and despair; a despotic world that can't endure nor must we allow it to much longer; one with endless wars for power and profit; where people are commodities to be used as needed and discarded like trash when they're not; with no concern for preserving an ecology able to sustain us and won't much longer because we're destroying it and ourselves for profit; where essential human needs don't matter under an economic model only valuing private gain; where democracy is incompatible with predatory capitalism; one no one should want to live in or ever have to; one we must change or perish. In the language of capital, that's the bottom line. Only a mass movement of committed people can change that world. It must or we all will.

Unless we can move from our failed economic model to a better alternative, it will end on its own one day by one means or other. But it may be a denouement no one would wish for - it's own self-destruction taking all else with it either by nuclear holocaust or an environment so inhospitable it won't support our ability to live in it. Our only chance is to work for change while there's still time.

A Vision of A Different Kind of World

History proves a better world is possible when committed people work hard enough for it. It's how slavery was ended; workers won the right to organize and bargain collectively; women gained equal suffrage to men, control of their own bodies, and more rights and status in the work force; blacks and other minorities won important civil rights; and politicians once enacted important social legislation if only out of fear of what might happen if they didn't.

Thomas Jefferson explained the "The price of liberty is eternal vigilance." It's also the price to keep our hard won social gains. For the past generation those gains have eroded while we weren't paying attention and only mass people action can regain them. The goal should be for a world of caring and sharing; where peoples' lives improve because we all work together for it; one at peace and not with endless wars to benefit the rich and powerful at our expense; where all essential human needs are met because governments work for the common good to assure it; with real participatory democracy where the public and elected officials work together to keep it strong and vibrant; with no oppressive corporate giants or banking cartels because the law won't allow any; where ecological nurturing and preservation are central; with clean air, water and soil and food that's fit and safe to eat; a much simpler world, more locally based than today's where notions like globalization aren't even in the vocabulary; one based on social equity and justice for all with government, law enforcement and the courts working to assure it stays that way; one we all want to live in and hope some day we can; one we want to pass on to future generations; one we can't afford not to have because the alternative may be no world at all.

We may now be at a key watershed moment where our fate hangs in the balance. We can either work together for a better, sustainable world or likely become the first species in it ever to destroy itself. If it happens, we'll likely take most others with us and not leave much behind for the few hearty ones that remain. We no longer have the luxury of debate for the kind of world we need to survive. The giant banks and corporations won't give it to us nor will a hostile government allied with them. It's up to us to go for it or likely perish if we fail. A good beginning would be by driving the Federal Reserve "money changers" out of our temple and the corporate giants with them. A better world is possible if we remember and live by political theorist Antonio Gramsci's inspirational words about "the optimism of the will." With it, organized people can find a way to beat organized money.

Stephen Lendman lives in Chicago and can be reached at lendmanstephen@sbcglobal.net. Also visit his blog site at sjlendman.blogspot.com.[/quote]

[Chris Henrys Dealer]

It's not a bad article overall, and thankfully he doesn't fall into the trap of some other commentators who use 80 year old data to make claims like the Rothschilds control the Federal Reserve.

I also agree that some Fed reform is essential, although, I am a huge supporter of it being a separate entity from the government. The way this government currently in the States has spent, would you want it having full control to print money? The US dollar would be trading at about 75% of the Canadian dollar if that was the case.

The Germans have taken it to the full limit, where the Bundesbank is a totally separate entity. While in the States, there is still some government control, as the administration can recommend Fed regional directors, although they still have to be publically elected. But the last thing you want, is the government controlling the central bank for the country. Some of the disasters you've seen in South American economies and even Mexico in the 90s, show what can happen when a government gets its hands on handling its own money supply. Not pretty.

But there are some innacuracies there in the article. He disses fractional reserve banking, and tries to compare it to individuals having that power. Well to make the analogy complete, the individual in question would have to have about $1 MM in the bank before he was even able to employ a fractional reserve system for his own purposes. So there is a little bit of a back stop. Has leverage in some cases gone too far? Absolutely, the way some hedge funds operate today, is a disaster waiting to happen. But if you look at the finances of some A to A- rated banks (by rating agencies such as Standard and Poors and Moodys), they are pretty solid, with large reserve ratios.

Ed Flaherty, a Ph.D. Economics professor at the University of Charleston, although I think he has moved into the private sector now published an article a while ago, providing some rebuttals to some widely held theories about the Fed that exist.

I'm just going to paste a few, and you folks can read them and make up your own minds.

[Chris Henrys Dealer]

Debunking the Federal Reserve Conspiracy Theories (and other financial myths)

BY: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C.

Facts: Yes, the Federal Reserve banks are privately owned, but they are controlled by the publically-appointed Board of Governors. The Federal Reserve banks merely execute the monetary policy choices made by the Board. In addition, nearly all the interest the Federal Reserve collects on government bonds is rebated to the Treasury each year, so the government does not pay any net interest to the Fed.

Facts: No foreigners own any part of the Fed. Each Federal Reserve bank is owned exclusively by the participating commercial banks and S&Ls operating within the Federal Reserve bank's district. Individuals and non-bank firms, be they foreign or domestic, are not permitted by law to own any shares of a Federal Reserve bank. Moreover, monetary policy is controlled by the publically-appointed Board of Governors, not by the Federal Reserve banks.

Fact: Independent accounting firms conduct full financial audits of the Federal Reserve banks and the Board of Governors every year. The Fed is also subject to certain types of audits from the Government Accounting Office.

Facts: The Federal Reserve rebates its net earnings to the Treasury every year. Consequently, the interest the Treasury pays to the Fed is returned, so the money borrowed from the Fed has no net interest obligation for the Treasury. The government could print its own currency independent of the Fed, but there would be no effective safeguards against abuse of this power for political gain.

Facts: The Federal Reserve banks have only a small share of the total national debt (about 7%). Therefore, only a small share of the interest on the debt goes to the Fed. Regardless, the Fed rebates that interest to the Treasury every year, so the debt held by the Fed carries no net interest obligation for the government. In addition, it is Congress, not the Federal Reserve, who is responsible for the federal budget and the national debt.

Facts: Kennedy wrote E.O. 11,110 to phase out silver certificate currency, not to issue more of it. Records show Kennedy and the Federal Reserve were almost always in agreement on policy matters. He even signed legislation to give the Fed more authority to issue currency.

Facts: McFadden was incorrect regarding the Fed costing the government money. However, later economic analysis agrees with him that Federal Reserve policy blunders had a substantial role in causing the Depression. However, his implication that this was done deliberately has no basis in fact. Moreover, for a dozen years prior to his rant, McFadden had been the chairman of the House subcommittee that oversaw the Federal Reserve. Why didn't he do anything to reform or abolish the Fed while he had the chance?

Facts: The banking system is indeed able to create money with a mere computer keystroke. However, a bank's ability to create money is tied directly to the amount of reserves customers have deposited there. A bank must pay a competitive interest rate on those deposits to keep them from leaving to other banks. This interest expense alone is a substantial portion of a bank's operating costs and is de facto proof a bank cannot costlessly create money.

Fact: The term 'lawful money' does not refer to gold or silver coin, but to types of money which the government would permit banks to use when tabulating their reserves. These types of money included, but were not limited to, gold and silver coin.

[quote][b]Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few senators in a secret meeting.[/b]

BY: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C.

On the Georgian resort hideaway of Jekyll Island (which has some excellent golf courses, by the way), there once met a coalition of Wall Street bankers and U.S. senators. This secret 1910 meeting had a sinister purpose, the conspiracy theorists say. The bankers wanted to establish a new central bank under the direct control of New York's financial elite. Such a plan would give the Wall Street bankers near total control of the financial system and allow them to manipulate it for their personal gain.

G. Edward Griffin lays out this conspiratorial version of history in his book The Creature from Jekyll Island. His amateurish take on history is highly suspect, however. Gerry Rough, in a series of well- researched essays on U.S. banking history, reveals many historical inaccuracies, inconsistencies, and even contradictions in Griffin's book and others of its genre. Instead of reproducing Rough's work here, I offer the reader a substantially more accurate view of the events leading up to the creation of the Federal Reserve System in 1913. To get a proper historical perspective, the story of begins just prior to the Civil War...

The National Banking Acts of 1863 & 1864

Prior to the Civil war there were thousands of banks in operation throughout the Union, all of them chartered, that is, licensed by the state governments. Banking regulations were virtually nonexistent. The federal government had no meaningful controls on banking practices, and state regulations were spotty and poorly enforced at best. Economic historians call the era leading up to the Civil War as the 'state banking era' or the 'free banking era.'

The problems with state banking were numerous, but three were conspicuous. First, the nation had no unified currency. State banks issued their own bank notes as currency, a system which at worst invited severe bouts of counterfeiting and at best introduced additional uncertainty in the task of determining the relative value of each bank note. Second, with no mitigating influence on the issuance of bank notes, the money supply and the price level were highly unstable, introducing and perhaps causing additional volatility in the business cycle. This was due in part to the fact that bank note issuance was frequently tied to the market value of the bank's bond portfolio which they were required to have by law. Third, frequent bank runs resulted in substantial depositor losses and severe crises of confidence in the payments system.5

The National Banking Acts of 1863 and 1864 were attempts to assert some degree of federal control over the banking system without the formation of another central bank. The Act had three primary purposes: (1) create a system of national banks, (2) to create a uniform national currency, and (3) to create an active secondary market for Treasury securities to help finance the Civil War (for the Union’s side).5

The first provision of the Acts was to allow for the incorporation of national banks. These banks were essentially the same as state banks, except national banks received their charter from the federal government and not a state government. This arrangement gave the federal government regulatory jurisdiction over the national banks it created, whereas it asserted no control over state-chartered banks. National banks had higher capital requirements and higher reserve requirements than their state bank counterparts. To improve liquidity and safety they were restricted from making real estate loans and could not lend to any single person an amount exceeding ten percent of the bank's capital. The National Banking Acts also created under the Treasury Department the office of Comptroller of the Currency. The duties of the office were to inspect the books of the national banks to insure compliance with the above regulations, to hold Treasury securities deposited there by national banks, and, via the Bureau of Engraving, to design and print all national banknotes.5

The second goal of the National Banking Acts was to create a uniform national currency. Rather than have several hundred, or several thousand, forms of currency circulating in the states, conducting transactions could be greatly simplified if there were a uniform currency. To achieve this all national banks were required to accept at par the bank notes of other national banks. This insured that national bank notes would not suffer from the same discounting problem with which state bank notes were afflicted. In addition, all national bank notes were printed by the Comptroller of the Currency on behalf of the national banks to guarantee standardization in appearance and quality. This reduced the possibility of counterfeiting, an understandable wartime concern.5

The third goal of the Acts was to help finance the Civil War. The volume of notes which a national bank issued was based on the market value of the U.S. Treasury securities the bank held. A national bank was required to keep on deposit with the Comptroller of the Currency a sizable volume of Treasury securities. In exchange the bank received bank notes worth 90 percent, and later 100 percent, of the market value of the deposited bonds. If the bank wished to extend additional loans to generate more profits, then the bank had to increase its holdings of Treasury bonds. This provision had its roots in the Michigan Act, and it was designed to create a more active secondary market for Treasury bonds and thus lower the cost of borrowing for the federal government.5

It was the hope of Secretary of the Treasury Chase that national banks would replace state banks, and that this would create the uniform currency he desired and ease the financing of the Civil War. By 1865 there were 1,500 national banks, about 800 of which had converted from state banking charters. The remainder were new banks. However, this still meant that state bank notes were dominating the currency because most of them were discounted. Accordingly, the public hoarded the national bank notes. To reduced the proliferation of state banking and the notes it generated, Congress imposed a ten percent tax on all outstanding state bank notes. There was no corresponding tax of national bank notes. Many state banks decided to convert to national bank charters because the tax made state banking unprofitable. By 1870 there were 1,638 national banks and only 325 state banks.5

While the tax eventually eliminated the circulation of state bank notes, it did not entirely kill state banking because state banks began to use checking accounts as a substitute for bank notes. Checking accounts became so popular that by 1890 the Comptroller of the Currency estimated that only ten percent of the nation's money supply was in the form of currency. Combined with lower capital and reserve requirements, as well as the ease with which states issued banking charters, state banks again became the dominant banking form by the late 1880’s. Consequently, the improvements to safety that the national banking system offered were mitigated somewhat by the return of state banking.5

There were two major defects remaining in the banking system in the post Civil War era despite the mild success of the National Banking Acts. The first was the inelastic currency problem. The amount of currency which a national bank could have circulating was based on the market value of the Treasury securities it had deposited with the Comptroller of the Currency, not the par value of the bonds. If prices in the Treasury bond market declined substantially, then the national banks had to reduce the amount of currency they had in circulation. This could be done be refusing new loans or, in a more draconian way, by calling-in loans already outstanding. In either case, the effect on the money supply is a restrictive one. Consequently, the size of the money supply was tied more closely to the performance of the bond market rather than needs of the economy.5

Another closely related defect was the liquidity problem. Small rural banks often kept deposits at larger urban banks. The liquidity needs of the rural banks were driven by the liquidity demands of its primary customer, the farmers. In the planting season the was a high demand for currency by farmers so they could make their purchases of farming implements, whereas in harvest season there was an increase in cash deposits as farmers sold their crops. Consequently, the rural banks would take deposits from the urban banks in the spring to meet farmers’ withdrawal demands and deposit the additional liquidity in the autumn. Larger urban banks could anticipate this seasonal demand and prepare for it most of the time. However, in 1873, 1884, 1893, and 1907 this reserve pyramid precipitated a financial crisis.5

When national banks experienced a drain on their reserves as rural banks made deposit withdrawals, new reserves had to be acquired in accordance with the federal law. A national bank could do this by selling bonds and stocks, by borrowing from a clearinghouse, or by calling-in a few loans. As long as only a few national banks at a time tried to do this, liquidity was easily supplied to the needy banks. However, an attempt en masse to sell bonds or stocks caused a market crash, which in turn forced national banks to call in loans to comply with Treasury regulations. Many businesses, farmers, or households who had these loans were unable to pay on demand and were forced into bankruptcy. The recessionary vortex became apparent. Frightened by the specter of losing their deposits, in each episode the public stormed any bank rumored, true or not, to be in financial straights. Anyone unable to withdraw their deposits before the bank’s till ran dry lost their savings or later received only pennies on the dollar. Private deposit insurance was scant and unreliable. Federal deposit insurance was non-existent.5

The 1907 Banking Panic

The 1907 crisis, also called the Wall Street Panic, was especially severe. The Panic caused what was at that time the worst economic depression in the country’s history. It appears to have begun with a stock market crash brought about by a combination of a modest speculative bubble, the liquidity problem, and reserve pyramiding. Centered on New York City, the scale of the crisis reached a proportion so great that banks across the country nearly suspended all withdrawals -- a kind of self-imposed bank holiday. Several long-standing New York banks fell. The unemployment rate reached 20 percent at the peak of the crisis. Millions lost their deposits as thousands of banks collapsed. The crisis was terminated when J.P. Morgan, a man of sometimes suspicious business tactics and phenomenal wealth, personally made temporary loans to key New York banks and other financial institutions to help them weather the storm. He also made an appeal to the clergy of New York to employ their Sunday sermons to calm the public’s fears.

Morgan’s emergency injection of liquidity into the banking system undoubtedly prevented an already bad situation from getting still worse. Although private clearinghouses were able to supply adequate temporary liquidity for their members, only a small portion of banks were members of such organizations. What would happen if there were no J.P. Morgan around during the next financial crisis? Just how bad could things really get? There began to emerge both on Wall Street and in Washington a consensus for a kind of institutionalized J.P. Morgan, that is, a public institution that could provide emergency liquidity to the banking system to prevent such panics from starting. The final result of the Panic of 1907 would be the Federal Reserve Act of 1913.

The Federal Reserve Act of 1913

Following the near catastrophic financial disaster of 1907, the movement for banking reform picked up steam among Wall Street bankers, dumbasss, and eastern Democrats. However, much of the country was still distrustful of bankers and of banking in general, especially after 1907. After two decades of minority status, Democrats regained control of Congress in 1910 and were able to block several dumbass attempts at reform, even though they recognized the need for some kind of currency and banking changes. In 1912 Woodrow Wilson won the Democratic party’s nomination for President, and in his populist-friendly acceptance speech he warned against the "money trusts," and advised that "a concentration of the control of credit ... may at any time become infinitely dangerous to free enterprise."3

Also in 1910, Senator Nelson Aldrich, Frank Vanderlip of National City (today know as Citibank), Henry Davison of Morgan Bank, and Paul Warburg of the Kuhn, Loeb Investment House met secretly at Jeckyll Island, a resort island off the coast of Georgia, to discuss and formulate banking reform, including plans for a form of central banking. The meeting was held in secret because the participants knew that any plan they generated would be rejected automatically in the House of Representatives if it were associated with Wall Street. Because it was secret and because it involved Wall Street, the Jekyll Island affair has always been a favorite source of conspiracy theories. However, the movement toward significant banking and monetary reform was well-known.3 It is hardly surprising that given the real possibility of substantial reform, the banking industry would want some sort of input into the nature of the reforms. The Aldrich Plan which the secret meeting produced was even defeated in the House, so even if the Jekyll Island affair was a genuine conspiracy, it clearly failed.

The Aldrich Plan called for a system of fifteen regional central banks, called National Reserve Associations, whose actions would be coordinated by a national board of commercial bankers. The Reserve Association would make emergency loans to member banks, create money to provide an elastic currency that could be exchanged equally for demand deposits, and would act as a fiscal agent for the federal government. Although it was defeated, the Aldrich Plan served as an outline for the bill that eventually was adopted. 5

The problem with the Aldrich Plan was that the regional banks would be controlled individually and nationally by bankers, a prospect that did not sit well with the populist Democratic party or with Wilson. As the debate began to take shape in the spring of 1913, Congressman Arsene Pujo provided good evidence that the nation’s credit markets were under the tight control of a handful of banks – the "money trusts" against which Wilson warned.1 Wilson and the Democrats wanted a reform measure which would decentralize control away from the money trusts.

The legislation that eventually emerged was the Federal Reserve Act, also known at the time as the Currency Bill, or the Owen-Glass Act. The bill called for a system of eight to twelve mostly autonomous regional Reserve Banks that would be owned by the banks in their region and whose actions would be coordinated by a Federal Reserve Board appointed by the President. The Board’s members originally included the Secretary of the Treasury, the Comptroller of the Currency, and other officials appointed by the President to represent public interests. The proposed Federal Reserve System would therefore be privately owned, but publicly controlled. Wilson signed the bill on December 23, 1913 and the Federal Reserve System was born.6

Conspiracy theorists have long viewed the Federal Reserve Act as a means of giving control of the banking system to the money trusts, when in reality the intent and effect was to wrestle control away from them. History clearly demonstrates that in the decades prior to the Federal Reserve Act the decisions of a few large New York banks had, at times, enormous repercussions for banks throughout the country and the economy in general. Following the return to central banking, at least some measure of control was removed from them and placed with the Federal Reserve.

References:

1. Davidson, James West, Mark A. Lytle, et al, (1998), Nation of Nations, New York: McGraw-Hill.

2. Galbraith, John K. (1995), Money: Whence it Came, Where it Went, Boston: Houghton Mifflin.

3. Greider, William (1987), Secrets of the Temple, New York: Simon & Schuster.

4. Griffin, G. Edward (1995), The Creature from Jekyll Island, Appleton: American Opinion Publishing, Inc.

5. Kidwell, David S. and Richard Peterson (1997), Financial Institutions, Markets, and Money, 6th edition, Fort Worth: Dryden Press.

6. "Wilson Signs the Currency Bill," New York Times, pages 1-2, December 24, 1913.[/quote]

[Chris Henrys Dealer]

[quote]Myth #2: The Federal Reserve Act never actually passed Congress. The Senate voted on the bill without a quorum, so the Act is null and void.

BY: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C.

The silliest of the Federal Reserve conspiracy theories is that the Federal Reserve Act of December 23, 1913 passed illegally. The constitution stipulates that both the House and the Senate must have at least half their members present, a quorum, to vote on any bill. According to this myth, the Senate voted on the Federal Reserve Act (known as the Currency Bill at the time) deviously in a late night session when most of its members had gone home or had left town for the holiday. This was done to impose the will of a pro-banker minority on the objecting majority. Since no quorum was present, the Federal Reserve Act is not valid.
This idea is better described as folklore than a full-blown conspiracy theory because I've never been able to find it in print, only on occasion on Usenet or in e-mail from readers. Gary Kah, author of En Route to Global Occupation, came close when he wrote that the bill's supporters waited until its opponents were out of town and it was passed under "suspicious circumstances" (Kah, p. 13-14).

Nevertheless, the myth has no basis in fact. The House passed the bill 298-60 on the evening of Dec. 22, 1913.3 The Senate began debate the following day at 10am, and passed it 43-25 at 2:30pm.4

What of the missing Senators? Since there were 48 states in 1913, forty eight votes plus the tie-breaking vote of vice-President Thomas Marshall would have been sufficient to approve the bill even if all absent votes had been cast against the bill. However, many of the missing Senators had their positions recorded in the Congressional Record.1 Of the 27 votes not cast, there were 11 'yeas' (in favor of the bill) and 12 'nays.'1 Even if the absentee Senators had been there, the Currency Bill would have passed easily.

President Wilson signed the Currency Bill into law in an "enthusiastic" public ceremony on Dec. 23, 1913.4

References:

1. Congressional Record, 63rd Congress, 2nd Session, Dec. 23, 1913, pp. 1487-1488.

2. Kah, Gary (1991), En Route to Global Occupation, Layfayette, La.: Huntington Press.

3. "Money bill goes to Wilson today," New York Times, pp. 1-3, Dec. 23, 1913.

4. "Wilson signs currency bill," New York Times, pp. 1-2, Dec. 24, 1913.[/quote]

[Chris Henrys Dealer]

[quote]Myth #3: The Federal Reserve Act and paper money are unconstitutional

BY: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C.

The constitution does not give Congress the specific right to create a central bank. Unless the specific power is spelled out, according to a strict interpretive philosophy, then Congress does not have it. Therefore, the Federal Reserve Act of 1913 is unconstitutional. Moreover, paper money itself is unconstitutional for the same reason. Only gold or silver coin is permitted by the constitution.

The Constitutional Basis for Central Banking

First, the constitution grants the Congress the rights to regulate money. Specifically, it has the right to coin money and regulate its value. It is not clear from the constitution or the Federalist Papers what the authors meant by the term 'value.' Traditionally, it has meant the weight and metallic content of the coin. No one challenges this interpretation. On the other hand, the only relevant meaning of 'value' in the context of money is its value in trade, also known as its purchasing power. This a government cannot regulate merely by an Act of Congress. The government's only tool for regulating this latter value is altering the money supply.

Second, Congress has the right to regulate interstate commerce. Banking and other financial services clearly involves interstate commerce as the courts have come to define it.

Finally, and perhaps most importantly, Congress has the right to make any law that is 'necessary and proper' for the execution of its enumerated powers (Art. I, Sec. 8, Cl. 18). A law creating a Bureau of the Mint, for example, is necessary and proper for the Congress to exercise its right to coin money. A similar argument may justify a central bank. It facilitates the expansion and contraction of the money supply and it serves as means to regulate the banking industry.

Is this a reasonable use of the necessary and proper clause? I do not know, but a test of its meaning came early. The history of central banking in the United States does not begin with the Federal Reserve. The Bank of the United States received its charter in 1791 from the U.S. Congress and Washington signed it. Secretary of State Alexander Hamilton designed the Bank's charter by modeling it after the Bank of England, the British central bank. Secretary of State Thomas Jefferson believed the Bank was unconstitutional because it was an unauthorized extension of federal power. Congress, Jefferson argued, possessed only delegated powers that were specifically enumerated in the constitution. The only possible source of authority to charter the Bank, Jefferson believed, was in the necessary and proper clause. However, he cautioned that if the clause could be interpreted so broadly in this case, then there was no real limit to what Congress could do.2

Hamilton conceded that the constitution was silent on banking. He asserted, however, that Congress clearly had the power to tax, to borrow money, and to regulate interstate and foreign commerce. Would it be reasonable for Congress to charter a corporation to assist in carrying out these powers? He argued that the necessary and proper clause gave Congress implied powers -- the power to enact any law that is necessary to execute its specific powers. A “necessary” law in this context Hamilton did not take to mean one that was absolutely indispensable. Instead, he argued that it meant a law that was “needful, requisite, incidental, useful, or conducive to” the primary Congressional power which it supported. Then Hamilton offered a proposed rule of discretion: “Does the proposed measure abridge a pre-existing right of any State or of any individual?” (Dunne, 19). If not, then it probably is constitutionally proper on these grounds. Hamilton’s arguments carried the day and convinced Washington.

The Supreme Court had its say on the matter as well. In McCulloch v. Maryland (1819) the Supreme Court voted 9-0 to uphold the Second Bank of the United States as constitutional. The Court argued with the doctrine of implied powers, stating that to be ‘necessary and proper’ the Bank needed only to be useful in helping the government meet its responsibilities in maintaining the public credit and regulating the money supply. Chief Justice Marshall wrote, “After the most deliberate consideration, it is the unanimous and decided opinion of this court that the act to incorporate the Bank of the United States is a law made in pursuance of the Constitution, and is part of the supreme law of the land” (Hixson, 117). The Court affirmed this opinion in the 1824 case Osborn v. Bank of the United States (Ibid, 14).

Therefore, the historical legal precedent exists for Congress' power to create a central bank. It formed the Federal Reserve system in 1913 to perform many of the same functions as its predecessor. As before, the courts have agreed that a central bank, and the Federal Reserve in particular, is constitutional.

The Constitutional Basis for Paper Money

Even if the Federal Reserve is a constitutionally proper institution, what of paper money? The federal government has issued many forms and denominations of paper currency since 1812. It first made paper a legal tender in 1862. Does not the constitution require the Congress to coin money, not to print it? Is this not what the authors of the constitution intended? Perhaps, but it's not an air-tight issue. S.P. Breckenridge wrote in Legal Tender of the significant disagreements the delegates to the constitutional convention had over the issue, and even over the interpretation of the wording that they eventually adopted.

Prior to the constitutional convention in the summer of 1787, the States exercised their sovereign powers over monetary matters. Most States had issued their own forms of paper money, typically called ‘bills of credit’ at the time, and had declared some foreign coins as a legal tender. By ‘legal tender’ we mean a form of money which a government specifies may be used to settle debts and to pay taxes due to it. During the Revolutionary War many States issued paper money to excess. The Congress of the Articles of Confederation had also relied heavily on using paper money to fund its war expenditures. The States had also declared various forms of paper currency, including the Congress’ emissions, a legal tender. Severe price inflation was the necessary result of this over-indulgence in paper, and by the time the constitutional convention convened paper money had many enemies.

The primary foes of paper money were commercial and banking interests. When a lender agrees to fund a loan, he charges a rate of interest which, among other factors, includes a premium for any expected loss in the purchasing power of the principal during the life of the loan. If the price level is expected to rise, say, five percent then the lender will insist on an interest of at least that amount. If in actuality the price level increases eight percent, then the lender stands to lose as much as three percent of his principal. If a government has the power to issue paper money, then the potential abuse of this power increases the probability of an unexpected inflation. Commercial concerns also were generally against allowing paper, and for similar reasons. The sour inflationary experience of the previous decades made the business climate less stable than it might otherwise be with a constitutionally guaranteed gold or silver monetary standard. In addition, such a standard would protect the integrity of commercial contracts that specified fixed payments in specie. These interests at the convention therefore had two objectives: To forbid both the States and the federal government from issuing bills of credit -- the common term for paper money at the time -- and to base the monetary system on gold or silver.

Paper money was not without its partisans, however. Agricultural interests and debtors were fond of paper money, as well as Ben Franklin, and for many of the same reasons. The losses a lender is likely to suffer at the hands of a paper-induced inflation are exactly offset by the gains of the borrower. The debtor would then be able to repay a fixed debt in less valuable currency. Farmers also generally favored paper money because it tended to create an economic climate of rising commodity prices relative to other goods, thereby increasing their real income. Their monetary goal at the convention was to give the government the right to issue bills of credit or, at the very least, not to deny it the power.

Charles Pinckney of South Carolina produced a draft of a constitution that had two interesting features for our purposes. From Art. VII. Sec. 1 of his draft we read “The legislature of the United States shall have power … (4) To coin money … (5) To regulate the value of foreign coin … (8) To borrow money and emit bills on the credit of the United States …” Also we find in Article XII: “No state shall coin money.” We further read in Article XIII: “No state, without the consent of the legislature of the United States, shall emit bills of credit, or make anything but specie a tender in payment of debts.” We can glean some indication of the Founders’ intent concerning paper money from the debate on the matter in Madison’s notes on the convention. What follows below is an excerpt of those notes on this debate:

MR. GOUVERNEUR MORRIS [PA.] moved to strike out “and emit bills on the credit of the United States.” If the United States had credit such bills would be unnecessary; if they had not, unjust and useless.
MR. BUTLER [S.C.] seconds the motion.

The fundamental theory on which the Founders created the U.S. constitution is of a government of limited powers. The federal government would have only those powers specifically enumerated and those reasonably necessary to enact them. If a power is not expressly given to it, then it is denied. What Robert Morris of Pennsylvania seeks to do with the above motion is to deny the federal government the specific right to issue paper money. The discussion continued:

MR. MADISON [Va.] Will it not be sufficient to prohibit making them a tender? This will remove the temptation to emit them with unjust views; and promissory notes in that shape may in some emergencies be best.

MR. GOUVERNEUR MORRIS: Striking out the words will still leave room for the notes of a responsible minister, which will do all the good without the mischief. The moneyed interests will oppose the plan of government if paper emissions be not prohibited.

MR. GORHAM [Mass.] had doubts on the subject. Congress, he thought, would not have the power unless it was expressed. Though he had a mortal hatred to paper money, yet, as he could not foresee all emergencies, he was unwilling to tie the hands of the legislature. He observed the late war could not have been carried on had such a prohibition existed.

Gorham’s thoughts on this are key to interpreting how the Founders would eventually resolve this issue. The Revolutionary War was financed to a great extent on paper money the Continental Congress and later the Congress of the Articles of Confederation had issued. The Congress had no taxing authority of its own and the newly independent States were unwilling to contribute any significant funds of their own for the war effort. The Congress, with limited credit, was therefore left to emitting paper money. Although its over-issuance was largely responsible for the severe inflation of the time, it was also clear to the Founders and to later historians the States could not have funded their effort in any other way. The personal financial losses many of the delegates suffered at the hands of the paper money did much to alienate them from the medium, but it did not erase from their memory the acknowledgment of its financial contribution to their independence. Gorham, like others at the convention, disliked paper, but were hesitant in denying forever the government’s ability to use it. Madison’s notes continued:

MR. MERCER [Md.] was a friend to paper money, though in the present state and temper of America he should neither propose nor approve of such a measure. He was consequently opposed to a prohibition of it altogether. It will stamp suspicion on the government to deny it discretion on this point. It was impolitic also to excite the opposition of all those who were friends to paper money. The people of property would be sure to be on the side of the plan, and it was impolitic to purchase their further attachment with the loss of the opposite class of citizens. MR. ELLSWORTH [Conn.] thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which been made were now fresh in the public mind, and had excited the disgust of all the respectable part of America. By withholding the power from the new government, more friends of influence would be gained to it than by almost anything else. Paper money can in no case be necessary. Give the government credit, and other resources will offer. The power may do harm, never good.

MR. RANDOLPH [Va.], notwithstanding his antipathy to paper money, could not agree to strike out the words, as he could not foresee all the occasions that might arise.

Here in a microcosm is the debate on whether to deny the federal government the right to issue paper money. Mercer and Ellsworth clearly represented the agricultural and commercial interests, respectively, and their positions are understandable within this context. Randolph, however, took the middle ground, wondering whether it was wise to tie the hands of future legislatures.
Eventually, the convention voted 9-2 to strike the clause, thereby denying the federal government the specific power to emit bills of credit. The relevant sections of the constitution eventually approved read: Art. I. Sec. 8.: “The Congress … shall have power … (2) to borrow money on the credit of the United States … (5) To coin money, regulate the value thereof, and of foreign coin, and fix the standard weight and measures.” Art. II. Sec 10.: “No state shall coin money nor emit bills of credit nor make anything but gold and silver coin a legal tender in payment of debts …”

These clauses have several implications relevant to the question of whether today’s paper money is constitutional. Among the lesser effects for our purposes is that it removed from the States their previous sovereign power to coin money or to emit paper money. It also restricted what they could declare a legal tender. The question, though, is whether the Congress may legally issue paper money. Some argue that it was the Founders’ intent to bar the door to paper money permanently and the vote to strike the bills of credit clause from Pinckney’s draft is evidence of this intent. This may be a hasty interpretation, however.

Although several members of the convention wanted to deny paper money to the federal government and believed the act of striking the 'bills of credit' clause accomplished the task, not all delegates shared either this intent or this interpretation. Several members, as shown above, were either friends of paper money or did not want to tie the hands of the Congress for all time. The interpretation of their action varies widely. Mason believed that if the power was not expressly given, it was denied. As far as he was concerned, the Congress could not authorize paper money. Morris, though, believed it to be permissible for a ‘responsible minister.’ Madison, who cast the deciding vote in the Virginia delegation to strike the clause, still viewed it as legal provided the notes were safe and proper. Madison wrote, “Nothing very definite can be inferred from this record” as to the views of the convention on this matter. As President, Madison approved of a $36 million non-legal tender paper money issue to help finance the War of 1812. His actions seem to have spoken louder than his words. Luther Martin, a delegate from Maryland, explained his views to the Maryland legislature and stated:

Against this motion we urged that it would be improper to deprive the Congress of that power; that it would be a novelty unprecedented to establish a government which should not have such authority; that it would be impossible to look forward into futurity so far as to decide that events might not happen that should render the exercise of such a power absolutely necessary; and that we doubted whether if a war should take place it would be possible for this country to defend itself without resort to paper credit, in which case there would be a necessity of becoming a prey to our enemies or violating the constitution of our government; and that, considering that our government would be principally in the hands of the wealthy, there could be little reason to fear an abuse of the power by an unnecessary or injurous exercise of it.
It is clear the intent of the Founders was to prohibit the States from issuing paper money. It is not clear whether the same intent applied to the Congress. Wrote Breckenridge, “the clause granting to Congress the power to emit bills was stricken out, and no prohibition was laid. Silence as to that was maintained; and all that can be said as to the interpretation of that silence is that, although there was a strong and well-nigh universal dread of paper issues, there was a stronger dread of too narrowly limiting the powers of the new legislature; and that there was neither a very definite nor a unanimous opinion as to the effect of striking out the clause, or as to the extent of the power granted (p.84).” It appears the Founders, whether intentionally or not, left the paper money issue to be settled by future generations.
Below are some recent court rulings on the issues of the Federal Reserve and paper money.

U.S. v. Rickman, 638 F.2d 182, C.A.Kan. 1980:

Federal Reserve Notes in which the defendant, charged with failure to file federal income tax returns, was paid were lawful money within the meaning of the United States Constitution. 26 USCA §7203; USCA Const. Art. 1, §8, cl. 5. U.S. v. Wangrund, 533 F.2d 495; C.A.Cal. 1976
The statute establishing Federal Reserve Notes as legal tender for all debts, public and private, including taxes, is within the constitutional authority of Congress; thus the defendant could not overturn his conviction on two counts of wilful failure to make an income tax return on the theory that he did not receive money since checks he received as compensation for his services could be cashed only for Federal Reserve Notes which were not redeemable in specie. 26 USCA (IRC 1954) §§61, 7203; USCA Const. art. 1, §8; Coinage Act of 1965, §102; 31 USCA §392.
Nixon v. Individual Head of St. Joseph Mortgage Company, 615 F.Supp. 890, affirmed 787 F.2d 596. D.C.Ind. 1985. Federal Reserve notes are legal tender.

Ginter v. Southern, 611 F.2d 1226, certiorari denied 100 S.Ct 2946, 446 US 967, 64 L.E.d.2d 827. C.A.Ark. 1979.

Tax protestor's claims concerning the constitutionality of the Federal Reserve System, Internal Revenue Code and establishment of tax court were so frivolous as not to require discussion and detail. USCA Const. Amends. 5, 13; 28 USCA §1346(a)(1); 26 USCA (IRC 1954) §6532(a), 7422(a).
U.S. v. Schmitz, 542 F.2d 782 certiorari denied 97 S.Ct. 1134, 429 US 1105, 51 L.Ed.2d 556. C.A.Cal. 1976.
Federal Reserve Notes constitute legal tender and are taxable dollars. USCA Const. Art. 1, §10.
Milam v. U.S., 524 F.2d 629. C.A.Cal. 1974.
The statute which delegates to the Federal Reserve System the power to issue circulating notes for money borrowed and the power to define the quality and force of those notes as currency is valid ... Although golden eagles, double eagles, and silver dollars were lovely to look at and delightful to hold, the holder of a $50 Federal Reserve Bank Note, although entitled to redeem his note, was not entitled to do so in precious metal. Federal Reserve Act, §16, 12 USCA §411; Coinage Act of 1965, §102, 31 USCA §392
The paper money issue is also an irrelevant one. If we replace each all paper that has "one dollar" printed on it with a coin that has "one dollar" stamped on it, what will we gain? We shall have achieved a literal compliance with the constitution at the expense of a convenient and popular form of money.

Gold and Silver Coin

It is also sometimes argued that the constitution permits the minting only of gold or silver coins. This is a misinterpretation, as a federal court makes clear in U.S. v. Rifen, 577 F.2d 1111. C.A.Mo. 1978:

The United States Constitution prohibits states from declaring legal tender anything other than gold or silver but does not limit Congress' power to declare what shall be legal tender for all debts ... Federal Reserve Notes are taxable dollars. Coinage Act of 1965, §102, 31 USCA §392; USCA Const. Art. 1, §10.
This point is made further in Nixon v. Phillipoff, 615 F.Supp. 890, affirmed 787 F.2d 596. D.C.Ind. 1985:
The provision of the Constitution [USCA Const Art. 1, §8, cl. 5] which gives Congress the right to coin money, and regulate the value thereof, gives Congress exclusive ability to determine what will be legal tender throughout the country ... The provision of the Constitution [USCA Const. Art. 1, §10, cl. 1] which mandates that no state shall make anything but gold or silver coin tender in payment of debts acts only to remove from states inherent soverign power to declare currency, thus leaving Congress as the sole declarant of what constitutes legal tender; the provision does not require states to accept only gold and silver as tender ... Federal Reserve Notes are legal tender for any debt or public charge ... Using or accepting Federal Reserve Notes as payment for state court filing fees was completely proper under the Constitution. USCA Const. Art. 1, §8, cl. 5; 31 USCA, §5103.
It was made somewhat humourously in Foret v. Wilson, 725 F.2d 400. C.A.La. 1984:
Gold and silver coin do not constitute the only legal tender by the United States; thus, the appellant, who bid $2.80 in silver dimes on a foreclosed property requiring a minimum bid of $80,000 under Louisiana law, was not entitled to the deed to the property.

Are Gold and Silver Practical Metals for Coins?
We could replace all our paper money with coins containing the appropriate amount of a precious metal. Gone would be the $1 Federal Reserve Note, and in its place a coin with $1 stamped on it. Apparently, this would make the paper money opponents happy. Or would it? As it turns out, the amount of gold that would need to be in a $1 coin would be so tiny it would barely be there at all.

In the summer of 1999, the price of gold is about $250/oz. Therefore, a $1 coin would need 1/250ths ounce of gold in it; that is to say, it would contain 0.4% gold and 99.6% base metals. A quarter-dollar would have 0.1% gold and 99.9% base metals. A $20 coin would have 8.0% gold and 92% base metals. If any more gold than that were included, then it would pay to melt the coins and sell the gold, and then we'd be without a physical medium of exchange.

Silver has little more practical monetary value. The price of silver is about $5/oz., so we could mint a $5 coin containing 100% silver. A $1 coin would have 20% silver. A quarter would have about 5% silver and 95% base metals. Could anyone honestly tell the difference between the quarter we have now and one with 5% silver?

Reference:

Breckenridge, S.P., Legal Tender, N.Y.: Greenwood Press, 1903, 1969.

Dunne, Gerald T., Monetary Decisions of the Supreme Court, Rutgers Univ. Press, 1960.

Hixson, William F., Triumph of the Bankers: Money and Banking in the Eighteenth and Nineteenth Centuries, Praeger, 1993.

Footnotes:

1. I have no formal legal training and do not consider myself a constitutional scholar.

2. Then, curiously, in the memorandum in which he articulated his thoughts on this matter, Jefferson advised that if the President felt that the pros and cons of constitutionality seemed about equal, then out of respect to the Congress which passed the legislation the President could sign it (Dunne, p. 17-19).[/quote]

[Chris Henrys Dealer]

[quote]Myth #4: The Federal Reserve is a privately owned bank out to make a profit at the taxpayers' expense.

BY: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C.

Facts: Yes, the Federal Reserve banks are privately owned, but they are controlled by the publically-appointed Board of Governors. The Federal Reserve banks merely execute the monetary policy choices made by the Board. In addition, nearly all the interest the Federal Reserve collects on government bonds is rebated to the Treasury each year, so the government does not pay any net interest to the Fed.[/quote]


[quote]Myth #5. The Federal Reserve is owned and controlled by foreigners

BY: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C.

Do foreigners own or control the Federal Reserve? Conspiracy theorists Gary Kah (1991) and Eustace Mullins (1983) certainly think so, as do many of their readers. Kah and Mullins each authored books alleging that the U.S. central bank – the Federal Reserve – is under the direction of an international banking community and that this financial elite, primarily British, uses its control to manipulate the U.S. economy and its financial markets for their personal gain. This is a very serious charge. The Federal Reserve sets the government’s monetary and interest rate policies. Any change in them has significant repercussions for just about everyone. An increase in interest rates that benefits savers could also price a new home just out of a family’s reach or make a manufacturing firm’s modernization plan too expensive to undertake. The Fed is supposed to choose a policy that benefits the whole of the U.S. economy, not an overseas banking cabal. The ultimate aim of this international banking elite, the conspiracy theory declares, is to establish a one-world government – the infamous New World Order. The Fed’s alleged role in this is simple according to Kah: At the appointed time, the New World Order schemers will instruct the Fed to sabotage the U.S. economy, causing financial and social chaos that will make it much easier for them to gain real political and military control over the United States. In the meantime they simply reap the Fed’s huge annual profits and manipulate the financial markets for further gain. Kah specifically claims that foreigners directly own the New York Federal Reserve Bank, the largest and most important of the twelve regional Federal Reserve Banks. Through the N.Y. Federal Reserve the international conspirators control the entire Federal Reserve System and gain its profits. In his book En Route to Global Occupation Kah also plays up the Fed’s alleged role in the New World Order plot. Mullins agrees on the importance of the N.Y. Fed, but claims that while domestic commercial banks own it, in reality a secret European banking club actually controls its policies from a distance. How much of these conspiracy theories, if any, is true? In this article I investigate the remarkable claims of Kah and Mullins. Specifically, I examine whether foreigners own the New York Federal Reserve Bank either directly or indirectly, whether the N.Y. Fed controls the whole of the Federal Reserve System, and whether foreigners receive the System’s large annual profits. As it turns out, very little of these conspiracy tales are true.

Who Owns the New York Federal Reserve Bank?

Each of the twelve Federal Reserve Banks is organized as a corporation in much the same way as many other firms. However, Gary Kah in 1991 claimed foreigners intent on global economic and political domination own a controlling interest in the shares of the New York Federal Reserve Bank. “Swiss and Saudi Arabian contacts,” according to Kah (p. 13), identified the top eight shareholders as

Rothschild Banks of London and Berlin
Lazard Brothers Banks of Paris
Israel Moses Seif Banks of Italy
Warburg Bank of Hamburg and Amsterdam
Lehman Brothers of New York
Kuhn, Loeb Bank of New York
Chase Manhatten Bank
Goldman, Sachs of New York.

Kah describes these as the Fed’s “Class A shareholders” (p. 14). This is curious because Federal Reserve stock is not classified in this manner. It can be either “member stock” or “public stock.” However, the directors of a Federal Reserve Bank are separated into Classes A, B, and C depending on how they are appointed (12 USCA §302).

Fellow conspiracy theorist Eustace Mullins presents a different list in his 1983 book Secrets of the Federal Reserve. He reports the top eight stockholders of the New York Fed in 1982 were

Citibank
Chase Manhatten Bank
Morgan Guaranty Trust
Chemical Bank
Manufacturers Hanover Trust
Bankers Trust Company
National Bank of North America
Bank of New York.

He notes that together these banks own about 63 percent of the New York Fed’s outstanding stock. European banking organizations, most notably the Rothschild banking dynasty, he then claims, own many of these banks. Mullins also contends that through their American agents, the European bankers – who he calls the London Connection – select the board of directors for the N.Y. Fed. Since the N.Y. Fed supposedly controls the whole Federal Reserve System, this allows the London Connection to direct U.S. monetary policy. He explains,

... The most powerful men in the United States were themselves answerable to another power, a foreign power, and a power which had been steadfastly seeking to extend its control over the young republic since its very inception. The power was the financial power of England, centered in the London Branch of the House of Rothschild. The fact was that in 1910, the United States was for all practical purposes being ruled from England, and so it is today (Mullins, p. 47-48).
Clearly, there is a discrepancy between the two lists. According to Kah, foreigners own shares of the N.Y. Fed directly. On the other hand, Mullins does not report any such direct foreign ownership. Instead, Europeans allegedly own the U.S. banks which, in turn, own the N.Y. Fed – an indirect ownership. So who is right? Mullins claimed the source of his information was the Federal Reserve Bulletin, however, that publication has never reported the shareholder list of any Federal Reserve Bank. It is not clear where he obtained his list. Kah’s source was supposedly an unnamed group of Swiss and Saudi Arabian contacts and so it is impossible even to verify his list. On the other hand, the two authors published their lists eight years apart. Since Mullins’ was the earlier of the two, it may be possible that sometime between 1983 and 1991 foreigners acquired a substantial amount of stock in the N.Y. Fed. It is also possible that both lists are wrong.

To clarify this mystery, let’s first look at the Federal Reserve Act of 1913 itself. The law requires that all nationally chartered commercial banks and savings & loans buy stock in their regional Federal Reserve Bank, thereby becoming “member banks” (12 USCA §282).1 The amount of stock a bank must buy, called “member stock,” is proportional to the bank’s size. So, we would expect that by law the largest shareholders of the N.Y. Fed to be the largest banks operating in its district. This is consistent with Mullins since all of the banks on his list were, at the time, the largest banks in the N.Y. Fed region.

Further examination of the law and the facts makes Kah’s list suspect. The law does not permit the stock of a Federal Reserve Bank to be traded publicly like the stock of a typical corporation. The original Federal Reserve Act called for each regional Bank to sell stock to raise at least $4 million to begin operations (12 USCA §281). The stock was to be sold to banks, not to the public. Only in the event that sales to member banks did not raise the necessary $4 million would the regional Fed Banks be permitted to sell shares to the public, called “public stock.” However, this did not happen and no stock in any Federal Reserve Bank has ever been sold to the public, to foreigners, or to any non-bank U.S. firm (Woodward, 1996). Note that foreign interests comprise half of the alleged owners on Kah’s list. Moreover, three of the hypothesized American owners are not even banks. The law permits neither foreigners nor non-bank firms from owning shares in any Federal Reserve Bank. Chase Manhatten is the only entity on Kah’s list that could possibly own shares of the N.Y. Fed.

We can simply look at the most recent list of shareholders to test the claim that foreigners own the New York Federal Reserve Bank. According to the N.Y. Fed itself, as of June 30, 1997 the top eight shareholders were

Chase Manhatten Bank
Citibank
Morgan Guaranty Trust Company
Fleet Bank
Bankers Trust
Bank of New York
Marine Midland Bank
Summit Bank.
All of the major shareholders seen here and all of the banks on the complete list are either nationally- or state-chartered banks. All of them are U.S.-owned. Kah’s claim that foreigners directly own the N.Y. Fed is completely wrong. This list is consistent, however, with Mullins in that all the owners are domestic banks functioning within the N.Y. Federal Reserve district. The discrepancies are likely due to mergers, new entries into the banking market, or other significant changes in the size of district banks since the publication of Mullins’ list. One point is clear: foreigners do not own the New York Federal Reserve directly.

Global Domination Through the Back Door?

Although foreigners do not own the New York Federal Reserve Bank directly, perhaps, Mullins argues, they own and control it indirectly via ownership of domestic banks. He claims that since the money-center banks of New York own the largest portion of stock in the New York Fed, they hand-pick its board of directors and president. This would give them, and hence the London Connection, control over Fed operations and U.S. monetary policy.

The Securities and Exchange Commission requires that firms whose stock is traded publicly report their major stockholders each year. The reports identify all institutional shareholders (primarily, firms owning stock in other companies), all company officials who own shares in their firm, and any individual or institution owning more than 5% of the firm’s stock. These reports show that only one of the N.Y. Fed’s current largest shareholders, Citicorp, has any major foreign stockholders. As of January 1996, Price Alwaleed Bin Talad of Saudi Arabia owned 8.9% of Citicorp stock.2 None of the member banks on the above list have any significant portion of shares held by any foreign individual or institution. Mullins' claim that foreigners own the N.Y. Federal Reserve indirectly is also wrong.

Moreover, the ownership rights of Federal Reserve Bank stock are different than the common stock of typical corporations. Usually, the number of votes a shareholder has is proportional to the number of shares he owns. However, ownership of Federal Reserve Bank stock entitles the shareholder to one vote when voting for its regional Federal Reserve Bank officials regardless of how many total shares the member bank may own. A group of international conspirators would need to purchase a controlling interest in a majority of the banks operating in the N.Y. district to guarantee the election of their desired minions to the N.Y. Fed’s board of directors. Buying that much stock in so many U.S. banks would require an outlay of hundreds of billions of dollars. Surely there must be a cheaper path to global domination.

Mullins’ premise here is that the member banks control the policies of the N.Y. Fed. In the next section I detail why this is wrong, but an historical example also illustrates the fault of this assumption. Galbraith (1990) recounts that in the spring of 1929 the New York Stock Exchange was booming. Prices there had been rising considerably, extending the bull market that began in 1924. The Federal Reserve Board decided to take steps to arrest the speculative bubble that appeared to be forming: It raised the cost banks had to pay to borrow from the Federal Reserve and it increased speculators’ margin requirements. Charles Mitchell, then the head of National City Bank (now Citicorp, one of the largest shareholders of the N.Y. Fed at the time), was so irritated by this decision that in a bank statement he wrote, “We feel that we have an obligation which is paramount to any Federal Reserve warning, or anything else, to avert any dangerous crisis in the money market” (Galbraith, p. 57). National City Bank promised to increase lending to offset any restrictive policies of the Federal Reserve. Wrote Galbraith, “The effect was more than satisfactory: the market took off again. In the three summer months, the increase in prices outran all of the quite impressive increase that had occurred during the entire previous year” (Ibid). If the Fed and its policies were really under the control of its major stockholders, then why did the Federal Reserve Board clearly defy the intent of its single largest shareholder?

Does the New York Fed Call the Shots?

Mullins and Kah both argue that by controlling the New York Federal Reserve Bank, the international banking elite command the entire Federal Reserve System and thus direct U.S. monetary policy for their own profit. “For all practical purposes,” Kah writes, “the Federal Reserve Bank of New York is the Federal Reserve” (Kah, p.13; emphasis his). This is the linchpin of their conspiracy theory because it provides the mechanism by which the international bankers can execute their plans. A brief look at how the Fed’s powers are actually distributed shows that this key assumption in the conspiracy theory is wrong.

The Federal Reserve System is controlled not by the New York Federal Reserve Bank, but by the Board of Governors (the Board) and the Federal Open Market Committee (FOMC). The Board is a seven-member panel appointed by the President and approved by the Senate. It determines the interest rate for loans to commercial banks and thrifts, selects the required reserve ratio which determines how much of customer deposits a bank must keep on hand (a factor that significantly affects a bank’s ability create new credit), and also decides how much new currency Federal Reserve Banks may issue each year (12 USCA §248). The FOMC consists of the members of the Board, the president of the New York Fed, and four presidents from other regional Federal Reserve Banks. It formulates open market policy which determines how much in government bonds the Fed Banks may buy or sell – the major tool of monetary policy (12 USCA §263).

The key point is that a Federal Reserve Bank cannot change its discount rate or required reserve ratio, issue additional currency, or purchase government bonds without the explicit approval of either the Board or the FOMC. The New York Federal Reserve Bank, through its direct and permanent representation on the FOMC, has more say on monetary policy than any other Federal Reserve Bank, but it still only has one vote of twelve on the FOMC and no say at all in setting the discount rate or the required reserve ratio. If it wanted monetary policy to go in one direction, while the Board and the rest of the FOMC wanted policy to go another, then the New York Fed would be out-voted. The powers over U.S. monetary policy rest firmly with the publicly-appointed Board of Governors and the Federal Open Market Committee, not with the New York Federal Reserve Bank or a group of international conspirators.

Mullins also made a great to-do about the Federal Advisory Council. This is a panel of twelve representatives appointed by the board of directors of each Fed Bank. The Council meets at least four times each year with the members of the Board to give them their advice and to discuss general economic conditions (12 USCA §261). Many of the members have been bankers, a point not at all missed by Mullins. He speculates that this Council of bankers is able to force its will on the Board of Governors:

The claim that the “advice” of the council members is not binding on the Governors or that it carries no weight is to claim that four times a year, twelve of the most influential bankers in the United States take time from their work to travel to Washington to meet with the Federal Reserve Board merely to drink coffee and exchange pleasantries (Mullins, p. 45).

A point Mullins neglects entirely is that the Council has no voting power in Board meetings, and thus has no direct input into monetary policy. In support of his hypothesis Mullins offers no evidence, not even an anecdote. Moreover, his Council theory is inconsistent with his general thesis that the London Connection runs the Federal Reserve System via their imagined control of the N.Y. Fed. If this were true, then why would they also need the Council?

Who Gets the Fed’s Profits?

Gary Kah and Thomas Schauf (1992) also maintain that the huge profits of the Federal Reserve System are diverted to its foreign owners through the dividends paid to its stockholders. Kah reports “Each year billions of dollars are ‘earned’ by Class A stockholders of the Federal Reserve” (Kah, p. 20). Schauf further laments by asking, “When are the profits of the Fed going to start flowing into the Treasury so that average Americans are no longer burdened with excessive, unnecessary taxes?”

The Federal Reserve System certainly makes large profits. According to the Board’s 1995 Annual Report, the System had net income totaling $23.9 billion, which, if it were a single firm, would qualify it as one of the most profitable companies in the world. How were these profits distributed? By an agreement between the Board and the Treasury, nearly all of the Fed’s annual profits are paid to the federal government. Accordingly, a lion’s share of $23.4 billion, which represented 97.9 percent of the Federal Reserve’s net income, was paid to the Treasury. The Federal Reserve Banks kept $283 million, and the remaining $231 million was paid to the Fed’s stockholders as dividends. Regarding Schauf’s lamentation, the Federal Reserve System has been paying its profits to the Treasury since 1947.

Conclusion

The allegation that an international banking cartel controls the Federal Reserve is wrong. Contrary to Kah’s claim, foreigners do not own any stock in the New York Federal Reserve Bank. Neither do they currently own any significant shares of the domestic banks that actually do own shares in the N.Y. Fed. Moreover, the central assumption that control of the New York Federal Reserve is the same as control of the whole System is badly mistaken. Also, the profits of the Federal Reserve System, again contrary to the conspiracy theorists, are funneled almost entirely back to the federal government, not to an international banking elite. If the U.S. central bank is in the grip of an international conspiracy, then Mullins and Kah have certainly not uncovered it.

Footnotes:
1. State chartered banks have the option of becoming member banks of the Federal Reserve System. Interestingly, only 10% of have done so.

2. Compact Disclosure CD-ROM, v3.0

References:

82nd Annual Report, 1995, Board of Governors of the Federal Reserve System, U.S. Government Printing Office. Galbraith, John K. (1990), A Short History of Financial Euphoria. New York: Whittle Direct Books.

Kah, Gary (1991), En Route to Global Occupation. Lafayette, La.: Huntington House.

Mullins, Eustace (1983), Secrets of the Federal Reserve. Staunton, Va.: Bankers Research Institute.

Schauf, Thomas (1992), The Federal Reserve, Streamwood, IL: FED-UP, Inc. Woodward, G. Thomas (1996), “Money and the Federal Reserve System: Myth and Reality.” Congressional Research Service.

United States Code Annotated, 1994. U.S. Government Printing Office.[/quote]

[quote]Myth #6: The Federal Reserve has never been audited

BY: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C.

An often repeated Federal Reserve conspiracy theory is that the Fed has never been audited. "Every year Congress introduces legislation to audit the FED," wrote Thomas Schauf, "and every year it is defeated."7 Why? Conspiracy theorists such as Schauf, Gary Kah (1991), and Pat Robertson (1994) say the reason is that the Fed is involved in an international plot to subvert U.S. sovereignty and create a one-world government. Naturally, the Fed will not permit Congress to audit its activities, lest it discover this treasonous plan and shut it down.
How much truth is there to this claim? Has the Fed ever been audited by Congress or anyone else? The Fed controls U.S. monetary policy and can act with a great deal of independence from Congress and the executive branch. Clearly, such awesome power requires some sort of regular public oversight at the very least to insure that the Fed is doing its job efficiently and effectively, and to detect any abuses of power or fraud. This essay explores the claim that the Fed has never been audited and finds that it is completely false.

A Brief History of Federal Reserve Audits

Since its inception in 1913 the Federal Reserve System has been subjected to a variety of financial and performance audits by Congress, the executive branch, and private accounting firms, although responsibility for this task has shifted from time to time. From 1913 to 1921 the Board of Governors, then known as the Federal Reserve Board which sets monetary policy and regulates the activities of the Federal Reserve Banks, was audited annually by the U.S. Treasury Department. In 1921 Congress created the Government Accounting Office (GAO) and assigned it to audit the Board until 1933. In the Banking Act of 1933, Congress voted specifically to remove the Board from the GAO's jurisdiction. From 1933 to 1952 audit teams from the twelve Federal Reserve Banks performed the annual examination of the BOG's books. From 1952 to 1978, the Board, under authorization from Congress, decided to employ nationally recognize accounting firms to conduct the audits of itself to insure independent oversight. This provided an external evaluation of the adequacy and effectiveness of the examination procedures.1

In 1978 Congress passed the Federal Banking Agency Audit Act (31 USCA 714). It placed the Federal Reserve System back under the auditing authority of the GAO. The Act significantly increased the access of the GAO to the Federal Reserve Banks, the Board, and the Federal Open Market Committee (the FOMC). Since then, the GAO has conducted over 100 financial audits and performance audits of the three Federal Reserve bodies.3

Scope of GAO Audits

Some of the more important GAO performance audits of the Fed have been in the areas of bank supervision, payment systems activities, and government securities activities. In the first area, the GAO examined how well the Fed was enforcing its regulatory powers over its member banks. In 1992 it drew attention to the Fed's sluggish compliance with regulatory reforms mandated by the Foreign Bank Supervision Act of 1991. In examining the Fed's payment system activities, the GAO made the Fed aware of how its pricing policies for such services as check-clearing affected private suppliers of check-clearing services, and also suggested ways to speed up the process of check collections. Security markets for government debt is a crucial market, and GAO performance audits of the Fed have lead to more openness in the primary dealer system, particularly concerning the disclosure of price information. The GAO is also involved in several ongoing performance audits of the Fed such as analysis of risks and benefits of interstate banking, regulation of derivatives, and the budget of the Federal Reserve system.2

Audits By Private Accounting Firms

Financial audits of the Fed are also conducted regularly. Each Reserve Bank is audited every year by independent General Auditors who report directly to the Board of Governors. These examinations involve financial statement audits and reviews on the effectiveness of financial controls. Each Reserve Bank also has its own internal audit mechanisms. The Board contracts each year with an outside accounting firm to evaluate the audit program's effectiveness. Price Waterhouse conducted an audit of the Board's 1994, 1995, 1996, 1997, and 1998 financial statements and filed this report in the Board's 1996 Annual Report (nearly identical ones appear in other Annual Reports):

We have audited the accompanying balance sheets of the Board of Governors of the Federal Reserve System (the Board) as of December 31, 1995 and 1994, and the related statements of revenues and expenses for the years then ended. These financial statements are the responsibility of the Board's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted accounting standards and Government Accounting Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estmates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of the Board as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.

As discussed in Notes 1 and 3 to the financial statements, the Board implemented Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits, effective January 1, 1994. In accordance with Government Accounting Standards, we have also issued a report dated March 25, 1996 on our consideration of the Board's internal control structure and a report dated March 25, 1996 on its compliance with laws and regulations.4

The Board has also contracted with Coopers & Lybrand to conduct annual financial audits of the Board and the individual Federal Reserve Banks.

Exemptions to the Scope of GAO Audits
The Government Accounting Office does not have complete access to all aspects of the Federal Reserve System. The Federal Banking Agency Audit Act stipulates the following areas are to be excluded from GAO inspections:

(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;

(2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, open market operations;

(3) transactions made under the direction of the Federal Open Market Committee; or

(4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items.

In 1993 Wayne D. Angell, then a member of the Board of Governors, submitted testimony before a House subcommittee on the reasons for the restrictions on GAO access. He commented, By excluding these areas, the Act attempts to balance the need for public accountability of the Federal Reserve through GAO audits against the need to insulate the central bank's monetary policy functions from short-term political pressures and to ensure that foreign central banks and governmental entities can transact business in the U.S. financial markets through the Federal Reserve on a confidential basis.2
In reference to a bill that would lift the constraints placed on the GAO's audit authority over the Federal Reserve, Angell stated,
The benefits, if any, of broadening the GAO's authority into the areas of monetary policy and transactions with foreign official entities would be small. With regard to purely financial audits, the Federal Reserve Act already requires that the Board conduct an annual financial examination of each Reserve Bank...The process of conducting financial audits is reviewed by a public accounting firm to confirm that the methods and techniques being employed are effective and that the program follows generally accepted auditing standards...Further, a private accounting firm audits the Board's balance sheet...Finally, and more broadly, the Congress has, in effect, mandated its own review of monetary policy by requiring semiannual reports to Congress on monetary policy under the Full Employment and Balanced Growth Act of 1978...In addition, there is a vast and continuously updated body of literature and expert evaluation of U.S. monetary policy. In this environment, the contribution that a GAO audit would make to the active public discussion of the conduct of monetary policy is not likely to outweigh the disadvantages of expanding GAO audit authority in this area.2
For more on GAO restrictions, you can search the Government Printing Office website for GAO report T-GGD-94-44, entitled "Federal Reserve System Audits: Restrictions on GAO's Access."

The Budget of the Federal Reserve and Other Oversight

The budget of the Federal Reserve system is determined by each Bank and the Board of Governors. Stephen L. Neal, the Chair of the House Subcommittee on Domestic Monetary Policy in 1991, stated that "Congress plays no direct role in setting or authorizing the Fed's budget. Control of its own budget is an essential component of the independence the Fed must enjoy."1 Additional oversight of the Federal Reserve System derives from the ability of Congress to expand or to contract the Fed's powers. On numerous occasions Congress has seen fit to change the Fed's structure, alter its mission, and grant it new or different powers. In 1935 Congress changed the composition of the Board of Governors to give it more independence, and it allowed the Board to determine the discount rate for all Federal Reserve Banks rather than allow each Bank to set its own rate. In1978 Congress mandated the Fed's new goal to be full employment and price stability. In 1980 Congress granted the Fed new regulatory powers over non-member banks.
Many other government reports on the audits of the Federal Reserve system are available on-line through the Government Printing Office website. Three interesting GAO reports on Federal Reserve finances and performance are:

Federal Reserve Banks: Innaccurate Reporting of Currency at the Los Angeles Branch, (9/30/96, GAO report AMID-96-146).

Federal Reserve Banks: Internal Control, Accounting, and Auditing Issues, (2/9/96, GAO report AMID-96-5).

Federal Reserve System: Current and Future Challenges Require Systemwide Attention, (6/17/96, GGD-96-128).

Conclusion
It is obvious that the Federal Reserve System is and has always been audited. It is difficult to imagine how Kah, Schauf, and other conspiracy theorists could not have come across this evidence in the course of their research. Perhaps they are merely poor researchers. Or maybe they are reluctant to acknowledge facts which contradict their basic thesis. Either way, their credibility among skeptical readers takes a sharp hit by making such obvious factual errors.

For more on how the Federal Reserve system is audited, see the New York Federal Reserve's FedPoints.

References

1. "The Budget of the Federal Reserve System," Hearing before the Subcommittee on Domestic Monetary Policy...[House], July 18, 1991, U.S. Government Printing Office, Serial no. 102-59.

2. H.R. 28: "Federal Reserve Accountability Act of 1993," Hearing before the Subcommittee on Domestic Monetary Policy...[House], October 27, 1993, U.S. Government Printing Office, Serial no. 103-86.

3. Public Law 95-320, "Federal Banking Agency Audit Act," July 21, 1978.

4. Annual Report, 1996, Board of Governors of the Federal Reserve System.

5. Kah, Gary (1991), En Route to Global Occupation. Layfayette, La.: Huntington House.

6. Robertson, Pat (1994). The Turning Tide. Dallas: Word Publishing.

7. Schauf, Thomas (1992). The Federal Reserve. Streamwood, IL: FED-UP, Inc.

8. United States Code Annotated, U.S. Government Printing Office. p>[/quote]

[Chris Henrys Dealer]

And work is getting insanely busy, so the rest of the links can be found here if interested:

[url="http://www.geocities.com/CapitolHill/Senate/3616/FedReserveFacts.html"]http://www.geocities.com/CapitolHill/Senat...serveFacts.html[/url]

[|Bengal Migration|]

[quote name='Chris Henrys Dealer' post='327995' date='Sep 1 2006, 02:03 PM']And work is getting insanely busy, so the rest of the links can be found here if interested:

[url="http://www.geocities.com/CapitolHill/Senate/3616/FedReserveFacts.html"]http://www.geocities.com/CapitolHill/Senat...serveFacts.html[/url][/quote]

Damn. Now that's a reply.

To be honest, I am a novice on this topic, as I'm pretty sure just about every other American is, too. And I don't necessarily hang my hat on any or everything in the article I posted, but I think it's better that folks discuss and understand how this system works to ENSURE that it is not being put to use for purposes which do not serve the American public as a whole, instead of allowing it to fuel the power hungry who already have more than they can use or spend.

Thanks for the reading material. Now lemme get to learing if there are any holes to be poked in these arguements, too

[Homer_Rice]

Just did a much too quick skim here, but fwiw:

1) You're better off reading the Greider book before getting into the arcana of the article you posted. Not that there isn't something there, but it is a little misleading. Greider is much more solid.

2) On the BIS, first hang around their website, lots of good info there. But... also read "Trading with the Enemy" on some of their shady dealings circa WWII.

3) Don't know anything about this Flaherty fellow that CHD cites, so also fwiw: I don't know if the guy was in a hurry, or trying to be brief, but he does not seem to make the distinction between national banking and central banking. It's important and, imo, that is where some contention lies.

4) As a matter of history, what Flaherty outlines is generally true, at least for starters. His outlook on the Civil War/Chase/National Banking Acts is interesting, but not as germane as the dissolution of the Second National Bank by Andrew Jackson. You can learn a shitload about American history by focusing on that period, much of which is relevant today in a reflective kind of way. I'd recommend Catterall's book on the 2nd Bank as a good starting point. It may be hard to find, though, as it was written around 1900ish.

Now, my opinion: The Fed is a fact, no matter it's provenance. Is sufficient governmental control exercised over the Board of Govs? I don't think so. But once again, that goes back to the distinction between national banks and central banks. My bias is more "industrial" (for lack of a better term) and oriented towards the general welfare and imo, monetarist doctrine does not take that into account. And that's the dominant ideology nowadays, so I'm in a minority.

[Chris Henrys Dealer]

Hi Homer, question please, what would be the additional governmental controls you would like to place on the Fed Board of Governers? More transparenct in terms of membership, operations? Or just to have an authority they could answer to etc?

[Homer_Rice]

[quote name='Chris Henrys Dealer' post='328090' date='Sep 1 2006, 11:07 AM']Hi Homer, questrion please, what would be the additional controls you would like to place on the Fed Board of Governers?[/quote]

I'm a layman and not up on statutory obligations per se, so my answer lies mostly on the informal side of things. I'd like to see the Treasury Secretary play a more prominent role in guiding the Fed. I'd like to see the flow of power (in the form of information and knowledge) reversed, but seeing as that is not likely simply due to modern complexities and specialization, I'd like to see it more equalized. As it stands now, Wall Street determines the menu, not the admin in power. To wit, using an example cited by the Greider book, Carter should have fired Volcker when it became clear that Volcker was not going to execute the desires of the admin.

I'm fully aware of the potential downside to this attitude, too. It's one reason I mentioned the 2nd Bank of the US. But, imo, there is more danger in the pretension that the Fed acts more "scientifically" than in the responsible acts of of an elected admin. Were power flows more equal, then I think the resulting tension would be a good thing, in general, as it would stimulate open debate about economic and financial policy. As it stands now, financial policy tends to dictate economic policy, and much of this takes place behind the scene, so to speak.

There is a lot of fiat money out there now, but damn little of it is directed into productive areas of the economy. The "market" is supposed to take care of this stuff according to theory, but that is not true, that's just a hiding of a different kind of political activity. It is Treasury's place (and Congress' as a matter of enabling legislation) to determine money supply and this has been usurped by the Fed.

Let me pose a question: would the US be better served by a national bank or by a central bank?

[|Bengal Migration|]

Ok, this might be an insanely naive post, but oh well. Why not go back to greenbacks and dump the fed?

And thanks for the reading recommendations, Homer. I do appreciate it.

[Homer_Rice]

[quote name='WhoDeyUK' post='328133' date='Sep 1 2006, 11:45 AM']Ok, this might be an insanely naive post, but oh well. Why not go back to greenbacks and dump the fed?

And thanks for the reading recommendations, Homer. I do appreciate it.[/quote]

Well, in essence, we do have Greenbacks. Two areas to look at are the floating of the dollar in 1971 (i.e. we departed from the gold standard) and the Species Resumption/bimetallism debates of the 1870s onwards, which is more directly associated with Civil War Greenbacks.

As for dumping the Fed as an institution? That would be a big mistake, as the lack of any national/centralizing focus would lead to the kind of anarchy which occured in the wake of Jackson's removal of the deposits when the 2nd Bank of the US was dissolved.

[Guest BlackJesus]

[color="#336666"][center][size=3][i]"None are more hopelessly enslaved than those who falsely believe they are free" [/i]


[b]--- Johan W. Von Goethe[/b][/size][/center][/color]

[Guest Coy Bacon]

[b]MEET EDWARD FLAHERTY,
CONSPIRACY POO-POOIST

A response to a critic of The Creature from Jekyll Island
© 2004 by G. Edward Griffin [/b]



[b]Edward Flaherty is a Ph.D. of Economics who has been critical of my book, The Creature from Jekyll Island: A Second look at the Federal Reserve.[/b] Periodically I receive inquiries from readers who have visited Flaherty's web site, and they want to know if I can rebut what he says. I put this off for a long time because, first, his critique is lengthy and loaded with minutia that requires considerable time to respond properly and, second, the number of inquiries has been so small as to place the importance of this task far down on my list of priorities. Nevertheless, whenever I get an inquiry, I dread that my reader may think that a lack of response is a sign of not being able to defend my work; so, at last, [b]I decided to step up to the plate and swing at the ball that Flaherty has thrown in my direction. [/b]

The essence of Flaherty's critique is that anyone who opposes the Federal Reserve must be some kind of a kook, totally lacking in scholarship. He lumps all Fed critics together, those who bring scholarship to the topic as well as those who do not, and the mixture tends to discredit everyone. It is an old tactic of dumping garbage into the grocery bag so that it all smells like garbage and is rejected in total.
On September 5, 2004, I received an email from a reader who had compared comments made in my recorded lecture with what Flaherty's web site says and asked for clarification. What follows is his inquiry with my reply embedded at appropriate locations.

My reader begins by quoting from my recorded lecture, followed by a quote from Eustace Mullins:
My lecture: [b]I came to the conclusion that the Federal Reserve needed to be abolished for seven reasons.[/b] I’d like to read them to you now just so that you get an idea of where I’m coming from, as they say. I put these into the most concise phrasing that I can to make them somewhat shocking so that, hopefully, you’ll remember them:

[b]1. The Fed is incapable of accomplishing its stated objectives.
2. It is a cartel operating against the public interest.
3. It is the supreme instrument of usury.
4. It generates our most unfair tax through inflation and bailouts.
5. It encourages war.
6. It destabilizes the economy.
7. It discourages private capital formation. [/b]

Eustace Mullins, Secrets of the Federal Reserve: “...the increase in the assets of the Federal Reserve banks from 143 million dollars in 1913 to 45 BILLION dollars in 1949 went directly to the private stockholders of the [federal reserve] banks.”

My reply: I stand firmly behind my seven points but [b]I do not agree with Mullins on this. Please do not lump my work with other writers. Flaherty does this a lot. Guilt by association is a ploy that must be challenged and rejected. [/b]

Flaherty: It would be a mistake to examine these conspiracy theories....

My reply: Stop right there. There is nothing about my work that merits being classified as a conspiracy theory. [b]In modern context, it is customary to associate the phrase “conspiracy theory” with those who are intellectually handicapped or ill informed. Using emotionally loaded words and phrases to discredit the work of others is to be rejected. If I am to be called a conspiracy theorist, then Flaherty cannot object if I were to call him a conspiracy poo-pooist. The later group is a ridiculous bunch, indeed, in view of the fact that conspiracies are so common throughout history. Very few major events of the past have occurred in the absence of conspiracies.[/b] To think that our modern age must be an exception is not rational. [b]Facts are either true or false. If we disagree with a fact, our job is to explain why, not to use emotionally-loaded labels to discredit those who disagree with us. [/b]

Flaherty continued: ... outside the context in which they were written.

My reply: I try hard not to present text outside its context. When searching through hundreds of documents and thousands of pages, it is inevitable that some subtleties of context may be missed, but so far I have not yet been advised of any instances of this. I welcome any corrections; but, until specifics are brought to my attention, I stand firm on everything I have written. Furthermore, I resent the implication that my work could not stand without taking text out of context.

Flaherty: All the conspiracy authors whose work I study here profess a belief in the alleged ‘New World Order’ conspiracy, or some variant thereof.

My reply: An informed reader would not waste time beyond this point. [b]It is absurd to claim that a blueprint for a New World Order based on the model of collectivism is merely “alleged.” The evidence that this is a demonstrable fact of modern history abounds[/b]. Some of that evidence is presented in my work, The Future Is Calling, found in the Issues Section of the Freedom Force website.

Flaherty: Hypothesis: Each of the 12 Federal Reserve banks is a privately owned corporation. Like any firm, their main objective is to maximize profits. They do so by lending the government money and charging interest. They manipulate monetary policy for their own gain, not for the public good. Facts: Yes, the Federal Reserve banks are privately owned, but they are controlled by the publicly-appointed Board of Governors. The Federal Reserve banks merely execute the monetary policy choices made by the Board.

My reply: [b]Basically, Flaherty is correct as far as he goes. But, as we shall see in so many of his statements, he stops short of the entire truth. A half-truth is just as much of a deception as an outright lie.[/b] Flaherty says that the [b]Board of Governors is politically appointed[/b]. This is true and it is [b]supposed to make us feel safe in the thought that the President responds to the will of the people and that he selects only those who have the public interest at heart[/b]. The part of the story omitted by Flaherty is that[b] the President does not select these people from his own personal address book, nor does he ask the public to submit nominations. With few exceptions, he makes appointments from lists given to him by the staffs of banking committees of Congress and from private sources that have been influential in his election campaign. The most powerful of all these groups are the financial institutions (including prominent members of the Fed itself) and the media corporations over which they have effective control. One does not have to be a so-called conspiracy theorist to recognize the tremendous influence that these institutions have over the outcome of presidential campaigns, and anyone with knowledge of how our current political system works will understand why the President makes exactly the appointments that the banks want him to make. [/b] All one has to do to see the accuracy of this appraisal is to [b]examine the backgrounds and attitudes of the men who receive the appointments. While there is an occasional token individual who appears to come from the consumer sector of society, the majority are bankers deeply committed to the perpetuation of the system that sustains them[/b]. Anyone who would seriously challenge the power of the banking cartel would never be appointed. [b]So, while Flaherty is correct in what he says, the implication of what he says (that the Fed is subject to control of the people through the political process) is entirely false[/b].

Flaherty: Nearly all the interest the Federal Reserve collects on government bonds is rebated to the Treasury each year, so the government does not pay any net interest to the Fed.

My reply: Here is [b]another half-truth that is a whopper deception[/b].[b] It is true that most of the money paid by the government for interest on the national debt is returned to the government. That is because the Fed’s charter requires any interest payments in excess of the Fed’s actual operating expenses to be refunded. [/b] However, before we jump to the conclusion that this is a wonderful benefit, we must remember that [b]the banking cartel is able to use tax dollars to pay 100% of its operating expenses with few questions asked about the nature of those expenses[/b]. After all of those expenses are paid, what is left over is rebated to the Treasury, as Flaherty says. There is no secret about this, and you will find an explanation of it in my book. Technically, there is no “profit” on this money. However, remember that [b]creating money for the government is only one of the functions of the Fed. The real bonanza comes, not from money created out of nothing for the government, but from money created out of nothing by the commercial banks for loans to the private sector[/b]. That’s where the real action is. This is the famous slight-of-hand trick. Distract attention with one hand while the coin is retrieved by the other. By focusing on the supposed generosity of the Fed by returning unused interest to the Treasury, we are supposed to overlook the much larger river of gold flowing into the member banks in the form of interest on nothing as a result of consumer and commercial loans.

Flaherty: Hypothesis: Bankers and senators met in secret on Jekyll Island, Georgia in 1910 to design a central bank that would give New York City banks control over the nation’s money supply. Facts: The meeting did take place, but plans for a return to central banking were already widely known. Regardless, the proposal that came out of the Jekyll Island meeting never passed Congress. The one that did, the Federal Reserve Act, placed control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks.

My reply: [b]Here again we have a half-truth that functions as a deception[/b]. Plans [b]for a return to central banking, indeed, were already know, but they were unpopular with the voters and large blocks of Congress. That was the very problem that led to the great secrecy.[/b] Frank Vanderlip, one of the participants at the Jekyll Island meeting, later confirmed that, if the public had known that the bankers were the ones creating legislation to supposedly “break the grip of the money trust,” the bill would never have been passed into law. The facts presented in my book, and fully documented by references from original sources, show that my version is historical fact. [b]Flaherty attempts to minimize these facts by implying that the original, secret meeting was not important because the first draft of the legislation was rejected. What he does not say is that the second draft that was passed into law was essentially the same as the first. The primary difference was that Senator Aldrich’s name was removed from the title of the bill and replaced by the names of Carter Glass and Robert Owen. [/b] This was to [b]remove the stigma of Aldrich as an icon for “big-business dumbasss” and replace it with the more popular image of Democrats, “defenders of the working man.” [/b] It was a s[b]trategy advocated by Paul Warburg, one of the participants at the Jekyll Island meeting. [/b] The fact that Flaherty makes no mention of this suggests that he has not made an objective analysis but, instead, has presented a biased critique in the guise of scholarship. His statement that “the Federal Reserve Act, placed control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks” cannot be taken seriously. The Federal Reserve is not a public body in any meaningful sense of the phrase.

Flaherty: Hypothesis: Through fractional reserve banking and double-entry accounting, banks are able to create new money with the stroke of a pen (or a computer keystroke). The money they lend costs them nothing to produce, yet they charge interest on it. Facts: The banking system is indeed able to create money with a mere computer keystroke. However, a bank’s ability to create money is tied directly to the amount of reserves customers have deposited there. A bank must pay a competitive interest rate on those deposits to keep them from leaving to other banks. This interest expense alone is a substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money.

My reply: [b]Flaherty presents facts that in no way contradict what I said in my book[/b]. I speak of rotten apples, and he speaks of sweet oranges. [b]My book makes it clear that the bank’s ability to create money is tied to its reserves. The current average ratio (it varies depending on the bank) is about ten-to one. In other words, for every one dollar on deposit and held in reserve, the bank can create up to an additional nine dollars out of nothing for the purpose of lending.[/b] The statement that the banks must pay a competitive interest rate on those deposits is humorous when one considers the math. For example, let us assume for the sake of illustration that the bank pays 1.5% interest. Then it turns around and charges, let’s say 6.5% interest. That’s a spread of 5%. Although that’s a pretty good brokerage commission, it doesn’t sound exorbitant. But, here is [b]another of those half-truths[/b]. Don’t forget that the bank uses each deposited dollar as a so-called reserve for creating up to an additional nine dollars in loans. It collects interest on these loans as well. Let us assume that the bank is not fully loaned up, as they call it, and has an average of only eight dollars in magic-money loans for every one dollar on deposit. In that case, it will collect 6.5% interest on all eight of those dollars. That means, [b]based on each dollar placed on deposit, the bank will collect 52% in interest. After paying the original depositor the generous “competitive” amount of 1.5%, the bank actually receives a brokerage fee of approximately 50%. When Flaherty says that “This interest expense alone is a substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money,” one can only wonder what banking system he is describing. It certainly is not the one in the United States. [/b]

Flaherty: Hypothesis: Supporters of the Federal Reserve Act knew they did not have the votes to win, so they waited to vote until its opponents left for Christmas vacation. Since a majority of senators were not present to vote on the bill, its passage is not constitutionally valid. Facts: The voting record clearly shows that a majority of the senate did vote on the bill. Although some senators had left Washington for the holiday, the Congressional Record shows their respective positions on the legislation. Even if all opponents had all been present to vote, the Federal Reserve Act still would have passed easily.

My reply: [b]I agree with Flaherty on this issue and often have said so in the Q&A portions of my lectur[/b]es. Please note that this is not contradictory to what I wrote in The Creature. What I said there is an accurate historical fact. [b]There is little doubt in my mind that the vote would have passed eventually, but by slipping it through as they did, it circumvented the possibility of challenges and debate. I have never commented on the Constitutionality question, although I tend to think that a strict interpretation would have made this vote invalid. The problem here, however, has nothing to do with the Federal Reserve Act but with the rules of Congress. [/b]

Flaherty: Hypothesis: All money is created only when someone takes out a loan. Therefore, there can never be enough of this debt-money in circulation to repay all principal and interest. This imbalance causes inflation, financial crises, social maladies, and will eventually destroy the economy unless there is a massive injection of “debt-free” money. This idea is from Dr. Jacques Jaikaran’s book, The Debt Virus. Facts: The hypothesis shows an incomplete view of how the banking system interacts with the economy. The system necessarily creates an amount of “debt-free” money equal to the interest on its loans. It does this whenever it pays operating expenses, dividends, or purchases assets. As a result, there is more than enough money in circulation to retire all bank-related debt.

My reply: I object to being lumped together with other analysts on this issue. I did not write The Debt Virus, I wrote The Creature from Jekyll Island. [b]On page 191, I explained why I consider the claim that there is not enough money to pay off interest to be a myth.[/b]

Flaherty: Hypothesis: The Federal Reserve consistently resists attempts to audit its books. This is because any independent inspection would reveal the Fed’s treachery. Fact: Independent accounting firms conduct full financial audits of the Federal Reserve banks and the Board of Governors every year. The Fed is also subject to certain types of audits from the Government Accounting Office.

My reply: [b]I never wrote or implied, as Flaherty says, that “any independent inspection would reveal the Fed’s treachery.” What I wrote is: (1) The Fed resists external audit; (2) If it were audited by an independent party, I suspect there would be nothing illegal found; (3) The problem is not that it steals from the American people illegally but that it does so legally; (4) Therefore, we do not need to audit the Fed, we need to abolish it. [/b]

Flaherty: Hypothesis: Major European banks and investment houses own the Federal Reserve. From across the Atlantic they dictate monetary policy for their own benefit. Facts: No foreigners own any part of the Fed. Each Federal Reserve bank is owned exclusively by the participating commercial banks and S&Ls operating within the Federal Reserve bank’s district. Individuals and non-bank firms, be they foreign or domestic, are not permitted by law to own any shares of a Federal Reserve bank. Moreover, monetary policy is controlled by the publicly-appointed Board of Governors, not by the Federal Reserve banks.

My reply: [b]Flaherty is basically correct, and I have never claimed in my book or in my lectures that it was otherwise. I do not appreciate being lumped together with those who claim foreign control over the Fed. The real danger in this line of reasoning is that it is often coupled with the argument that, if we could only get control away from foreigners and put it into the hands of Congress or the Treasury, then everything would be all right. In truth, even if the Fed were in the hands of foreigners, placing it into the hands of American bankers and politician would make little difference. The Fed does not need to be converted into a government agency. It needs to be abolished.[/b]