Of all the conspiracy
theories that may come up in American political discourse, there is one that
requires nothing that is supernatural, or even particularly out of the ordinary.
The players may only be vaguely familiar: Rockefellers, Rothschilds,
Morgans, Warburgs - and the Federal Reserve (whose part tonight will be played
by Ben Bernanke, a PhD economist with education from Harvard and M.I.T.)
The scope is nothing short
of a total underground or shadow government that directs hundreds of billions
of dollars a year. But the cost of funding the operation would only
be a few pennies on the dollar (quite literally).
Other conspiracies have
come and gone, but the distrust of central banks has been with us for hundreds
of years - and the actual verifiable history is murky at best. The
individuals involved are known to posses incalculable wealth, and they
entertain themselves with controversial social causes & international
political activity - but they value their privacy and make their conclusions
away from scrutiny. The totality of the plot is so pervasive, so
totalitarian, that it encompasses a massive international network. If
you've been reading a while, you may have heard me brush on a few of these
topics.
The Promises of a Central
Bank
The fundamental promise of
a central bank like the Federal Reserve is economic stability. The theory
is that manipulating the value of the currency allows financial booms to go
higher, and crashes to be more mild. If growth becomes speculative and
unsustainable, the central bank can make the price of money go up and force
some deleveraging of risky investments - again, promising to make the crashes
more mild.
In reality? The
results are mixed. No doubt, America has experienced rapid growth since
the institution of the central bank. Then again, we did pretty darn good
before the Fed, too. Does it bring stability? Again, this is
mixed. It must be noted that the Fed was established prior to the Great Depression,
but it must also be noted that we have experienced many periods of rapid
economic growth.
A Revolutionary History
The period leading up to
the American Revolution was characterized by increasingly authoritarian
legislation from England. Acts passed in 1764 had a particularly harsh
effect on the previously robust colonial economy. The Sugar Act was in
effect a tax cut on easily smuggled molasses, and a new tax on commodities that
England more directly controlled trade over. The navy would be used in
increased capacity to enforce trade laws and collect duties.
Perhaps even more
significant than the militarization and expansion of taxes was the Currency Act
passed later in the year 1764.
"The colonies suffered
a constant shortage of currency with which to conduct trade. There were no gold
or silver mines and currency could only be obtained through trade as regulated
by Great Britain. Many of the colonies felt no alternative to printing their
own paper money in the form of Bills of Credit." [1]
The result was a true free
market of currency - each bank competed, exchange rates fluctuated wildly, and
merchants were hesitant to accept these notes as payment. Of course, they
didn't have 24-hour digital Forex markets, but I'll hold off opinions on the
viability of unregulated currency for another time.
England's response was to
seize control of the colonial money supply - forbidding banks, cities, and
colony governments from printing their own. This law, passed so soon
after the Sugar Act, started to really bring revolutionary tension inside the
colonies to a higher level. American bankers had learned early on that
debasing a currency through inflation is a helpful way to pay off perpetual
trade deficits - but Britain proved that the buyer of the currency would only take
the deal for so long...
Establishing and Abolishing
Central Banks
Following the (first)
American Revolution, the "First Bank of the United States" was
chartered to pay off collective war debts, and effectively distribute the cost
of the revolution proportionately throughout all of the states. Although
the bank had vocal and harsh skeptics, it only controlled about 20% of the
nation's money supply. Compared to today's central bank, it was nothing.
Thomas Jefferson argued
vocally against the institution of the bank, mostly citing constitutional
concerns and the limitations of government found in the 10th amendment.
There was one additional quote that hints at the deeper structural flaw of a
central bank in a supposedly free capitalist economy:
"the existing banks
will, without a doubt, enter into arrangements for lending their agency, and
the more favorable, as there will be a competition among them for it; whereas
the bill delivers us up bound to the national bank, who are free to refuse all
arrangement, but on their own terms, and the public not free, on such refusal,
to employ any other bank" [2]
Basically, the existing
banks will fight over gaining favor with the central bank - rather than
improving their performance relative to a free market. The profit margins
associated with collusion would obviously outweigh the potential profits gained
from legitimate business.
The Second Bank of the
United States was passed five years after the first bank's charter
expired. An early enemy of central banking, President James Madison, was
looking for a way to stabilize the currency in 1816. This bank was also
quite temporary - it would only stay in operation until 1833 when President Andrew
Jackson would end federal deposits at the institution. The charter
expired in 1836 and the private corporation was bankrupt and liquidated by
1841.
1863 & 1864::
National Bank Act(s)
While the South had been
the major opponent of central banking systems, the end of the Civil War allowed
for (and also made necessary) the system of national banks that would dominate
the next fifty years.
The Office of the
Comptroller of the Currency (OCC) says that this post-war period of a unified
national currency and system of national banks "worked well."
[3] Taxes on state banks were imposed to encourage people to use the
national banks - but liquidity problems persisted as the money supply did not
match the economic cycles.
Overall, the American
economy continued to grow faster than Europe, but the period did not bring
economic stability by any stretch of the imagination. Several panics and
runs on the bank - and it became a fact of life under this system of competing
nationalized banks. In 1873, 1893, 1901, and 1907 significant panics
caused a series of bank failures. The new system wasn't stable at all, in
fact, many suspected it was wrought with fraud and manipulation.
1907-1913: Triumph of
the Robber Barons
"The most notable
robber barons were J.P. Morgan (banking), John D. Rockefeller (oil), and Andrew
Carnegie (steel)" [5]
Panic of 1907
The Federal Reserve Bank of
Minneapolis is not shy about attributing the causes of the Panic of 1907 to
financial manipulation from the existing banking establishment. "If Knickerbocker
Trust would falter, then Congress and the public would lose faith in all trust
companies and banks would stand to gain, the bankers reasoned." [4]
In timing with natural
economic cycles, major banks including J.P. Morgan and Chase launched an
all-out assault on Heinze's Knickerbocker Trust. Financial institutions
on the inside started silently selling off assets in the competitor, and
headlines about a few bad loans started making top spots in the
newspapers. The run on Knickerbocker turned into a general panic - and
the Federal Government would come to the rescue of its privately owned
"National Banks."
During the Panic of 1907,
"Depositors 'run' on
the Knickerbocker Bank. J.P. Morgan and James Stillman of First National City
Bank (Citibank) act as a "central bank," providing liquidity ... [to
stop the bank run]
President Theodore
Roosevelt provides J.P. Morgan with $25 million in government funds ... to
control the panic. Morgan, acting as a one-man central bank, decides which
firms will fail and which firms will survive." [5]
Interlocking Directorates
How did JP Morgan get so
powerful that the government would provide them with funding to increase their
power? This question will come up again in 2008.
As Congressman Arsène Pujo
would discover in his Congressional investigation of the "robber
barons" or "money trusts," the key to expanding wealth beyond
typical monopolies is the practice of interlocking directorates. Railroad
and oil monopolists could still expand their power and wealth by creating
series of banks, and sponsoring directors at the institutions. Alliances
across the insiders would be cemented with cross-institution investment.
Tycoon A would found banks 1, 2, and 3 - Tycoon B would found 4, 5, and 6 - and
each bank would be heavily invested in the various banks and monopolies they
represented.
The result is a sort of
conglomeration of monopolies - a place where each industry's dominant
corporation merges into a larger entity, a goal short of nothing but
monopolization of everything.
But such a entity could not
be expected to exist or thrive in a purely efficient (competitive)
market. It is important then to remember that the private national banks
of this "Robber baron" period were effectively subsidized by a tax on
their state-based competition. This is of course in addition to the interest
gained from public deposits, and the fees that the government paid for the
printing of currency.
No, from the onset, the
National Bank System was little more than a federally subsidized profit
opportunity.
The resulting outrage and
scandal would result in a chorus of calls all demanding the same thing:
More government action, a stronger central bank. What few but the bankers
understood is that the government action and stronger central bank subsidies
allowed the creation the things the people feared the most: corruption,
monopoly, and central planning of mundane activity and commerce.
1913 The Federal Reserve
Government interventionists
got their wish in 1913 with the Federal Reserve (and income tax
amendment). Just in time, too, because the nation needed a new source of
unlimited cash to finance both sides of WW1 and eventually our own entry to the
war. After the war, with both sides owing us debt through the Federal
Reserve backed banks, the center of finance moved from London to New York.
But did the Federal Reserve
reign in the money trusts and interlocking directorates? Not by a long
shot. If anything, the Federal Reserve granted new powers to the National
Banks by permitting overseas branches and new types of banking services.
The greatest gift to the bankers, was a virtually unlimited supply of loans
when they experience liquidity problems. [5]
From the early 1920s to
1929, the monetary supply expanded at a rapid pace and the nation experienced
wild economic growth. Curiously, however, the number of banks started to
decline for the first time in American history. [6]
Toward the end of the
period, speculation and lose money had propelled asset and equity prices to
unreal levels. The stock market crashed, and as the banks struggled with
liquidity problems, the Federal Reserve actually cut the money supply.
Without a doubt, this is the greatest financial panic and economic collapse in
American history - and it never could have happened on this scale without
the Fed's intervention. The number of banks crashed and a few of the old
robber barons' banks managed to swoop in and grab up thousands of competitors
for pennies on the dollar.
[1] The Currency Act, 1764 -
http://www.ushistory.org/declaration/related/currencyact.htm
[2] Jefferson's Opinion on the Constitutionality of a National
Bank, 1791 - http://www.yale.edu/lawweb/avalon/amerdoc/bank-tj.htm
[3] National Bank Notes: A Uniform Curency (1865-1914) -
http://www.occ.treas.gov/exhibits/histor4.htm
[4] F. Augustus Heinze of Montana and the Panic of 1907 -
http://minneapolisfed.org/pubs/region/89-08/REG898C.cfm
[5] FDIC Learning Bank: 1900-1919 -
http://www.fdic.gov/about/learn/learning/when/19-1919.html
[6] Depression-era bank failures: the great
contagion or the great shakeout? - http://www.encyclopedia.com/doc/1G1-132680382.htmlSource: http://www.undergroundpolitics.com/economy/federal-reserve-history/
