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They would take the brunt of the engine's noise and smoke that, somehow, always managed to seep through unseen cracks. A dining car was placed between the sections as a subtle barrier between the two classes of travelers. By today's Standards, the environment was drab. Chairs and mattresses were hard. Surfaces were metal or scarred wood. Colors were dark green and gray.
The shades were drawn, but through the open door, one could see mahogany paneling, velvet drapes, plush armchairs, and a well stocked bar.
Porters with white serving coats were busying themselves with routine chores. And there was the distinct aroma of expensive cigars. Other cars in the station bore numbers on each end to distinguish them from their dull brothers. But numbers were not needed for this beauty. On the center of each side was a small plaque bearing but a single word: ALDRICH.
As an investment associate of J.P. Morgan, he had extensive holdings in banking, manufacturing, and public utilities. His son-in-law was John D. Rockefeller, Jr. Sixty years later, his grandson, Nelson Aldrich Rockefeller, would become Vice-President of the United States.
Had they forgotten something? Was there a problem with the engine?
CONCENTRATION OF WEALTH
In the United States, there were two main focal points of this control: the Morgan group and the Rockefeller group. Within each orbit was a maze of commercial banks, acceptance banks, and investment firms. In Europe, the same process had proceeded even further and had coalesced into the Rothschild group and the Warburg group.
An article appeared in the New York Times on May 3, 1931, commenting on the death of George Baker, one of Morgan's closest associates.
It said:
The reference was only to those in the Morgan group, (members of the Jekyll Island Club), It did not include the Rockefeller group or the European financiers. When all of these are combined, the previous estimate that one-fourth of the world's wealth was represented by these groups is probably conservative.
In spite of his efforts, however, the final report of the committee at large was devastating:
Under our system of issuing and distributing corporate securities the investing public does not buy directly from the corporation.
The securities travel from the issuing house through middlemen to the investor. It is only the great banks or bankers with access to the mainsprings of the concentrated resources made up of other people's money, in the banks, trust companies, and life insurance companies, and with control of the machinery for creating markets and distributing securities, who have had the power to underwrite or guarantee the sale of large-scale security issues.
The men who through their control over the funds of our railroad and industrial companies are able to direct where such funds shall be kept, and thus to create these great reservoirs of the people's money are the ones who are in a position to tap those reservoirs for the ventures in which they are interested and to prevent their being tapped for purposes which they do not approve...
Quickly, the crew threw a switch, and the engine nudged the last car onto a siding where, just as quickly, it was uncoupled and left behind. When passengers stepped onto the platform at the terminal a few moments later, their train appeared exactly as it had been when they boarded.
They could not know that their travelling companions for the night, at that very instant, were joining still another train which, within the hour, would depart Southbound once again.
But, by that time, the Sea Islands that sheltered the coast from South Carolina to Florida already had become popular as winter resorts for the very wealthy. One such island, just off the coast of Brunswick, had recently been purchased by J.P. Morgan and several of his business associates, and it was here that they came in the fall and winter to hunt ducks or deer and to escape the rigors of cold weather in the North. It was called Jekyll Island.
Who were Mr. Aldrich's guests? Why were they here? Was there anything special happening?
Mr. Davison, who was one of the owners of Jekyll Island and who was well known to the local paper, told them that these were merely personal friends and that they had come for the simple amusement of duck hunting. Satisfied that there was no real news in the event, the reporters returned to their office.
It is difficult to imagine any event in history - including preparation for war - that was shielded from public view with greater mystery and secrecy.
In more specific terms, the purpose and, indeed, the actual outcome of this meeting was to create the blueprint for the Federal Reserve System.
Even now, the accepted view is that the meeting was relatively unimportant, and only paranoid unsophisticates would try to make anything out of it.
Ron Chernow writes:
Little by little, however, the story has been pieced together in amazing detail, and it has come directly or indirectly from those who actually were there.
Furthermore, if what they say about their own purposes and actions does not constitute a classic conspiracy, then there is little meaning to that word.
At any rate, the opening paragraph contained a dramatic but highly accurate summary of both the nature and purpose of the meeting:
I am not romancing. I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written.2
1 - Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Atlantic Monthly Press, 1990), p. 129. 2 - "Men Who Are Making America/' by B.C. Forbes, Leslie's Weekly, October 19, 1916, p. 423.
In 1930, Paul Warburg wrote a massive book - 1750 pages in all - entitled The Federal Reserve System, Its Origin and Growth. In this tome, he described the meeting and its purpose but did not mention eitheNts location or the names of those who attended.
But he did say:
Then, in a footnote he added:
An interesting insight to Paul Warburg's attendance at the Jekyll Island meeting came thirty-four years later, in a book written by his son, James.
James had been appointed by F.D.R. as Director of the Budget and, during World War II, as head of the Office of War Information. In his book he described how his father, who didn't know one end of a gun from the other, borrowed a shotgun from a friend and carried it with him to the train to disguise himself as a duck hunter.2
Stephenson continues with a description of the encounter at Brunswick station.
He tells us that, shortly after they arrived, the station master walked into the private car and shocked them by his apparent knowledge of the identities of everyone on board. To make matters even worse, he said that a group of reporters were waiting outside.
Davison took charge.
No one claims to know what story was told standing on the railroad ties that morning, but a few moments later Davison returned with a broad smile on his face.
Stephenson continues:
1. Paul Warburg, The Federal Reserve
System: Its Origin and Growth (New York: Macmillan, 1930), Vol. I, p. 58. It
is apparent that Warburg wrote this line two years before the book was
published.
In the February 9, 1935, issue of the Saturday Evening Post, an article appeared written by Frank Vanderlip.
In it he said:
THE STRUCTURE WAS PURE CARTEL
A cartel is a group of independent businesses
which join together to coordinate the production, pricing, or marketing of
their members. The purpose of a cartel is to reduce competition and thereby
increase profitability. This is accomplished through a shared monopoly over
their industry which forces the public to pay higher prices for their goods
or services than would be otherwise required under free-enterprise
competition.
They were often competitors, and there is little doubt that there was considerable distrust between them and skillful maneuvering for favored position in any agreement. But they were driven together by one overriding desire to fight their common enemy.
The enemy was competition.
Almost all banks in the 1880s were national banks, which means they were chartered by the federal government. Generally, they were located in the big cities, and were allowed by law to issue their own currency in the form of bank notes.
Even as early as 1896, however, the number of non-national banks had grown to sixty-one per cent, and they already held fifty-four per cent of the country's total banking deposits. By 1913, when the Federal Reserve Act was passed, those numbers were seventy-one per cent non-national banks holding fifty-seven per cent of the deposits.1
In the eyes of those duck hunters from New York, this was a trend that simply had to be reversed.
Rates were low enough to attract serious borrowers who were confident of the success of their business ventures and of their ability to repay, but they were high enough to discourage loans for frivolous ventures or those for which there were alternative sources of funding - for example, one's own capital. That balance between debt and thrift was the result of a limited money supply.
Banks could create loans in excess of their actual deposits, as we shall see, but there was a limit to that process. And that limit was ultimately determined by the supply of gold they held. Consequently, between 1900 and 1910, seventy per cent of the funding for American corporate growth was generated internally, making industry increasingly independent of the banks.1
Even the federal government was becoming thrifty. It had a growing stockpile of gold, was systematically redeeming the Greenbacks - which had been issued during the Civil War - and was rapidly reducing the national debt.
To accomplish this, the money supply simply had to be disconnected from gold and made more plentiful or, as they described it, more elastic.
This is because, when banks accept a customer's deposit, they give in return a "balance" in his account. This is the equivalent of a promise to pay back the deposit anytime he wants. Likewise, when another customer borrows money from the bank, he also is given an account balance which usually is withdrawn immediately to satisfy the purpose of the loan.
This creates a ticking time bomb because, at that point, the bank has issued more promises to "pay-on-demand" than it has money in the vault. Even though the depositing customer thinks he can get his money any time he wants, in reality it has been given to the borrowing customer and no longer is available at the bank.
And, because only about three per cent of these accounts are actually retained in the vault in the form of cash - the rest having been put into even more loans and investments - the bank's promises exceed its ability to keep those promises by a factor of over three hundred-to-one.2
1. William Greider, Secrets ofthe
Temple (New York: Simon and Schuster, 1987), p. 274, 275. Also Kolko, p. 145
As long as only a small percentage
Bankruptcy usually follows in due course.
Instead of withdrawing their funds at the teller's window, they simply wrote checks to purchase goods or services. People receiving those checks took them to a bank for deposit. If that bank happened to be the same one from which the check was drawn, then all was well, because it was not necessary to remove any real money from the vault.
But if the holder of the check took it to another bank, it was quickly passed back to the issuing bank and settlement was demanded between banks.
While the Downtown Bank is demanding payment from the Uptown Bank, the Uptown Bank is also clearing checks and demanding payment from the Downtown bank. As long as the money flow in both directions is equal, then everything can be handled with simple bookkeeping. But if the flow is not equal, then one of the banks will have to actually send money to the other to make up the difference.
If the amount of money required exceeds a few percentage points of the bank's total deposits, the result is the same as a run on the bank by depositors. This demand of money by other banks rather than by depositors is called a currency drain.
It was dangerous enough to loan ninety per cent of their customers' savings (keeping only one dollar in reserve out of every ten), but that had proven to be adequate most of the time. Some banks, however, were tempted to walk even closer to the precipice.
They pushed the ratio to ninety-too per cent, ninety-five per cent, ninety-nine per cent. After all, the way a bank makes money is to collect interest, and the only way to do that is to make loans. The more loans, the better. And, so, there was a practice among some of the more reckless banks to "loan up," as they call it.
Which was another way of saying to push dawn their reserve ratios.
No major currency drains would ever occur.
The entire banking industry might collapse under such a system, but not individual banks - at least not those that were part of the cartel. All would walk the same distance from the edge, regardless of how close it was. Under such uniformity, no individual bank could be blamed for failure to meet its obligations. The blame could be shifted, instead, to the "economy" or "government policy" or "interest rates" or "trade deficits" or the "exchange-value of the dollar" or even to the "capitalist system" itself.
Thus, the bank which pursued a more reckless
lending policy had to draw against its reserves in order to make payments to
the more conservative banks and, when those funds were exhausted, it usually
was forced into bankruptcy. Historian John Klein tells us that,
In other words, the "panics" and resulting bank failures were caused, not by negative factors in the economy, but by currency drains on the banks which were loaned up to the point where they had practically no reserves at all.
The banks did not fail because the system was weak. The system failed because the banks were weak.
To do this, they had to find a way to force all banks to walk the same distance from the edge, and, when the inevitable disasters happened, to shift public blame away from themselves. By making it appear to be a problem of the national economy rather than of private banking practice, the door then could be opened for the use of tax money rather than their own funds for paying off the losses.
The most important task before them, therefore, can be stated as objective number five:
The task was a delicate one.
The American people did not like the concept of
a cartel. The idea of business enterprises joining together to fix prices
and prevent competition was alien to the free-enterprise system. It could
never be sold to the voters. But, if the word cartel was not used, if the
venture could be described
Henceforth, the cartel would operate as a central bank. And even that was to be but a generic expression. For purposes of public relations and legislation, they would devise a name that would avoid the word bank altogether and which would conjure the image of the federal government itself.
Furthermore, to create the impression that there would be no concentration of power, they would establish regional branches of the cartel and make that a main selling point.
Stephenson tells us:
But political expediency required that such plans be concealed from the public.
As John Kenneth Galbraith explained it:
1. Stephenson, p. 378.
Because of this knowledge, Paul Warburg became the dominant and guiding mind throughout all of the discussions. Even a casual perusal of the literature on the creation of the Federal Reserve System is sufficient to find that he was, indeed, the cartel's mastermind.
Galbraith says,
Professor Edwin Seligman, a member of the international banking family of J. & W. Seligman, and head of the Department of Economics at Columbia University, writes that,
He had come to the United States only nine years previously. Soon after arrival, however, and with funding provided mostly by the Rothschild group, he and his brother, Felix, had been able to buy partnerships in the New York investment banking firm of Kuhn, Loeb & Company, while continuing as partners in Warburg of Hamburg.1
1. Anthony Sutton, Wall Street and FDR (New Rochelle, New York: Arlington House, 1975), p. 92.
Within twenty years, Paul would become one of the wealthiest men in America with an unchallenged domination over the country's railroad system.
This was, of course, a central bank, and it was one of the cartel models used in the construction of the Federal Reserve System. The Reichsbank, incidentally, a few years later would create the massive hyperinflation that occurred in Germany, wiping out the middle class and the entire German economy as well.
These attracted wide attention in both financial and academic circles and set the intellectual climate for all future discussions regarding banking legislation. In these treatises, Warburg complained that the American monetary system was crippled by its dependency on gold and government bonds, both of which were in limited supply.
What America needed, he argued, was an elastic money supply that could be expanded and contracted to accommodate the fluctuating needs of commerce. The solution, he said, was to follow the German example whereby banks could create currency solely on the basis of "commercial paper," which is banker language for I.O.U.s from corporations.
In March of that year, for example, The Nezv York Times published an eleven-part series written by Warburg explaining and expounding what he called the Reserve Bank of the United States.1
To cover the fact that a central bank is merely a cartel which has been legalized, its proponents had to lay down a thick smoke screen of technical jargon focusing always on how it would supposedly benefit commerce, the public, and the nation; how it would lower interest rates, provide funding for needed industrial projects, and prevent panics in the economy.
There was not the slightest glimmer that, underneath it all, was a master plan which was designed from top to bottom to serve private interests at the expense of the public.
He said:
Precisely. A union of banks.
He said:
And that is about as good a definition of a cartel as one is likely to find.
In an article published in July of that year in a magazine called The Independent, he boasted:
One of the most widely-used textbooks on this subject says:
Even the most naive student must sense a grave contradiction between this cherished view and the System's actual performance.
Since its inception, it has presided over the crashes of 1921 and 1929; the Great Depression of '29 to '39; recessions in '53, '57, '69, '75, and '81; a stock market "Black Monday" in '87; and a 1000% inflation which has destroyed 90% of the dollar's purchasing power.3
1. Quoted by KoLko, Triumph, p. 235.
That incredible loss in value was quietly transferred to the federal government in the form of hidden taxation, and the Federal Reserve System was the mechanism by which it was accomplished.
The consequences of wealth confiscation by the Federal-Reserve mechanism are now upon us.
In the current decade,
FIRST REASON TO ABOLISH THE SYSTEM
There can be no argument that the System has failed in its stated objectives. Furthermore, after all this time, after repeated changes in personnel, after operating under both political parties, after numerous experiments in monetary philosophy, after almost a hundred revisions to its charter, and after the development of countless new formulas and techniques, there has been more than ample opportunity to work out mere procedural flaws.
It is not unreasonable to conclude, therefore, that the System has failed, not because it needs a new set of rules or more intelligent directors, but because it is incapable of achieving its stated objectives.
The painful answer is: those were never its true objectives.
When one realizes the circumstances under which it was created, when one contemplates the identities of those who authored it, and when one studies its actual performance over the years, it becomes obvious that the System is merely a cartel with a government facade. There is no doubt that those who run it are motivated to maintain full employment, high productivity, low inflation, and a generally sound economy.
They are not interested in killing the goose that lays such beautiful golden eggs. But, when there is a conflict between the public interest and the private needs of the cartel - a conflict that arises almost daily - the public will be sacrificed. That is the nature of the beast. It is foolish to expect a cartel to act in any other way.
For example, William Greider was a former Assistant Managing Editor for The Washington Post. His book, Secrets of The Temple, was published in 1987 by Simon and Schuster. It was critical of the Federal Reserve because of its failures, but, according to Greider, these were not caused by any defect in the System itself, but merely because the economic factors are "sooo complicated" that the good men who have struggled to make the System work have just not yet been able to figure it all out.
But, don't worry, folks, they're working on it! That is exactly the kind of powder-puff criticism which is acceptable in our mainstream media. Yet, Greider's own research points to an entirely different interpretation.
Speaking of the System's origin, he says:
Anthony Sutton, former Research Fellow at the Hoover Institution for War, Revolution and Peace, and also Professor of Economics at California State University, Los Angeles, provides a somewhat deeper analysis.
1. Greider, p. 275.
He writes:
The real significance of the journey to Jekyll Island and the creature that was hatched there was inadvertently summarized by the words of Paul Warburg's admiring biographer, Harold Kellock:
1. Sutton, Wall Street and F.D.R., p,
94.
Those who attended represented the great financial institutions of Wall Street and, indirectly, Europe as well. The reason for secrecy was simple. Had it been known that rival factions of the banking community had joined together, the public would have been alerted to the possibility that the bankers were plotting an agreement in restraint of trade - which, of course, is exactly what they were doing.
What emerged was a cartel agreement with five objectives: stop the growing competition from the nation's newer banks; obtain a franchise to create money out of nothing for the purpose of lending; get control of the reserves of all banks so that the more reckless -ones would not be exposed to currency drains and bank runs; get the taxpayer to pick up the cartel's inevitable losses; and convince Congress that the purpose was to protect the public.
It was realized that the bankers would have to become partners with the politicians and that the structure of the cartel would have to be a central bank. The record shows that the Fed has failed to achieve its stated Objectives. That is because those were never its true goals.
As a banking cartel, and in terms of the five
objectives stated above, it has been an Unqualified success.
Chapter
Two
That, of course, is one of the more controversial assertions made in this book.
Yet, there is little room for any other interpretation when one confronts the massive evidence of history since the System was created. Let us, therefore, take another leap through time. Having jumped to the year 1910 to begin this story, let us now return to the present era.
We would stare with incredulity at men dressed like aliens from another planet; throwing their bodies against each other; tossing a funny shaped object hack and forth; fighting over it as though it were of great value, yet, occasionally kicking it out of the area as though it were worthless and despised; chasing each other, knocking each other to the ground and then walking away to regroup for another surge; all this with tens of thousand of spectators riotously shouting in unison for no apparent reason at all.
Without a basic understanding that this was a game and without knowledge of the rules of that game, the event would appear as total chaos and universal madness.
Which, as far as monetary matters is concerned, is the common state of the vast majority of Americans today.
The procedure by which this is accomplished is as follows:
The banks derive profit from this easy money, not by spending it, but by lending it to others and collecting interest.
The only way to do this and balance the books once again is to draw upon the capital which was invested by the bank's stockholders or to deduct the loss from the bank's current profits. In either case, the owners of the bank lose an amount equal to the value of the defaulted loan.
So, to them, the loss becomes very real. If the bank is forced to write off a large amount of bad loans, the amount could exceed the entire value of the owners' equity. When that happens, the game is over, and the bank is insolvent.
But the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Federal Deposit Loan Corporation now guarantee that massive loans made to large corporations and to other governments will not be allowed to fall entirely upon the bank's owners should those loans go into default.
This is done under the argument that, if these corporations or banks are allowed to fail, the nation would suffer from vast unemployment and economic disruption.
More on that in a moment.
The larger the loan, the better it is, because it will produce the greatest amount of profit with the least amount of effort A single loan to a third-world country netting hundreds of millions of dollars in annual interest is just as easy to process - if not easier - than a loan for $50,000 to a local merchant on the shopping mall. If the interest is paid, it's gravy time.
If the loan defaults, the federal government will "protect the public" and, through various mechanisms described shortly, will make sure that the banks continue to receive their interest.
There are no such guarantees for the small loans. The public will not swallow the line that bailing out the little guy is necessary to save the system. The dollar amounts are too small. Only when the figures become mind-boggling does the ploy become plausible.
They make a profit from interest on the loan, not repayment of the loan. If a loan is paid off, the bank merely has to find another borrower, and that can be an expensive nuisance. It is much better to have the existing borrower pay only the interest and never make payments on the loan itself. That process is called rolling over the debt. One of the reasons banks prefer to lend to governments is that they do not expect those loans ever to be repaid.
When Walter Wriston was chairman of the Citicorp Bank in 1982, he extolled the virtue of the action this way:
When this activity is carried out in the United States, as it is weekly, it is described as a Treasury bill auction.
But when basically the same process is conducted abroad in a foreign language, our news media usually speak of a country's "rolling over its debts." The perception remains that some form of disaster is inevitable. It is not.
Certainly in an era of $100-billion deficits, no one lending money to our Government by buying a Treasury bill expects that it will be paid at maturity in any way except by our Government's selling a new bill of like amount.1
1. "Banking Against Disaster/' by Walter B. Wriston, The New York Times, September 14, 1982.
Furthermore, it is predictable that most unsound loans eventually will go into default. When the borrower finally declares that he cannot pay, the bank responds by rolling over the loan.
This often is stage managed to appear as a concession on the part of the bank but, in reality, it is a significant forward move toward the objective of perpetual interest.
So the bank's next move is to create additional money out of nothing and lend that to the borrower so he will have enough to continue paying the interest, which by now must be paid on the original loan plus the additional loan as well. What looked like certain disaster suddenly is converted by a brilliant play into a major score.
This not only maintains the old loan on the books as an asset, it actually increases the apparent size of that asset and also results in higher interest payments, thus, greater profit to the bank.
He is not interested in making interest payments
with nothing left for himself. He comes to realize that he is merely working
for the bank and, once again, interest payments stop. The opposing teams go
into a huddle to plan the next move, then rush to the scrimmage
Finally, a "compromise" is worked out.
As before, the bank agrees to create still more money out of nothing and lend that to the borrower to cover the interest on both of the previous loans but, this time, they up the ante to provide still additional money for the borrower to spend on something other than interest. That is a perfect score. The borrower suddenly has a fresh supply of money for his purposes plus enough to keep making those bothersome interest payments.
The bank, on the other hand, now has still larger assets, higher interest income, and greater profits.
What an exciting game!
This realization usually comes when the interest payments become so large they represent almost as much as the entire corporate earnings or the country's total tax base. This time around, roll-overs with larger loans are rejected, and default seems inevitable.
A voice over the public address system announces:
Rescheduling usually means a combination of a lower interest rate and a longer period for repayment.
The effect is primarily cosmetic. It reduces the monthly payment but extends the period further into the future. This makes the current burden to the borrower a little easier to carry, but it also makes repayment of the capital even more unlikely.
It postpones the day of reckoning but, in the meantime, you guessed it: The loan remains as an asset, and the interest payments continue.
The borrower realizes he can never repay the capital and flatly refuses to pay interest on it. It is time for the Final Maneuver.
1- "Overseas Lending... Trigger for A Severe Depression?" The Banking Safety Digest (U.S. Business Publishing/Veribanc, Wakefield, Massachusetts), August, 1989, p. 3.
The banks can absorb the losses of their bad loans to multinational corporations and foreign governments, but that is not according to the rules.
It would be a major loss to the stockholders who would receive little or no dividends during the adjustment period, and any chief executive officer who embarked upon such a course would soon be looking for a new job. That this is not part of I the game plan is evident by the fact that, while a small portion of the Latin American debt has been absorbed, the banks are continuing to make gigantic loans to governments in other parts of the world, particularly Africa, Red China, and Eastern European nations.
For reasons which will be analyzed in chapter four, there is little hope that the performance of these loans will be different than those in Latin America.
But the most important reason for not absorbing the losses is that there is a standard play that can still [breathe life back into those dead loans and reactivate the bountiful income stream that flows from them.
The captains of both teams approach the Referee and the Game Commissioner to request that the game be extended. The reason given is that this is in the interest of the public, the spectators who are having such a wonderful time and [who will be sad to see the game ended.
They request also that, while the spectators are in the stadium enjoying themselves, the barking-lot attendants be ordered to quietly remove the hub caps from every car.
These can be sold to provide money for additional salaries for all the players, including the referee and, of course, the Commissioner himself. That is only fair since they are now working overtime for the benefit of the spectators. When the deal is finally struck, the horn will blow three times, and a roar of joyous relief will sweep across the stadium.
Not only will there be unemployment and hardship at home, there will be massive disruptions in world markets. And, since we are now so dependent on those markets, our exports will drop, foreign capital will dry up, and we will suffer greatly.
What is needed, they will say, is for Congress to provide money to the borrower, either directly or indirectly, to allow him to continue to pay interest on the loan and to initiate new spending programs which will be so profitable he will soon be able to pay everyone back.
After all, the amount to be lost through the write-off was created out of nothing in the first place and, without this Final Maneuver, the entirety would be written off.
Furthermore, this modest write down is dwarfed by the amount to be gained through restoration of the income stream.
That means to guarantee future payments should the borrower again default. Once Congress agrees to this, the government becomes a co-signer to the loan, and the inevitable losses are finally lifted from the ledger of the bank and placed onto the backs of the American taxpayer.
All of these mechanisms extract payments from the American people and channel them to the deadbeat borrowers who then send them to the banks to service their loans. Very little of this money actually comes from taxes.
Almost all of it is generated by the Federal Reserve System. When this newly created money returns to the banks, it quickly moves out again into the economy where it mingles with and dilutes the value of the money already there. The result is the appearance of rising prices but which, in reality, is a lowering of the value of the dollar.
They do not realize that these groups also are victimized by a monetary system which is constantly being eroded in value by and through the Federal Reserve System.
A man from the audience rose and asked angrily:
And the audience of several hundred people actually cheered in enthusiastic approval!
Yet, many of them still manage to bungle themselves into insolvency. As we shall see in a later section of this study, insolvency actually is inherent in the system itself, a system called fractional-reserve banking.
Lo and behold, there isn't enough to go around and, when that happens, the cat is finally out of the bag. The bank must close its doors, and the depositors still waiting in line outside are... well, just that: still waiting.
In other words, they should keep cash in the vault equal to 100% of their depositors' accounts. When we give our hat to the hat-check girl and obtain a receipt for it, we don't expect her to rent it out while we eat dinner hoping she'll get it back - or one just like it - in time for our departure.
We expect all the hats to remain there all the time so there will be no question of getting ours back precisely when we want it.
They are told they can have their money any time they want it and they are paid interest as well. Even if they do not receive interest, the bank does, and this is how so many customer services can be offered at little or no direct cost. Occasionally, a thirty-day or sixty-day delay will be mentioned as a possibility, but that is greatly inadequate for deposits which have been transformed into ten, twenty, or thirty-year loans. The banks are simply playing the odds that everything will work out most of the time.
Students of finance are told that there simply is no other way for the system to function. Once that premise is accepted, then all attention can be focused, not on the inherent fraud, but on ways and means to live with it and make it as painless as possible.
That is banker language meaning it stands ready to create money out of nothing and immediately lend it to any bank in trouble. (Details on how that is accomplished are in chapter eight.)
But there are practical limits to just how far that process can work. Even the Fed will not support a bank that has gotten itself so deeply in the hole it has no realistic chance of digging out. When a bank's bookkeeping assets finally become less than its liabilities, the rules of the game call for transferring the losses to the depositors themselves. This means they pay twice: once as taxpayers and again as depositors.
The mechanism by which this is accomplished is called the Federal Deposit Insurance Corporation.
THE FDIC PLAY
The money to do this comes out of a special fund which is derived from assessments against participating banks. The banks, of course, do not pay this assessment. As with all other expenses, the bulk of the cost ultimately is passed on to their customers in the form of higher service fees and lower interest rates on deposits.
When moral hazard is present, it is normal for people to become careless, and the likelihood increases that what is being insured against will actually happen. An example would be a government program forcing everyone to pay an equal amount into a fund to protect them from the expense of parking fines.
One hesitates even to mention this absurd proposition lest some enterprising politician should decide to put it on the ballot.
Therefore, let us hasten to point out that, if such a numb-skull plan were adopted, two things would happen:
The FDIC operates exactly in this fashion.
Depositors are told their insured accounts are protected in the event their bank should become insolvent. To pay for this protection, each bank is assessed a specified percentage of its total deposits. That percentage is the same for all banks regardless of their previous record or how risky their loans. Under such conditions, it does not pay to be cautious.
The banks making reckless loans earn a higher rate of interest than those making conservative loans.
They also are far more likely to collect from the fund, yet they pay not one cent more. Conservative banks are penalized and gradually become motivated to make more risky loans to keep up with their competitors and to get their "fair share" of the fund's protection. Moral hazard, therefore, is built right into the system.
As with protection against parking tickets, the FDIC increases the likelihood that what is being insured against will actually happen.
It is not a solution to the problem, it is part of the problem.
Banks with solid loans on their books would be able to obtain protection for their depositors at reasonable rates, because the chances of the insurance company having to pay would be small. Banks with unsound loans, however, would have to pay much higher rates or possibly would not be able to obtain coverage at any price.
Depositors, therefore, would know instantly, without need to investigate further, that a bank without insurance is not a place where they want to put their money. In order to attract deposits, banks would have to have insurance. In order to have insurance at rates they could afford, they would have to demonstrate to the insurance company that their financial affairs are in good order.
Consequently, banks which failed to meet the minimum standards of sound business practice would soon have no customers and would be forced out of business. A voluntary, private insurance program would act as a powerful regulator of the entire banking industry far more effectively and honestly than any political scheme ever could.
Unfortunately, such is not the banking world of today.
As we have already seen, the first line of defense in this scheme is to have large, defaulted loans restored to life by a Congressional pledge of tax dollars. If that should fail and the bank can no longer conceal its insolvency through creative bookkeeping, it is almost certain that anxious depositors will soon line up to withdraw their money - which the bank does not have.
The second line of defense, therefore, is to have the FDIC step in and make those payments for them.
If the bank is rescued in this fashion, management is fired and what is left of the business usually is absorbed by another bank. Furthermore, the value of the stock will plummet, but this will affect the small stockholders only. Those with controlling interest and those in management know long in advance of the pending catastrophe and are able to sell the bulk of their shares while the price is still high.
The people who create the problem seldom suffer the economic consequences of their actions.
If that amount were in existence, it could be held by the banks themselves, and an insurance fund would not even be necessary. Instead, the FDIC operates on the same assumption as the banks: that only a small percentage will ever need money at the same time. So the amount held in reserve is never more than a few percentage points of the total liability.
Typically, the FDIC holds about $1.20 for every $100 of covered deposits. At the time of this writing, however, that figure had slipped to only 70 cents and was still dropping. That means that the financial exposure is about 99.3% larger than the safety net which is supposed to catch it.
The failure of just one or two large banks in the system could completely wipe out the entire fund.
In the final stage of this process, therefore, the FDIC itself runs out of money and turns, first to the Treasury, then to Congress for help. This step, of course, is an act of final desperation, but it is usually presented in the media as though it were a sign of the system's great strength.
U.S. News & World Report blandly describes it this way:
1. "How Safe Are Deposits in Ailing Banks, S&L's?" U.S. News & World Report, March 25, 1985, p. 73.
Isn't that wonderful? It sort of makes one feel rosy all over to know that the fund is so well secured.
The public picks up a portion of these I.O.U.s, and the Federal Reserve buys the rest. If there is a monetary crisis at hand and the size of the loan is great, the Fed will pick up the entire issue.
The old paycheck doesn't buy as much any more,
so we learn to get along with a little bit less. But, see? The bank's doors
are open again, and all the depositors are happy - until they return to
their cars and discover the missing hub caps! That is what is meant by "the full faith and credit of the federal government."
The central fact to understanding these events is that all the money in the banking system has been created out of nothing through the process of making loans.
A defaulted loan, therefore, costs the bank little of tangible value, but it shows up on the ledger as a reduction in assets without a corresponding reduction in liabilities. If the bad loans exceed the size of the assets, the bank becomes technically insolvent and must close its doors. The first rule of survival, therefore, is to avoid writing off large, bad loans and, if possible, to at least continue receiving interest payments on them.
To accomplish that, the endangered loans are rolled over and increased in size.
This provides the borrower with money to continue paying interest plus fresh funds for new spending. The basic problem is not solved, but it is postponed for a little while and made worse.
The FDIC is not insurance, because the presence of "moral hazard" makes the thing it supposedly protects against more likely to happen.
A portion of the FDIC funds are derived from assessments against the banks. Ultimately, however, they are paid by the depositors themselves. When these funds run out, the balance is provided by the Federal Reserve System in the form of freshly created new money.
This floods through the economy causing the appearance of rising prices but which, in reality, is the lowering of the value of the dollar. The final cost of the bailout, therefore, is passed to the public in the form of a hidden tax called inflation.
In the previous chapter, we offered the whimsical analogy of a sporting event to clarify the maneuvers of monetary and political scientists to bail out those commercial banks which comprise the Federal-Reserve cartel.
The danger in such an approach is that it could leave the impression the topic is frivolous. So, let us abandon the analogy and turn to reality. Now that we have studied the hypothetical rules of the game, it is time to check the scorecard of the actual play itself, and it will become obvious that this is no trivial matter.
A good place to start is with the rescue of a consortium of banks which were holding the endangered loans of Penn Central Railroad.
In 1970, it also became the nation's biggest bankruptcy. It was deeply in debt to just about every bank that was willing to lend it money, and that list included Chase Manhattan, Morgan Guaranty, Manufacturers Hanover, First National City, Chemical Bank, and Continental Illinois. Officers of the largest of those banks had been appointed to Penn Central's board of directors as a condition for obtaining funds, and they gradually had acquired control over the railroad's Management.
The banks also held large blocks of Penn Central stock in their trust departments.
Chris Welles, in The Last Days of the Club, describes what happened:
More to the point of this study is the fact that virtually all of the major management decisions which led to Penn Central's demise were made by or with the concurrence of its board of directors, which is to say, by the banks that provided the loans.
In other words, the bankers were not in trouble because of Penn Central's poor management, they were Penn Central's poor management. An investigation conducted in 1972 by Congressman Wright Patman, Chairman of the House Banking and Currency Committee, revealed the following: The banks provided large loans for disastrous expansion and diversification projects.
They loaned additional millions to the railroad so it could pay dividends to its stockholders. This created the false appearance of prosperity and artificially inflated the market price of its stock long enough to dump it on the unsuspecting public.
Thus, the banker-managers were able to engineer a three-way bonanza for themselves.
They,
1. Chris Welles, The Last Days ofthe
Club (New York: E.P. Dutton, 1975), pp. 398-99.
Reports from the Securities and Exchange Commission showed that the company's top executives had disposed of their stock in this fashion at a personal savings of more than $1 million.1
That is a common practice among corporate raiders who use borrowed funds to seize control of a company, bleed off its assets to other enterprises which they also control, and then toss the debt-ridden, dying carcass upon the remaining stockholders or, in this case, the taxpayers.
The banking cartel, commonly called the Federal Reserve System, was created for exactly this kind of bailout. Arthur Burns, who was the Fed's chairman, would have preferred to provide a direct infusion of newly created money, but that was contrary to the rules at that time.
In his own words:
1- "Penn Central: Bankruptcy Filed
After Loan Bill Fails/' 1970 Congressional Quarterly Almanac (Washington,
D.C.: Congressional Quarterly, 1970), p. 811.
The company's cash crisis came to a head over a weekend and, in order to avoid having the corporation forced to file for bankruptcy on Monday morning.
Burns called the homes of the heads of the Federal Reserve banks around the country and told them to get the word out immediately that the System was anxious to help.
On Sunday, William Treiber, who was the first vice-president of the New York branch of the Fed, contacted the chief executives of the ten largest banks in New York and told them that the Fed's Discount Window would be wide open the next morning. Translated, that means the Federal Reserve System was prepared to create money out of nothing and then immediately loan it to the commercial banks so they, in turn, could multiply and re-lend it to Perm Central and other corporations, such as Chrysler, which were in similar straits.1
Furthermore, the rates at which the Fed would make these funds available would be low enough to compensate for the risk, speaking of what transpired on the following Monday, Burns boasted:
Looking back at the event, Chris Welles approvingly describes it as,
Finest hour or not, the banks were not that interested in the proposition unless they could be assured the taxpayer would co-sign the loans and guarantee payment.
So the action inevitably shifted back to Congress. Perm Central's executives, bankers, and union representatives came in droves to explain how the railroad's continued existence was in the best interest of the public, of the working man, of the economic system itself. The Navy Department spoke of protecting the nation's "defense resources." Congress, of course, could not callously ignore these pressing needs of the nation.
It responded by ordering a retroactive, 13½ per cent pay raise for all union employees. After having added that burden to the railroad's cash drain and putting it even deeper into the hole, it then passed the Emergency Rail Services Act of 1970 authorizing $125 million in federal loan guarantees.3
AMTRAK took over the passenger services of Perm Central, CONRAIL assumed operation of its freight services, along with five other Eastern railroads. CONRAIL technically is a private corporation. When it was created, however, 85% of its stock was held by the government.
The remainder was held by employees. Fortunately, the government's stock was sold in a public offering in 1987. AMTRAK continues under political control and operates at a loss. It is sustained by government subsidies - which is to say by taxpayers. In 1997, Congress dutifully gave it another $5.7 billion and, by 1998, liabilities exceeded assets by an estimated $14 billion.
CONRAIL, on the other hand, since it was returned to the private sector, has experienced an impressive turnaround and has been running at a profit - paying taxes instead of consuming them.
LOCKHEED
The Bank of America and several smaller banks had loaned $400 million to the Goliath and they were not anxious to lose the bountiful interest-income stream that flowed from that; nor did they wish to see such a large bookkeeping asset disappear from their ledgers. In due course, the banks joined forces with Lockheed's management, stockholders, and labor unions, and the group descended on Washington.
Sympathetic politicians were told that, if Lockheed were allowed to fail, 31,000 jobs would be lost, hundreds of sub contractors would go down, thousands of suppliers would be forced into bankruptcy, and national security would be seriously jeopardized.
What the company needed was to borrow more money and lots of it. But, because of its current financial predicament, no one was willing to lend. The answer? In the interest of protecting the economy and defending the nation, the government simply had to provide either the money or the credit.
The government agreed to guarantee payment on an additional $250 million in loans - an amount which would put Lockheed 60% deeper into the debt hole than it had been before. But that made no difference now. Once the taxpayer had been made a co-signer to the account, the banks had no qualms about advancing the funds.
Other defense contractors which had operated more efficiently would lose business, but that could not be proven. Furthermore, a slight increase in defenses expenditures would hardly be noticed.
Under such an arrangement, it makes little difference if the loans were paid back or not.
Taxpayers were doomed to pay the bill either way.
In 1975, New York had reached the end of its credit rope and was unable even to make payroll. The cause was not mysterious. New York had long been a welfare state within itself, and success in city politics was traditionally achieved by lavish promises of benefits and subsidies for "the poor."
Not surprisingly, the city also was notorious for political corruption and bureaucratic fraud. Whereas the average large city employed thirty-one people per one-thousand residents, New York had forty nine. That's an excess of fifty-eight per cent. The salaries of these employees far outstripped those in private industry. While an X-ray technician in a private hospital earned $187 per week, a porter working for the city earned $203.
The average bank teller earned $154 per week, but a change maker on the city subway received $212. And municipal fringe benefits were fully twice as generous as those in private industry within the state. On top of this mountainous overhead were heaped additional costs for free college educations, subsidized housing, free medical care, and endless varieties of welfare programs.
Even after transfer payments from Albany and Washington added state and federal taxes to the take, the outflow continued to exceed the inflow. There were now only three options: increase city taxes, reduce expenses, or go into debt. The choice was never in serious doubt. By 1975, New York had floated so many bonds it had saturated the market and could find no more lenders.
Two billion dollars of this debt was held by a small group of banks, dominated by Chase Manhattan and Citicorp.
Starvation, disease, and crime would run rampant through the city.
It would be a disgrace to America. David Rockefeller at Chase Manhattan persuaded his friend Helmut Schmidt, Chancellor of West Germany, to make a statement to the media that the disastrous situation in New York could trigger an international financial crisis.
All of this money, of course, would first have to be borrowed by Congress which was, itself, deeply in debt. And most of it would be created, directly or indirectly, by the Federal Reserve System. That money would be taken from the taxpayer through the loss of purchasing power called inflation, but at least the banks could be repaid, which is the object of the game.
New York City has continued to be a welfare utopia, and it is unlikely that it will ever get out of debt.
It had rolled over its debt to the banks many times, and the game was nearing an end. In spite of an OPEC oil embargo which had pushed up the cost of gasoline and in spite of the increasing popularity of small-automobile imports, the company had continued to build the traditional gas hog. It was now saddled with a mammoth inventory of unsaleable cars and with a staggering debt which it had acquired to build those cars.
America was also experiencing high interest rates which, coupled with fears of U.S. military involvement in Cambodia, had led to a slump in the stock market. Banks felt the credit crunch keenly and, in one of those rare instances in modern history, the money makers themselves were scouring for money.
The banks agreed to write down $600 million of their old loans and to exchange an additional $700 million for preferred stock.
Both of these moves were advertised as evidence the banks were taking a terrible loss but were willing to yield in order to save the nation. It should be noted, however, that the value of the stock which was exchanged for previously uncollectable debt rose drastically after the settlement was announced to the public.
Furthermore, not only did interest payments resume on the balance of the old loans, but the banks now replaced the written down portion with fresh loans, and these were far superior in quality because they were fully guaranteed by the taxpayers. So valuable was this guarantee that Chrysler, in spite of its previously poor debt performance, was able to obtain loans at 10.35% interest while its more solvent competitor, Ford, had to pay 13.5%.
Applying the difference of 3.15% to one and-a-half billion dollars, with a declining balance continuing for only six years, produces a savings in excess of $165 million. That is a modest estimate of the size of the federal subsidy.
The real value was far greater because, without it, the corporation would have ceased to exist, and the banks would have taken a loss of almost their entire loan exposure.
Banking services are uninterrupted and, aside from a change in name, most customers are unaware of the transaction. This option is generally selected for small and medium banks. In both a payoff and a sell off, the FDIC takes over the bad loans of the failed bank and supplies the money to pay back the insured depositors.
Irvine Sprague, a former director of the FDIC, explains:
1- Irvine H. Sprague, Bailout: An Insider's Account ofBank Failures and Rescues (New York: Basic Books, 1986), p, 23.
That's right, he said everyone - insured or not - is fully protected.
The banks which comprise the elect few generally are the large ones. It is only when the number of dollars at risk becomes mind numbing that a bailout can be camouflaged as protection of the public.
Sprague says:
1. Sprague, p. 68.
Favoritism toward the large banks is obvious at many levels.
One of them is the fact that, in a bailout, the FDIC covers all deposits, whether insured or not. That is significant, because the banks pay an assessment based only on their insured deposits. So, if un insured deposits are covered also, that coverage is free - more precisely, paid by someone else.
What deposits are uninsured?
Those in excess of $100,000 and those held outside the United States. Which banks hold the vast majority of such deposits? The large ones, of course, particularly those with extensive overseas operations.2 The bottom line is that the large banks get a whopping free ride when they are bailed out. Their uninsured accounts are paid by FDIC, and the cost of that benefit is passed to the smaller banks and to the taxpayer.
This is not an oversight. Part of the plan at Jekyll Island was to give a competitive edge to the large banks.
In 1971, Unity Bank and Trust Company in the Roxbury section of Boston found itself hopelessly insolvent, and the federal agency moved in. This is what was found: Unity's capital was depleted; most of its loans were bad; its loan collection practices were weak; and its personnel represented the worst of two worlds: overstaffing and inexperience.
The examiners reported that there were two persons for every job, and neither one had been taught the job.
As Sprague, himself, admitted:
But Unity Bank was different.
It was located in a black neighborhood and was minority owned. As is often the case when government agencies are given discretionary powers, decisions are determined more by political pressures than by logic or merit, and Unity was a perfect example. In 1971, the specter of rioting in black communities still haunted the halls of Congress.
Would the FDIC allow this bank to fail and assume the awesome responsibility for new riots and bloodshed?
Sprague answers:
1- Sprague, pp. 41-42.
On July 22, 1971, the FDIC declared that the continued operation of Unity Bank was, indeed, essential and authorized a direct infusion of $1.5 million.
Although appearing on the agency's ledger as a loan, no one really expected repayment. In 1976, in spite of the FDIC's own staff report that the bank's operations continued "as slipshod and haphazard as ever/' the agency rolled over the "loan" for another five years. Operations did not improve and, on June 30, 1982, the Massachusetts Banking Commissioner finally revoked Unity's charter.
There were no riots in the streets, and the FDIC quietly wrote off the sum of $4,463,000 as the final cost of the bailout.
From that point forward, however, the FDIC game plan was strictly according to Hoyle. The next bailout occurred in 1972 involving the $1.5 billion Bank of the Common-Wealth of Detroit.
Commonwealth had funded most of its phenomenal growth through loans from another bank, Chase Manhattan in New York.
When Commonwealth went belly up, largely due to securities speculation and self dealing on the part of its management, Chase seized 39% of its common stock and actually took control of the bank in an attempt to find a way to get its money back.
FDIC director Sprague describes the inevitable sequel:
1. Sprague, p. 68.
The bankers argued that Commonwealth must not be allowed to fold because it provided "essential" banking services to the community.
That was justified on two counts:
It was unclear what the minority issue had to do with it inasmuch as every neighborhood in which Commonwealth had a branch was served by other banks as well.
Furthermore, if Commonwealth were to be liquidated, many of those branches undoubtedly would have been purchased by competitors, and service to the communities would have continued. Judging by the absence of attention given to this issue during discussions, it is apparent that it was merely thrown in for good measure, and no one took it very seriously.
In any event, the FDIC did not want to be accused of being indifferent to the needs of Detroit's minorities and it certainly did not want to be a destroyer of free-enterprise competition. So, on January 17,1972, Commonwealth was bailed out with a $60 million loan plus numerous federal guarantees.
Chase absorbed some losses, primarily as a result of Commonwealth's weak bond portfolio, but those were minor compared to what would have been lost without FDIC intervention.
Better to have financial power concentrated in Saudi Arabia than in Detroit. The bank continued to flounder and, in 1983, what was left of it was resold to the former Detroit Bank & Trust Company, now called Comerica.
Thus the dreaded concentration of local power was realized after all, but not until Chase Manhattan was able to walk away from the deal with most of its losses covered.
First Perm was the nation's twenty-third largest bank with assets in excess of $9 billion. It was six times the size of Commonwealth; nine hundred times larger than Unity. It was also the nation's oldest bank, dating back to the Bank of North America which was created by the Continental Congress in 1781.
As long as the economy expanded, these gambles were profitable, and the stockholders loved him dearly. When his gamble in the bond market turned sour, however, the bank plunged into a negative cash flow.
By 1979, First Penn was forced to sell off
several of its profitable subsidiaries in order to obtain operating funds,
and it was carrying $328 million in questionable loans. That was $16 million
more than the entire stockholder investment. The bank was insolvent, and the
time had arrived to hit up the taxpayer for the loss.
They were joined by spokesmen from the nation's top three: Bank of America, Citibank, and of course the ever-present Chase Manhattan.
They argued that, not only was the bailout of First Penn essential" for the continuation of banking services in Philadelphia, it was also critical to the preservation of world economic stability.
The bank was so large, they said, if it were allowed to fall, it would act as the first domino leading to an international financial crisis. At first, the directors of the FDIC resisted that theory and earned the angry impatience of the Federal Reserve.
Sprague recalls:
The Fed's role as lender of last resort first generated contention between the Fed and FDIC during this period.
The Fed was lending heavily to First Pennsylvania, fully secured, and Fed Chairman Paul Volcker said he planned to continue funding indefinitely until we could work out a merger or a bailout to save the bank.
1. Sprague, pp. 88-89.
So, in due course, a bailout package was put together which featured a $325 million loan from FDIC, interest free for the first year and at a subsidized rate thereafter; about half the market rate.
Several other banks which were financially tied to First Perm, and which would have suffered great losses if it had folded, loaned an additional $175 million and offered a $1 billion line of credit FDIC insisted on this move to demonstrate that the banking industry itself was helping and that it had faith in the venture. To bolster that faith, the Federal Reserve opened its Discount Window offering low-interest funds for that purpose.
The bank has remained on shaky ground, however, and the final page of this episode has not yet been written.
With assets of $42 billion and with 12,000 employees working in offices in almost every major country in the world, its loan portfolio had undergone spectacular growth. Its net income on loans had literally doubled in just five years and by 1981 had rocketed to an annual figure of $254 million. It had become the darling of the market analysts and even had been named by Dun's Review as one of the five best managed companies in the country.
These opinion leaders failed to perceive that the spectacular performance was due, not to an expertise in banking or investment, but to the financing of shaky business enterprises and foreign governments which could not obtain loans anywhere else. But the public didn't know that and wanted in on the action. For awhile, the bank's common stock actually sold at a premium over others which were more prudently managed.
The Mexican and Argentine debt crisis was coming to a head, and a series of major corporate bankruptcies were receiving almost daily headlines. Continental had placed large chunks of its easy money with all of them. When these events caused the bank's credit raring to drop, cautious depositors began to withdraw their funds, and new funding dwindled to a trickle.
The bank became desperate for cash to meet its daily expenses. In an effort to attract new money, it began to offer unrealistically high rates of interest on its CDs. Loan officers were sent to scour the European and Japanese markets and to conduct a public relations campaign aimed at convincing market managers that the bank was calm and steady.
David Taylor, the bank's chairman at that time, said:
1- Quoted by Chernow, p. 657.
In the fantasy land of modern finance, glitter is often more important than substance, image more valuable than reality.
The bank paid the usual quarterly dividend in
August, in spite of the fact that this intensified its cash crunch. As with
the Perm Central Railroad twelve years earlier, that move was calculated to
project an image of business-as-usual prosperity. And the ploy worked - for a while, at least. By November, the public's confidence had been restored, and the bank's stock recovered to its pre-Penn Square level. By March of 1983, it had risen even higher. But the worst was yet to come.
On Tuesday, May 8, Reuters, the British news agency, moved a story on its wire service stating that banks in the Netherlands, West Germany, Switzerland, and Japan had increased their interest rate on loans to Continental and that some of them had begun to withdraw their funds. The story also quoted the bank's official statement that rumors of pending bankruptcy were "totally preposterous."
Within hours, another wire, the Commodity News Service, reported a second rumor: that a Japanese bank was interested in buying Continental.
A billion dollars in Asian money moved out that first day. The next day - a little more than twenty-four hours following Continental's assurance that bankruptcy was totally preposterous, its long-standing customer, the Board of Trade Clearing Corporation, located just down the street - withdrew $50 million. Word of the defection spread through the financial wire services, and the panic was on. It became the world's first global electronic bank run.
Chernow says:
Sprague writes:
This was the golden moment for which the Federal Reserve and the FDIC were created.
Without government intervention, Continental would have collapsed, its stockholders would have been wiped out, depositors would have been badly damaged, and the financial world would have learned that banks, not only have to talk about prudent management, they actually have to adopt it. Future banking practices would have been severely altered, and the long-term economic benefit to the nation would have been enormous.
But with government intervention, the discipline of a free market is suspended, and the cost of failure or fraud is politically passed to the taxpayers.
Depositors continue to live in a dream world of false security, and banks can operate recklessly and fraudulently with the knowledge that their political partners in government will come to their rescue when they get into trouble.
Which means that the bank paid insurance premiums into the fund based on only four per cent of its total coverage, and the taxpayers now would pick up the other ninety-six per cent.
FDIC director Sprague explains:
That course was never seriously considered by any of the players.
From the beginning, there were only two questions: how to come to Continental's rescue by covering its total liabilities and, equally important, how to politically justify such a fleecing of the taxpayer. As pointed out in the previous chapter, the rules of the game require that the scam must always be described as a heroic effort to protect the public.
In the case of Continental, the sheer size of the numbers made the ploy relatively easy.
There were so many depositors involved, so many billions at risk, so many other banks interlocked, it could be claimed that the economic fabric of the entire nation - of the world itself - was at stake. And who could say that it was not so.
Sprague argues the case in familiar terms:
1. Sprague, p. 184.
There would be some preliminary lip service given to the necessity of allowing the banks themselves to work out their own problem. That would be followed by a plan to have the banks and the government share the burden. And that finally would collapse into a mere public-relations illusion.
In the end, almost the entire cost of the bailout would be assumed by the government and passed on to the taxpayer.
At the May 15 meeting, Treasury Secretary Regan spoke eloquently about the value of a free market and the necessity of having the banks mount their own rescue plan, at least for a part of the money.
To work out that plan, a summit meeting was arranged the next morning among the chairmen of the seven largest banks:
The meeting was perfunctory at best.
The bankers knew full well that the Reagan Administration would not risk the political embarrassment of a major bank failure. That would make the President and the Congress look bad at re-election time. But, still, some kind of tokenism was called for to preserve the Administration's conservative image. So, with urging from the Fed and the Treasury, the consortium agreed to put up the sum of $500 million - an average of only $71 million for each, far short of the actual need.
Chernow describes the plan as "make-believe" and says "they pretended to mount a rescue."1
Sprague supplies the details:
1- Chernow, p. 659.
The final bailout package was a whopper.
Basically, the government took over Continental Illinois and assumed all of its losses. Specifically, the FDIC took $4.5 billion in bad loans and paid Continental $35 billion for them. The difference was then made up by the infusion of $1 billion in fresh capital in the form of stock purchase. The bank, therefore, now had the federal government as a stockholder controlling 80 per cent of its shares, and its bad loans had been dumped onto the taxpayer.
In effect, even though Continental retained the appearance of a private institution, it had been nationalized.
If the bank had been allowed to fail, and the FDIC had been required to cover the losses, the drain would have emptied the entire fund with nothing left to cover the liabilities of thousands of other banks. In other words, this one failure alone, if it were allowed to happen, would have wiped out the entire FDIC!
That's one reason the bank had to be kept operating, losses or no losses, and that's why the Fed had to be involved in the bail out In fact, that was precisely the reason the System was created at Jekyll Island:
The scam could never work unless the Fed was able to create money out of nothing and pump it into the banks along with "credit" and "liquidity" guarantees.
Which means, if the loans go sour, the money is eventually extracted from the American people through the hidden tax called inflation. That's the meaning of the phrase "lender of last resort."
While explaining this fleecing of the taxpayer to the Senate Banking Committee, Fed Chairman Paul Volcker said:
With those words, he has confirmed one of the more controversial assertions of this book.
There could be no better example of this than the bail out of Continental Illinois. In 1983, the bank paid a premium into the fund of only $6.5 million to protect its insured deposits of $3 billion. The actual liability, however - including its institutional and overseas deposits - was ten times that figure, and the FDIC guaranteed payment on the whole amount.
As Sprague admitted,
How true.
Within the same week that the FDIC and the Fed were providing billions in payments, stock purchases, loans, and guarantees for Continental Illinois, it closed down the tiny Bledsoe County Bank of Pikeville, Tennessee, and the Planters Trust and Savings Bank of Opelousas, Louisiana. During the first half of that year, forty-three smaller banks failed without an FDIC bailout.
In most cases, a merger was arranged with a larger bank, and only the uninsured deposits were at risk. The impact of this inequity upon the banking system is enormous. It sends a message to bankers and depositors alike that small banks, if they get into trouble, will be allowed to fold, whereas large banks are safe regardless of how poorly or fraudulently they are managed.
As a New York investment analyst stated to news reporters, Continental Illinois, even though it had just failed, was,
1- Quoted by Greider, p. 628.
Nothing could be better calculated to drive the small independent banks out of business or to force them to sell out to the giants.
And that, in fact, is exactly what has been happening. Since 1984, while hundreds of small banks have been forced out of business, the average size of the banks which remain - with government protection - has more than doubled. It will be recalled that this advantage of the big banks over their smaller competitors was also one of the objectives of the Jekyll Island plan.
Their lament was that it should now protect them in the same paternalistic fashion. Voters and politicians were silent on the issue, apparently awed by the sheer size of the numbers and the specter of economic chaos. Decades of public education had left their mark. After all, wasn't this exactly what government schools have taught is the proper function of government? Wasn't this the American way?
Even Ronald Reagan, viewed as the national champion of economic conservatism, praised the action.
From aboard Air Force One on the way to California, the President said:
The Reagan endorsement brought into focus one of the most amazing phenomena of the 20th century:
William Greider, a former writer for the liberal Washington Post and The Rolling Stone, complains:
In the past, conservative scholars and pundits had objected loudly at any federal intervention in the private economy, particularly emergency assistance for failing companies.
Now, they hardly seemed to notice. Perhaps they would have been more vocal if the deed had been done by someone other than the conservative champion, Ronald Reagan.2
The FDIC pumped $130 million into its main banking unit and took warrants for 55% ownership. The pattern had been set. By accepting stock in a failing bank in return for bailing it out, the government had devised an ingenious way to nationalize banks without calling it that. Issuing stock sounds like a business transaction in the private sector.
And the public didn't seem to notice the reality that Uncle Sam was going into banking.
Here are some of the big games of the season and
their final scores.
Directors concealed reality from the stockholders and made additional loans so the company could pay dividends to keep up the false front. During this time, the directors and their banks unloaded their stock at unrealistically high prices. When the truth became public, the stockholders were left holding the empty bag.
The bailout, which was engineered by the Federal Reserve, involved government subsidies to other banks to grant additional loans.
Then Congress was told that the collapse of Perm Central would be devastating to the public interest. Congress responded by granting $125 million in loan guarantees so that banks would not be at risk. The railroad eventually failed anyway, but the bank loans were covered. Perm Central was nationalized into AMTRAK and continues to operate at a loss.
This was accomplished by granting lucrative defense contracts at non-competitive bids. The banks were paid back.
News of the deal pushed up the market value of that stock and largely offset the loan write-off. The banks' previously uncollectable debt was converted into a government-backed, interest-bearing asset.
So the FDIC pumped in a $60 million loan plus federal guarantees of repayment. Commonwealth was sold to an Arab consortium. Chase took a minor write down but converted most of its potential loss into government-backed assets.
So the FDIC gave a $325 million loan - interest-free for the first year, and at half the market rate thereafter. The Federal Reserve offered money to other banks at a subsidized rate for the specific purpose of relending to First Perm. With that enticement, they advanced $175 million in immediate loans plus a $1 billion line of credit.
The previous year, its profits had soared as a result of loans to high-risk business ventures and foreign governments. Although it had been the darling of market analysts, it quickly unraveled when its cash flow turned negative, and overseas banks began to withdraw deposits. It was the world's first electronic bank run.
Federal Reserve Chairman Volcker told the FDIC that it would be unthinkable to allow the world economy to be ruined by a bank failure of this magnitude. So, the FDIC assumed $4.5 billion in bad loans and, in return for the bailout, took 80% ownership of the bank in the form of stock. In effect, the bank was nationalized, but no one called it that. The United States government was now in the banking business.
We must not forget that the phrase "lender of
last resort" means that the money is created out of nothing, resulting in
the confiscation of our nation s wealth through the hidden tax called
inflation.
As we have seen in previous chapters, the damage done by the banking cartel is made possible by the fact that money can be created out of nothing. It also destroys our purchasing power through the hidden tax called inflation.
The mechanism by which it works is hidden and subtle.
The end result is the same in both cases.
American politicians were impressed at how radical Marxists were able to attract popular support by blaming the capitalist system for the country's woes and by promising a socialist Utopia. They admired and feared these radicals; admired them for their skill at mass psychology; feared them lest they become so popular as to win a plurality at the ballot box.
It was not long before many political figures began to mimic the soap-box orators, and the voters enthusiastically put them into office.
And so, the concept became widely accepted at all levels of American life - the "downtrodden masses" as well as the educated elite - that it was desirable for the government to take care of its citizens and to protect them in their economic affairs.
A federal charter became a kind of government seal of approval. The public, at last, was being protected.
Everything would be reimbursed by the government.
This was to make it easier for everyone to realize the dream of having their own home. While the Marxists were promising a chicken in every pot, the New Dealers were winning elections by pushing for a house on every lot.
The voters, however, were not perceptive enough to understand this canceling effect and continued to vote for politicians who promised to expand the system.
It may not have been good for the economy as a whole but it was good politics.
The damage to the public as a result of this intervention would be delayed a long time in coming, but when it came, it would be cataclysmic.
The additional cost to S&Ls of compliance with this regulation has been estimated by the American Bankers Association at about $11 billion per year, which represents a whopping 60% of all their profits.
Their cash flow was needed to support the bailout fund.
Yet, under the Carter administration, the level of FDIC insurance was raised from $40,000 to $100,000 for each account. Those with more than that merely had to open several accounts, so, in reality, the sky was the limit. Clearly this had nothing to do with protecting the common man. The purpose was to prepare the way for brokerage houses to reinvest huge blocks of capital at high rates of interest virtually without risk.
It was, after all, insured by the federal government.
The public began to worry.
That was a reassuring phrase, but many people had the gnawing feeling that, somehow, we were going to pay for it ourselves. And they were right.
Consumer Reports explained:
The plight of the S&Ls was dramatically brought to light in Ohio in 1985 when the Home State Savings Bank of Cincinnati collapsed as a result of a potential $150 million loss in a Florida securities firm.
This triggered a run, not only on the thirty-three branches of Home State, but on many of the other S&Ls as well. The news impacted international markets where overseas speculators dumped paper dollars for other currencies, and some rushed to buy gold.
He said this was merely a,
Then he flew to Washington and met with Paul Volcker, chairman of the Federal Reserve Board, and with Edwin Gray, chairman of the Federal Home Loan Bank Board, to request federal assistance.
They assured him it was available.
1. "How Safe Are Your Deposits?",
Consumer Reports, August, 1988, p. 503. This was not the first time there had been a failure of state-sponsored insurance funds. The one in Nebraska was pulled down ^ 1983 when the Commonwealth Savings Company of Lincoln failed. It had over $60 million in deposits, but the insurance fund had less than $2 million to cover, not just Commonwealth, but the whole system.
Depositors were lucky to get 65 cents on the dollar, and even that was expected to take up to 10 years.1
1. "How Safe Are Deposits in Ailing Banks, S&Ls?/' U.S. 'News & World Report, March 25, 1985, p. 74.
In fact, they no longer even were required to obtain a down payment on their loans. They could now finance 100% of a deal - or even more. Office buildings and shopping centers sprang up everywhere regardless of the need. Developers, builders, managers, and appraisers made millions. The field soon became overbuilt and riddled with fraud.
Billions of dollars disappeared into defunct projects. In at least twenty-two of the failed S&Ls, there is evidence that the Mafia and CIA were involved.
But that was not fraud, it was the intent of the regulators. The amount by which the appraisal exceeded the market value was defined as "appraised equity" and was counted the same as capital. Since the S&Ls were required to have $1 in capital for every $33 held in deposits, an appraisal that exceeded market value by $1 million could be used to pyramid $33 million in deposits from Wall Street brokerage houses.
And the anticipated profits from those funds was one of the ways in which the S&Ls were supposed to recoup their losses without the government having to cough up the money - which it didn't have. In effect the government was saying:
THE FALLOUT BEGINS
The FSLIC closed one institution that year and arranged for the merger of twenty-six others which were insolvent. In order to persuade healthy firms to absorb insolvent ones, the government provides cash settlements to compensate for the liabilities. By 1984, these subsidized mergers were costing the FDIC over $1 billion per year. Yet, that was just the small beginning.
By the end of that year, the figure had dropped to two-tenths of a penny for each dollar "insured." Obviously, they had to keep those thrifts in business, which meant they had to invent even more accounting gimmicks to conceal the reality.
1- Fizzling FSLIC" by Shirley Hobbs Scheibla, Barron's, Feb. 9, 1987, p. 16.
By 1988, two years later, the thrift industry as a whole was losing $9.8 million per day, and the unprofitable ones - the corpses which were propped up by the FSLIC - were losing $35.6 million per day. And, still, the game continued.
Like the thrifts it supposedly protected, it was, itself, insolvent and looking for loans. It had tried offering bond issues, but these fell far short of its needs. Congress had discussed the problem but had failed to provide new funding. The collapse of Lincoln Savings brought the crisis to a head.
There was no money, period.
If it were the will of the people to bail out a savings institution, then it is up to Congress to approve the funding. If Congress does not have the money or cannot borrow it from the public, then the Fed can create it (out of nothing, of course) and give it to the government. But, in this instance, the Fed was usurping the role of Congress and making political decisions entirely on its own.
There is no basis in the Federal Reserve Act for this action. Yet, Congress remained silent, apparently out of collective guilt for its own paralysis.
Four entirely new layers of bureaucracy were added to the existing tangled mess:
When President Bush signed the bill, he said:
1- "Review of the News," The New American, Sept. 11,1989, p. 15.
Treasury spokesmen were now quoting $130 billion, about twice the original estimate. How much is $130 billion? In 1990, it was 30% more than the salaries of all the schoolteachers in America. It was more than the combined profits of all the Fortune-500 industrial companies. It would send 1.6 million students through the best four-year colleges, including room and board.
And the figure did not even include the cost of liquidating the huge backlog of thrifts already seized nor the interest that had to be paid on borrowed funds. Within only a few days of the announced increase, the Treasury again revised the figure upward from $130 billion to $150 billion.
As Treasury Secretary Nicholas Brady told the press,
Indeed, the estimates continued to change with each passing week.
The government had sold or merged 223 insolvent thrifts during 1988 and had given grossly inadequate estimates of the cost. Financiers such as Ronald Perelman and the Texas investment partnership called Temple-Inland, Inc., picked up many of these at fantastic bargains, especially considering that they were given cash subsidies and tax advantages to sweeten the deal.
At the time, Danny Wall, who was then Chairman of the Federal Home Loan Bank Board, announced that these deals "took care" of the worst thrift problems. He said the cost of the bailout was $39 billion.
The Wall Street Journal replied:
But the 1988 thrift rescues' most expensive flaw doesn't appear to be the enrichment of tycoons.
Rather it's that none of the deals ended or even limited the government's exposure to mismanagement by the new owners, hidden losses on real estate in the past, or the vicissitudes of the real-estate markets in the future... And some of the deals appear to be sham transactions, in which failing thrifts were sold to failing thrifts, which are failing all over again...
When Congress passed FIRREA the previous year to "safeguard and stabilize America's financial system," the staggering sum of $300 billion dollars was authorized to be taken from taxes and inflation over the following thirty years to do the job.
Now, Federal Reserve Chairman Alan Greenspan was saying that the true long-term cost would stand at $500 billion, an amount even greater than the default of loans to all the Third-World countries combined.
The figure was still too low. A non-biased private study released by Veribank, Inc. showed that, when all the hidden costs are included, the bill presented to the American people will be about $532 billion.2
The problems that President Bush promised would "never happen again" were happening again.
Furthermore, market interest rates had risen far above the rates that were locked into most of the S&L loans, and that decreased the value of those mortgages. The true value of a $50,000 mortgage that is paying 7% interest is only half of a $50,000 mortgage that is earning 14%. So the protectors of the public devised a scheme whereby the S&Ls were allowed to value their assets according to the original loan value rather than their true market value.
That helped, but much more was still needed.
With the mere stroke of a pen, the referees created $2.5 billion in such assets, and the players continued the game.
Such promises are assets but, since the thrifts would be obligated to pay back any money it received in a bailout, those pay-back obligations should also have been put on the books as liabilities. The net position would not change. The only way they could count the certificates as assets without adding the offsetting liabilities would be for the bailout promises to be outright gifts with no obligation to ever repay.
That may be the eventual result, but it is not the way the plan was set up. In any event, the thrifts were told they could count these pieces of paper as capital, the same as if the owners had put up their own cash. And the game continued.
But not in the never-never land of socialism where government is the great protector.
Dennis Turner explains:
U.S. News & World Report continues the commentary:
1- Dennis Turner' When Your Bank Fails
(Princeton, New Jersey: Amwell Publishing, Inc. - 1983) - p.141.
But with Washington setting guidelines and standing by to make up losses, a manager would be fired if he didn't take advantage of the opportunity. After all, Congress specifically said it was OK when it passed the laws. These were loopholes deliberately put there to be used.
Dr. Edward Kane explains:
The press has greatly exaggerated the role of illegal fraud in these matters with much time spent excoriating the likes of Donald Dixon at Vernon S&L and Charles Keating at Lincoln Savings.
True, these flops cost the taxpayer well over $3 billion dollars, but all the illegal fraud put together amounts to only about one-half of one per cent of the total losses so far.2
Focusing on that minuscule component serves only to distract from the fact that the real problem is government regulation itself.
1. "FIRREA: Financial Malpractice/' by
Edward J. Kane, Durell Journal of Money and Banking, May, 1990, p. 5.
Wait a minute! What are junk bonds, anyway? This may come as a surprise, but those held by the S&Ls were anything but junk. In fact, in terms of risk-return ratios, most of them were superior-grade investments to bonds from the Fortune-500 companies-so-called junk bonds are merely those that are offered by smaller companies which are not large enough to be counted among the nation's giants.
The large reinvestors, such as managers of mutual funds and retirement funds, prefer to stay with well-known names like General Motors and IBM.
They need to invest truly huge blocks of money every day, and the smaller companies just don't have enough to offer to satisfy their needs. Consequently, many stocks and bonds from smaller companies are not traded in the New York Stock Exchange. They are traded in smaller exchanges or directly between brokers in what is called "over the counter."
Because they do not have the advantage of being traded in the larger markets, they have to pay a higher interest rate to attract investors, and for that reason, they are commonly called high-yield bonds.
From 1981 to 1991, the average return on ten-year Treasury bills was 10.4 per cent; the Dow Jones Industrial Average was 12.9 per cent; and the average return on so-called junk bonds was 14.1 per cent. Because of this higher yield, they attracted more than $180 billion from savvy investors, some of whom were S&Ls.
It was basically a new market which was orchestrated by an upstart, Michael Milken, at the California-based Drexel Burnham Lambert brokerage house.
Here, seventy years later, the same trend was developing again in a slightly different form. Capital, especially for small companies, was now coming from bonds which Drexel had found a way to mass market. In fact, Drexel was even able to use those bonds to engineer corporate takeovers, an activity that previously had been reserved for the mega-investment houses.
By 1986, Drexel had become the most profitable investment bank in the country.
Glenn Yago, Director of the Economic Research Bureau and Associate Professor of Management at the State University of New York at Stony Brook, explains the problem:
1. Glenn Yago, Junk Bonds: How High Yield Securities Restructured Corporate America (New York: Oxford University Press, 1991), p. 5.
The first line of attack on this new market of high-yield bonds was to call them "junk." The word itself was powerful. The financial media picked it up and many investors were frightened away.
Furthermore, the bonds were performing satisfactorily and were a source of much needed revenue. Nevertheless, The Financial Institutions Reform and Recovery Act, which was discussed previously, was passed in 1989. It forced S&Ls to liquidate at once their "junk" bond holdings. That caused their prices to plummet, and the thrifts were even further weakened as [hey took a loss on the sale.
Jane Ingraham comments:
Incidentally, these bonds have since recovered and, had the S&Ls been allowed to keep them, they would be in better financial condition today. And so would be the RTC.
The New York firm of Salomon Brothers, for example, one of Drexel's most severe critics during the 1980s, is now a leading trader in the market Drexel created.
Those that remain fall into two groups: those
The RTC-run organizations, on the other hand, continue to hemorrhage due to failure by Congress to provide funding to close them down and pay them off. Losses from this group are adding $6 billion per year to the ultimate cost of bailout. President Clinton was asking Congress for an additional $45 billion and hinting that this should be the last bailout - but no promises.
The game continues.
One would normally expect dozens of politicians to be calling for a large-scale investigation of the ongoing disaster, but there is hardly a peep. The reason becomes obvious when one realizes that savings-and-loan associations, banks, and other federally regulated institutions are heavy contributors to the election campaigns of those who write the regulatory laws.
A thorough, public investigation would undoubtedly turn up some cozy relationships that the legislators would just as soon keep confidential.
As economist Hans Sennholz has observed:
The savings-and-loan industry, is really a cartel within a cartel. It could not function without Congress standing by to push unlimited amounts 0f money into it. And Congress could not do that without the banking cartel called the Federal Reserve System standing by as the "lender of last resort" to create money out of nothing for Congress to borrow.
This comfortable arrangement between political scientists and monetary scientists permits Congress to vote for any scheme it wants, regardless of the cost. If politicians tried to raise that money through taxes, they would be thrown out of office. But being able to "borrow" it from the Federal Reserve System upon demand, allows them to collect it through the hidden mechanism of inflation, and not one voter in a hundred will complain.
After 60 years of subsidizing and regulating the housing industry, how many young people today can afford a home?
Tinkering with the laws of supply and demand, plus the hidden tax called inflation to pay for the tinkering, has driven prices beyond the reach of many and has wiped out the down payments of others.
Without such costs, common people would have much more money and purchasing power than they do today, and homes would be well within their reach.
Americans were becoming impressed by the theories of socialism and soon embraced the concept that it was proper for government to provide benefits for its citizens and to protect them against economic hardship.
The fiasco could never have happened without the
cartel called the Federal Reserve System standing by to create the vast
amounts of bailout money pledged by Congress.
As we have seen, the game called Bailout has been played over and over again in the rescue of large corporations, domestic banks, and savings-and-loan institutions.
The pretense has been that these measures were necessary to protect the public. The result, however, has been just the opposite. The public has been exploited as billions of dollars have been expropriated through taxes and inflation. The money has been used to make up losses that should have been paid by the failing banks and corporations as the penalty for mismanagement and fraud.
Through a complex tangle of bank loans, subsidies, and grants, the Federal Reserve is becoming the "lender of last resort" for virtually the entire planet.
The other difference is that, instead of claiming to be Protectors of the Public, the players have emblazoned across the backs of their uniforms: Saviors of the World.
Officially, it was called the United Nations Monetary and Financial Conference, but is generally referred to today as simply the Bretton Woods Conference. Two international agencies were created at that meeting: the International Monetary Fund and its sister organization, the International Bank for Reconstruction and Development - commonly called the World Bank.
But the method by which these goals were to be achieved was less admirable. It was to terminate the use of gold as the basis of international currency exchange and replace it with a politically manipulated paper standard. In other words, it was to allow governments to escape the discipline of gold so they could create money out of nothing without paying the penalty of having their currencies drop in value on world markets.
This is not the same as a "gold-standard" in which a currency is backed by gold. It was merely that the exchange ratios of the various currencies - most of which were not backed by gold - were determined by how much gold they could buy in the open market. Their values, therefore, were set by supply and demand.
Politicians and bankers hated the arrangement, because it was beyond their ability to manipulate. In the past, it had served as a remarkably efficient mechanism but it was a strict disciplinarian.
As John Kenneth Galbraith observed:
The method by which this was to be accomplished was exactly the method devised on Jekyll Island to allow American banks to create money out of nothing without paying the penalty of having their currencies devalued by other banks.
It was the establishment of a world central bank which would create a common fiat money for all nations and then require them to inflate together at the same rate. There was to be a kind of international insurance fund which would rush that fiat money to any nation that temporarily needed it to face down a "run" on its currency. It wasn't born with all these features fully developed, just as the Federal Reserve wasn't fully developed when it was born.
That, nevertheless, was the plan, and it was launched with all the structures in place.
1- Keynes often is portrayed as having been merely a liberal. But, for his Lifelong involvement with Fabians and their work, see Rose Martin, Fabian Freeway; High Road to Socialism in the U.S.A. (Boston: Western Islands, 1966).
Whereas Communists wanted to establish socialism quickly through violence and revolution, the Fabians preferred to do it slowly through propaganda and legislation. The word socialism was not to be used. Instead, they would speak of benefits for the people such as welfare, medical care, higher wages, and better working conditions. In this way, they planned to accomplish their objective without bloodshed and even without serious opposition.
They scorned the Communists, not because they disliked their goals, but because they disagreed with their methods. To emphasize the importance of gradualism, they adopted the turtle as the symbol of their movement. The three most prominent leaders in the early days were Sidney and Beatrice Webb and George Bernard Shaw.
A stained-glass window in the Beatrice Webb House in Surrey, England is especially enlightening.
Across the top appears the last line from Omar Khayyam:
Beneath the line Remould it nearer to the heart's desire, the mural depicts Shaw and Webb striking the earth with hammers.
Across the bottom, the masses kneel in worship of a stack of books advocating the theories of socialism. Thumbing his nose at the docile masses is H.G. Wells who, after quitting the Fabians, denounced them as "the new machiavellians."
The most revealing component, however, is the Fabian crest which appears Between Shaw and Webb, It is a wolf in sheep's clothing!1
He eventually became the first Executive Director for the United States at the IMF. An interesting footnote to this story is that White was simultaneously a member of the Council on Foreign Relations (CFR) and a member of a Communist espionage ring in Washington while he served as Assistant Secretary of the Treasury.
And even more interesting is that the White House was informed of that fact when President Truman appointed him to his post.
The FBI had transmitted to the White House detailed proof of White's activities on at least two separate occasions.2 Serving as the technical secretary at the Bretton Woods conference was Virginius Frank Coe, a member of the same espionage ring to which White belonged. Coe later became the first Secretary of the IMF.
There were undoubtedly other reasons for Communists to be enthusiastic about the IMF and the World Bank, despite the fact that the Soviet Union elected at the time not to become a member. The goal of the organizations was to create a world currency, a world central bank, and a mechanism to control the economies of all nations.
In order for these things to happen, the United States would of necessity have to surrender its dominant position.
In fact, it would have to be reduced to just one part of the collective whole. That fit in quite nicely with the Soviet plan. Furthermore, the World Bank was seen as a vehicle for moving capital from the United States and other industrialized nations to the underdeveloped nations, the very ones over which Marxists have always had the greatest control.
They looked forward to the day when we would pay their bills. It has all come to pass.
It is funded on a quota basis by its member nations, almost two hundred in number. The greatest share of capital, however, comes from the more highly industrialized nations such as Great Britain, Japan, France, and Germany, The United States contributes the most, at about twenty per cent of the total. In reality, that twenty per cent represents about twice as much as the number indicates, because most of the other nations contribute worthless currencies which no one wants.
The world prefers dollars.
As Keynes explained it:
It was illegal for American citizens to own gold at that time, but everyone else in the world could exchange their paper dollars for gold at a fixed price of $35 per ounce.
That made it the de facto international currency because, unlike any other at the time, its value was guaranteed. So, at the outset, the IMF adopted the dollar as its own international monetary unit.
The media optimistically described it as "paper gold," but it was pure bookkeeping wizardry with no relationship to gold or anything else of tangible value. SDRs are based on "credits" which are provided by the member nations. These credits are not money.
They are merely promises that the governments will get the money by taxing their own citizens should the need arise. The IMF considers these to be "assets" which then become the "reserves" from which loans are made to other governments. As we shall see in chapter ten, this is almost identical to the bookkeeping sleight-of-hand that is used to create money out of nothing at the Federal Reserve System.
When the IMF was created, it was the vision of Fabian Socialist John Maynard Keynes that there be a world central bank issuing a reserve currency called the "bancor" to free all governments from [he discipline of gold.
With the creation of SDRs, the IMF had finally begun to fulfill that dream.
GOLD IS FINALLY ABANDONED
As long as the dollar was the primary currency used by the IMF and as long as it was redeemable in gold at $35 per ounce, the amount of international money that could be created would be limited. If the IMF were to function as a true world central bank with unlimited issue, the dollar had to be broken away from its gold backing as a first step toward replacing it completely with a bancor, an SDR or something else equally free from restraint.
It had to depend on the central banks of its member nations to provide cash and so-called credits; but since these banks, themselves, could create as much money as they wished, from now on, there would be no limit.
So, when the dollar broke loose from gold and there was no longer a ready standard for measuring currency values, the IMF merely changed its goal and continued to expand its operation.
The new goal was to "overcome trade deficits."
In both cases, the process cannot be sustained unless:
Unless one of these occurs, the individual or the country has no choice but to decrease spending.
The problem with this option is that few politicians respect the dynamic power of the free-enterprise system. Their world is built upon political programs in which the laws of the free market are manipulated to achieve politically popular goals. They may desire the option of increasing the nation's income by increasing its productivity, but their political agenda prevents that from happening.1
As for private assets, nations can, for a while, sell these to foreign buyers and offset their negative trade balances.
That is what has been happening in the United States for many years as office buildings, stocks, factories, and entire companies have been sold to foreign investors. But the fact remains that the nation is still spending more than it earns, and that process cannot continue indefinitely. Foreign ownership and control over industry and commerce also create sociological and political problems.
Underdeveloped countries do not have to worry about any of that, however, because they have few private assets to sell.
In that event, it is possible to create money out of nothing, and other nations have no choice but to accept it. Thus, for years, the United States has been able to spend more money than it earned in trade by having the Federal Reserve create whatever it needed.
Also, the U.S. was one of the safest places in the world to invest one's money. But, to do so, one first had to convert his native currency into dollars. These facts gave the U.S. dollar greater value on international markets than it otherwise would have merited.
So, in spite of the fact that the Federal Reserve was creating huge amounts of money during this time, the demand for it by foreigners was seemingly limitless. The result is that America has continued to finance its trade deficit with fiat money - counterfeit, if you will - a feat which no other nation in the world could hope to accomplish.
Weakening the dollar is a euphemism for increasing Ration. In truth, America is not hurt by a trade deficit at all. In ' We are the benefactors while our trading partners are the victims. We get the cars and TV sets while they get the funny money.
We get the hardware. They get the paperware.
As this flood of dollars bids up prices, we will finally experience the inflation that should have been caused in years past but which was postponed because foreigners were kind enough to take the dollars out of our economy in exchange for their products.
Its new mission was to provide loans so countries can continue to spend more than they earn, but to do so in the name of "overcoming trade deficits."
They go into state-owned and state-operated industries which are constipated by bureaucracy and poisoned by corruption. Doomed to economic failure from the start, they consume the loans with no possibility of repayment Even the interest quickly becomes too much to handle. Which means the IMF must fall back to the "reserves," back to the "assets," back to the "credits," and eventually back to the taxpayers to bail them out.
Acting as Savior of the World, it seeks to aid the underdeveloped nations, to feed the hungry, and to bring a better life to all mankind. In pursuit of these humanitarian goals, it provides loans to governments at favorable terms, usually at rates below market, for terms as long as fifty years, and often with no payments due until after ten years.
(In that sense it is more honest than the real FDIC which does maintain the pretense but, in reality, is based on nothing more than a similar promise.)
It then takes these funds and relends them to the underdeveloped countries at slightly higher rates, making a profit on the arbitrage.
This should not be surprising considering that the Bank was perceived by its founders as an instrument for social and political change. The change which it was designed to bring about was the building of world socialism, ^d that is exactly what it is accomplishing today.
In the first category, only part of the money is to be used for the costs of specific projects while the rest goes to support policy changes in the economic sector. In the second group, all of the money is for policy changes and none of it is for projects. In recent years, almost half of the loans to underdeveloped countries have been in that category. What are the policy changes that are the object of these loans? They add up to one thing: the building of world socialism.
Instead, the loans are issued for government hydro-electric projects, government oil refineries, government lumber mills, government mining companies, and government steel plants. It is delivered from the hands of politicians and bureaucrats into the hands of other politicians and bureaucrats. When the money comes from government, goes to government, and is administered by government, the result will be the expansion of government.
Writing in Business Week, he says:
Ken Ewert explains further that the conditions imposed by the fund are seldom free-market oriented.
He says:
1- "The International Monetary Fund" by Ken S. Ewert, The Freeman, April, 1989, p 157, 158.
An important feature of the Structural-Adjustment Loans is that the money need not be applied to any specific development project. It can be spent for anything the recipient wishes. That includes interest payments on overdue bank loans.
Thus, the World Bank becomes yet one more conduit from the pockets of taxpayers to the assets of commercial banks which have made risky loans to Third-World countries.
Some of them even appear to be in support of the private sector, such as the reduction of government subsidies and welfare. They may include tax increases to reduce budget deficits. These policy changes are often described in the press as "austerity measures" and they are seen as hard-nosed business decisions to salvage the failing economies of underdeveloped countries.
But, as the wolf (in sheep's clothing) said to Little Red-Riding-Hood,
These austerity measures are mostly rhetoric. The borrowing nations usually ignore the conditions with impunity, and the World Bank keeps the money coming anyway. It's all part of the game.
People who have been taught that it is
government's role to provide for their welfare, their health care, their
food and housing, their jobs and retirement - such people will not be happy
when they hear that these "rights" are being threatened. So they demonstrate in the streets in protest, they riot in the commercial sections of town so they can steal goods from stores, and they throng to the banner of leftist politicians who promise to restore or increase their benefits.
As described by Insight magazine:
Quite true.
An honest reading of the record shows that the IMF, far from being a force for austerity in these countries, has been an engine of socialist waste and a fountain of abundance for the corrupt leaders who rule.
Julius Nyerere, the dictator of Tanzania, is notorious for his "villagization" program in which the army has driven the peasants from their land, burned their huts, and loaded them like cattle into trucks for relocation into government villages.
The purpose is to eliminate opposition by bringing everyone into compounds where they can be watched and controlled. Meanwhile the economy staggers, farms have gone to weed, and hunger is commonplace. Yet, Tanzania has received more aid per capita from the World Bank than any other nation.
Not daunted by these failures, the socialist politicians announced in 2991 that they were going to nationalize half of the remaining farms as well. And they barred the courts from inquiring into how much compensation would be paid to their owners.
The famine of 1984-85, which threatened the lives of millions of people, was the result of government nationalization and disruption of agriculture. Massive resettlement programs have torn hundreds of thousands of people from their privately owned land in the north and deported them to concentration-camp "villages" in the south, complete with guard towers.
A report by a French voluntary medical-assistance group, Doctors without Borders, reveals that the forced resettlement program may have killed as many people as the famine itself.1
Dr. Rony Brauman, director of the organization, describes their experience:
1- "Ethiopia Bars Relief Team/' by
Blaine Harden, Washington Post, December 3, 1985,p.A-21.
It was modeled after Stalin's starvation program in the Ukraine in the 1930s and Mao's starvation of the peasants in the '40s.
Its purpose was to starve the population into total submission to the government, for it is the government which decides who will eat and who will not. Yet, right up to the time Mengistu was overthrown, the World Bank continued to send him hundreds of millions of dollars, with much of it going specifically to the Ministry of Agriculture, the very agency in charge of the resettlement program.1
Throughout it all, the regime was generously funded by the World Bank.
Yet, these regimes have been the recipient of literally billions of dollars from the World Bank.
The brutalities of these countries are all in a days work for serious socialists who view them as merely unfortunate necessities for the building of their Utopia. Lenin said you cannot make an omelet without cracking a few eggs.
George Bernard Shaw, one of the early leaders of the Fabian Socialist movement, expressed it this way:
Under the right circumstances, they could easily switch roles. What we have seen is merely a preview of what can be expected for the entire world if the envisioned New World Order becomes operational.
The Fed has become an accomplice in the support of totalitarian regimes throughout the world. As stated at the beginning of this study, that is one of the reasons it should be abolished: It is an instrument of totalitarianism.
The bureaucracy enjoys a plush life administering the process, and the politicians on the receiving end obtain wealth and power. Ideology is not their concern. Socialism, capitalism, fascism, it makes no difference to them as long as the money flows.
In his book, Lords of Poverty, he speaks of the IMF's Structural-Adjustment loans:
1. Graham Hancock, Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business (New York: Atlantic Monthly Press, 1989), pp. 59,60.
In Brazil, it spent a billion dollars to "develop" a part of the Amazon basin and to fund a series of hydroelectric projects. It resulted in the deforestation of an area half the size of Great Britain and has caused great human suffering because of resettlement. In Kenya, the Bura irrigation scheme caused such desolation that a fifth of the native population abandoned the land.
The cost was $50,000 per family served. In Indonesia, the transmigration program mentioned previously has devastated tropical forests - at the same time that the World Bank is funding reforestation projects. The cost of resettling one family is $7,000, which is about ten-times the Indonesian per-capita income.
In Zaire, Mexico, and the Philippines, political leaders became billionaires while receiving World Bank loans on behalf of their nations. In the Central African Republic, IMF and World Bank loans were used to stage a coronation for its emperor.
Here are just a few examples.
Under socialism, food had to be imported - paid for by foreign aid and more loans from the World Bank. The country is hopelessly in debt with no way to repay.
By 1982, the Gross National Product was in a nose dive, manufacturing had fallen to less than half of capacity, thousands of privately owned companies had been forced into bankruptcy, unemployment was soaring, and so was welfare. By 1989, inflation was running at an average of 5,000% and, in the summer of that year, topped at 1,000,000%!
Banks were offering interest rates of 600% per month in hopes of keeping deposits from being moved out of the country. People were rioting in the streets for food, and the government was blaming greedy shop owners for raising prices. The nation was hopelessly in debt with no way to repay.
Despite huge oil deposits and record-high oil prices, the company operated at a loss and was not even able to produce enough gasoline for its own citizens. By 1990, inflation was running at 5,000%.
Since 1960, its prices had risen to 164,000 times their original level. A new crime was invented called hedging against inflation," and people were arrested for charging the free-market price for their goods and for using dollars or gold as money.
Led by Communist organizers, mobs roamed the streets shouting,
The nation was hopelessly in debt with no way to
repay.
They also built chemical plants and railroads, and launched many other industrial projects. These were run as welfare agencies instead of businesses: too many people on the payroll, too many managers, excessive salaries, too many holidays, and unrealistic benefits. The ventures floundered and lost money. Private businesses failed by the thousands, and unemployment rose.
The government increased the minimum wage causing more businesses to fail and more unemployment. That led to more welfare and unemployment benefits. To pay for that, the government borrowed even more and began creating its own fiat money. Inflation destroyed what was left of the economy.
By 1989, it had fallen to 10%. Mexico, once one of the major food exporters in the world, was now required to import millions of dollars worth of food grains.
This required still more money and more loans. All this occurred while oil prices were high and production was booming. A few years later, when oil prices fell, the failures and shortfalls became even more dramatic.
The nation is now hopelessly mired in socialism. The Communist Party, promising "reform" and still more socialism, is attracting a large following and could become a potent political force.
Most countries are worse off than before the Saviors of the World got to them.
Their announced goals were to facilitate international trade and to stabilize the exchange rates of national currencies. The unannounced goals were quite different. They were the elimination of the gold-exchange standard as the basis of currency valuation and the establishment of world socialism.
The money was to be delivered from the hands of politicians and bureaucrats into the hands of other politicians and bureaucrats. When the money comes from government, goes to government, and is administered by government, the result will be the expansion of government.
These are merely promises by the member governments to get the money from their taxpayers if the Bank gets into trouble with its loans.
The money has simply disappeared down the drain
of political corruption and waste.
Chapter
Six
Let us return now to the game called bailout. Everything in the previous chapter has been merely background information to understand the game as it is played in the international arena.
Here, finally, are the rules:
Since this game results in a hemorrhage of wealth from the industrialized nations, their economies are doomed to be brought down further and further, a process that has been going on since Bretton Woods.
The result will be a severe lowering of their living standards and their demise as independent nations. The hidden reality behind so-called development loans is that America and other industrialized nations are being subverted by that process.
That is not an accident; it is the essence of the plan. A strong nation is not likely to surrender its sovereignty. Americans would not agree to turn over their monetary system, their military, or their courts to a world body made up of governments which have been despotic to their own people, especially since most of those regimes have already revealed anti-American hostility.
But if Americans can be brought to the point where they are suffering from a collapse of their economy and from a breakdown in civil order, things will be different. When they stand in bread lines and face anarchy in their streets, they will be more willing to give up sovereignty in return for "assistance" from the World Bank and the UN "peacekeeping" forces.
This will become even more acceptable if a
structured demise of Communism can be arranged ahead of time to make it
appear that the world's major political systems have converged into the
common denominator of "social democracy."
THE FINAL PLAY
What is happening to them is that their political leaders are becoming addicted to the IMF cash flow and will be unable to break the habit. These countries are being conquered by money instead of arms. Soon they will no longer be truly independent nations. They are becoming mere components in the system of world socialism planned by Harry Dexter White and John Maynard Keynes.
Their leaders are being groomed to become potentates in a new, high-tech feudalism, paying homage to their Lords in New York. And they are eager to do it in return for privilege and power within the "New World Order."
That is the final play.
They either do not get the money in the first place - too much is siphoned off by the bureaucracies which administer the programs - or, if they do get any of it, they don't know what to do with it. They merely spend it until it is gone, and then no one has any money - except, of course, those who administer the government programs.
Nevertheless, politicians know that promises to redistribute the wealth are popular among two groups: the voters who naively believe it will help the poor, and the socialist managers who see it as job security. Supported by these two voting blocs, election to office is assured.
He undoubtedly learned the concept while attending the Fabian London School of Economics in 1935-36 just prior to his father's appointment as Ambassador to England. When JFK became President, his political views continued to carry the imprint of that training.
In September of 1963, he addressed the finance ministers and central-bank governors from 102 nations at the annual meeting of the IMF/World Bank.
He explained the concept of world socialism in glowing terms:
CFR SETS STRATEGY
We shall look at it closely in future chapters, but it is important to know at this point that almost all of America's leadership has come from this small group. That includes our presidents and their advisers, cabinet members, ambassadors, board members of the Federal Reserve System, directors of the largest banks and investment houses, presidents of universities, and heads of metropolitan newspapers, news services, and TV networks.2
It is not an exaggeration to describe this group as the hidden government of the United States.
In 1939, Dulles said:
CFR member Zbigniew Brzezinski was the National Security Adviser to CFR member Jimmy Carter. In 1970, Brzezinski wrote:
1. "Text of Kennedy Speech to World
Monetary Parley/' New York Times, October 1, 1963, p. 16.
At the Spring, 1983, Economic Summit in Williamsburg, Virginia, President Ronald Reagan declared:
The CFR strategy for convergence of the world's monetary systems was spelled out by Harvard Professor Richard N. Cooper, a CFR member who had been the Under Secretary of State for Economic Affairs in the Carter Administration:
It is highly doubtful whether the American public, to take just one example, could ever accept that countries with oppressive autocratic regimes should vote on the monetary policy that would affect monetary conditions in the United States...
For such a bold step to work at all, it presupposes a certain convergence of political values....
CFR member, Richard Gardner - another adviser to President Carter - explains the meaning of these phrases and also calls for the Fabian strategy of deception and gradualism:
As for the programmed decline of the American economy, CFR Member Samuel Huntington argues that, if higher education is considered to be desirable for the general population,
CFR member Paul Volcker, former Chairman of the Federal Reserve, says:
By 1993, Volcker had become the U.S. Chairman of the Trilateral Commission.
The TLC was created by David Rockefeller to coordinate the building of The New World Order in accordance with the Gardner strategy:
The objective is to draw the United States, Mexico, Canada, Japan, and Western Europe into political and economic union. Under slogans such as free trade and environmental protection, each nation is to surrender its sovereignty "piece by piece" until a full-blown regional government emerges from the process.
The new government will control each nation's working conditions, wages, and taxes. Once that has happened, it will be a relatively simple step to merge the regionals into global government.
That is the reality behind the so-called trade treaties within,
They have little to do with trade. In the Trilateral Commission's annual report for 1993, Volcker explains:
1. Michael Crozier, Samuel P.
Huntington, and Joji Watanuki, The Crisis of Democracy (New York: New York
University Press, 1975), pp. 183-84.
In 1992, the Trilateral Commission released a report co-authored by Toyoo Gyohten, Chairman of the Board of the Bank of Tokyo and formerly Japan's Minister of Finance for International Affairs.
Gyohten had been a Fulbright Scholar who was trained at Princeton and taught at Harvard Business School. He also had been in charge of the Japan Desk of the International Monetary Fund. In short, he represents the Japanese monetary interests within The New World Order.
In this report, Gyohten explains that the real importance of "trade" agreements is not trade but the building of global government:
In sum, the regional integration process in Europe can be seen as akin to an exercise in nation-building.
The newspaper article that contained this statement was appropriately entitled:
David Rockefeller (CFR) was even more emphatic. He said that it would be "criminal" not to pass the treaty because:
1- Toyoo Gyohten and Charles E.
Morrison, Regionalism in A Converging World (New York: Trilateral
Commission, 1992), pp. 4, 7-9,11.
By early 1994, the drift toward the New World Order had become a rush.
On April 15, the government of Morocco placed a full-page ad in the New York Times celebrating the creation of the World Trade Organization which was formed by the signing of the General Agreement on Tariffs and Trade (GATT) which took place in the Moroccan city of Marrakech. While Americans were still being told that GATT was merely a "trade" agreement, the internationalists were celebrating a much larger concept.
The ad spelled it out in unmistakable terms:
A RARE GLIMPSE INTO THE INNER WORKINGS
Let us begin with a glimpse into the inner workings of the Presidential Cabinet James Watt was the Secretary of the Interior in the Reagan Administration. In his memoirs, he described an incident at a Cabinet meeting in the spring of 1982. The first items on the agenda were reports by Treasury Secretary Donald Regan and Budget Director David Stockman concerning problems the less-developed countries were having with their bank loans.
Watt said:
After the Regan and Stockman briefings, there were several minutes of discussion before I asked,
When no one spoke up, I asked,
The answer came from several voices at once,
Would the customers lose their money? No, came the answer, but the stockholders might lose dividends.
1. New York Times, April 15, 1994, p.
A9.
PANAMA
A consortium of banks including Chase Manhattan, First National of Chicago, and Citibank brought pressure to bear on Washington to give the Canal to the Panamanian government so it could use the revenue to pay interest on its loans.
Although there was massive opposition to this move among the American people, the Senate yielded to insider pressure and passed the give-away treaty. The Panamanian government inherited $120 million in annual revenue, and the interest payments to the banks were restored.
As Congressman Philip Crane observed:
1- Philip M. Crane, Surrender in Panama (Ottawa, Illinois: Caroline House Books, pp. 64,68.
The Panama bailout was a unique play.
In no other country did we have an income-producing property to give away, so from that point forward the bailout would have to be done with mere money. To pave the way for that, Congress passed the Monetary Control Act of 1980 which authorized the Federal Reserve to "monetize foreign debt."
That is banker language meaning that the Fed was now authorized to create money out of nothing for the purpose of lending to foreign governments. It classifies those loans as "assets" and then uses them as collateral for the creation of even more money here in the United States. That was truly a revolutionary expansion of the Fed's power to inflate.
Until then, it was permitted to make money only for the American government Now, it was able to do it for any government. Since then it has been functioning as a central bank for the entire world.
MEXICO
Mexico led the way by announcing it could not send any more money that year on its $85 billion debt. Federal Reserve Governor Henry Wallich rushed to Switzerland to negotiate an IMF loan of $4.5 billion through the Bank of International Settlements. The central banks of Europe and Japan provided $1.85 billion (about 40%); the rest came from the Federal Reserve.
Commercial banks postponed payments on the principal for two years; but, with the infusion of new loans, payment on the interest was resumed. That did not solve the problem. Within a few years, Mexico was in arrears again and, in 1985, the banks agreed to postpone $29 billion in payments and rolled over another $20 billion, which means they issued new loans to pay off the old.
Behind the announcement was the implication that the federal government acting through the Federal Reserve System, could be counted on to assist if the loans went sour.
Baker called for funneling $29 billion over
three years primarily to Latin American countries, of which Mexico was a
prime recipient.
CURRENCY SWAP
Whereupon Paul Volcker, head of the Federal Reserve, rushed to meet with Mexico's finance minister, Jesus Silva Herzog, and offered to put the American taxpayer into the breach.
A $600 million short-term loan was extended to get Mexico past its election date of July 4. It was called a "currency swap" because Mexico exchanged an equal number of pesos which it promised to redeem in U.S. dollars. Pesos, of course, were worthless in international markets - which is the reason Mexico wanted the dollars.
William Greider gives the details:
DEBT SWAP
So, in March of 1988, the players and referees agreed to introduce a new maneuver in the game: an accounting trick called a "debt swap." A debt swap is similar to a currency swap in that the United States exchanges something of real value in return for something that is worthless. But instead of currencies, they exchange government bonds. The transaction is complicated by the time-value of those bonds.
Currencies are valued by their immediate worth, what they will buy today, but bonds are valued by their future worth, what they will buy in the future. After that differential factor is calculated, the process is essentially the same. Here is how it worked.
Then Mexico issued its own bonds with the US. securities tied to them as collateral. This meant that the future value of Mexico's bonds, previously considered worthless, were now guaranteed by the United States government. The banks eagerly swapped their old loans for these new Mexican bonds at a ratio of about 1.4 to 1. In other words, they accepted $100 million in bonds in return for canceling $140 million in old debt.
That reduced their interest income, but they were happy to do it, because they had swapped worthless loans for fully-guaranteed bonds.
The reasoning was that the Treasury bonds were sold at normal market rates. The Mexican government paid as much for them as anyone else. That part was true, but what the commentators failed to notice was where Mexico got the American dollars with which to buy the bonds. They came through the IMF in the form of "foreign-currency exchange reserves."
In other words, they were subsidies from the industrialized nations, primarily the United States. So, the U.S. Treasury put up the lion's share of the money to buy its own bonds. It went a half-billion dollars deeper in debt and agreed to pay $3.7 billion more in future payments so the Mexican government could continue paying interest to the banks.
That is called bailout, and it does fall on the
American taxpayer.
IMF BECOMES FINAL GUARANTOR
The IMF gave Mexico a new loan of $3.5 billion (later increased to $7.5 billion), the World Bank gave another $1,5 billion, and the banks reduced their previous loan values by about a third. The private banks were quite willing to extend new loans and reschedule the old. Why not? Interest payments would now be guaranteed by the taxpayers of the United States and Japan.
The phrases "internal debt" and "domestic borrowing" are code for the fact that government has inflated its money supply by selling bonds.
The interest it must pay to entice people to purchase those bonds can be staggering and, in fact, interest on Mexico's domestic borrowing was draining three times as much from the economy as the foreign debt service had been siphoning off.2
1. "U.S. Bond Issue Will Aid Mexico in
Paying Debts/' by Tom Redburn, Los Angeles Times, December 30, 1987.
Did it have anything to do with the fact that the Federal Reserve and the IMF would guarantee payments? Not so.
1- ibid, p. 35.
At the end of 1994, the game was still going, and the play was the same.
On December 21, the Mexican government announced that it could no longer pay the fixed exchange rate between the peso and the dollar and that the peso would now have to float in the free market to find its true value. The next day it plummeted 39 per cent, and the Mexican stock market tumbled.
Once again, Mexico could not pay the interest on its loans. On January 11, President Clinton (CFR) urged Congress to approve U.S. guarantees for new loans up to $40 billion.
Secretary of the Treasury Robert Rubin (CFR) explained:
But, while Congress debated the issue, the loan clock was ticking. Payment of $17 billion in Mexican bonds was due within 60 days, and $4 billion of that was due on the first of February! Who was going to pay the banks?
On January 31, acting independently of Congress, President Clinton announced a bailout package of over $50 billion in loan guarantees to Mexico; $20 billion from the U.S. Exchange Stabilization Fund, $17.8 billion from the IMF, $10 billion from the Bank of International Settlements, and $3 billion from commercial banks.
Twenty days later, it gave another $1.5 billion; the Bank of International Settlements advanced $1-2 billion.
The following month, the IMF provided $5.5 billion; Western banks extended $10 billion in trade credits; old loans were rescheduled; and $4.4 billion in new loans were made by a Morgan Bank syndication.
The "temporary" loans from the U.S. Treasury were extended with no repayment date established.
Ron Chernow comments:
1. Chernow, p. 644.
By 1983, Third-World governments owed $300 billion to banks and $400 billion to the industrialized governments.
Twenty-five nations were already behind in their payments. Brazil was in default a second time and asked for rescheduling, as did Rumania, Cuba, and Zambia. The IMF stepped in and made additional billions of dollars available to the delinquent countries. The Department of Agriculture, through its Commodity Credit Corporation, paid $431 million to American banks to cover payments on loans from Brazil, Morocco, Peru, and Rumania.
At the conclusion of these agreements, the April 20, 1983, Wall Street Journal editorialized that,
Not quite.
By 1987, Brazil was again in default on its monstrous $121 billion debt, this time for one and a-half years. In spite of the torrent of money that had passed through its hands, it was now so broke, it couldn't even buy gasoline for its police cars.
In 1989, as a new round of bailout was being organized, President Bush (CFR) announced that the only real solution to the Third-World debt problem was debt forgiveness.
ARGENTINA
The banks extended their loans while the IMF prepared a new infusion in the amount of $2.15 billion. This restored the interest payments and gave the Argentinean politicians a little extra spending money. Seven months later, Argentina announced it could not make any more payments until the fall of 1983. The banks immediately began negotiations for rollovers, guarantees, and new IMF loans.
The United States government gave an additional $500 million directly. Argentina then paid $850 million in overdue interest charges to the banks.
As summarized by Larry A. Sjaastad at the University of Chicago:
As mentioned previously, this history can become repetitious and boring. It would be counterproductive to cover the same sordid story as it has unfolded in each country.
Suffice it to say that the identical game has been played with teams from,
...and almost every other less-developed country
in the world.
THE NEED FOR CONVERGENCE
It is the inclusion of China and the former Soviet bloc into the Grand Design for global government. As with all the other countries in the world, the primary mechanism being used to accomplish this goal - at least in the field of economics - is the IMF/World Bank.2
1- ''Another Plan to Mop Up the Mess,"
Insight, April 10, 1989, p. 31.
The process is:
The thing that is new and which sets this stage apart from previous developments is that the apparent crumbling of Communism has created an acceptable rationale for the industrialized nations to now allow their lifeblood to flow into the veins of their former enemies.
It also creates the appearance of global,
political "convergence/' a condition which CFR theoretician, Richard Cooper,
said was necessary before Americans would accept having their own destinies
determined by governments other than their own.
CHINA
By 1987, China was the IMF's second largest borrower, next to India, and the transfusions have grown at a steady pace ever since.
Vice Premier Yao Yilin announced that there was too much needless construction, too many private loans, and too much spending on "luxuries" such as cars and banquets. To stop these excesses, he said, it would be necessary to increase government controls over wages, prices, and business activities.
James Bovard answers:
1- Bovard, pp. 18-19.
THE GREAT DECEPTION
It is fact at the bottom level of Communist society where the people, in truth, rejected it long ago. The only reason they appeared to embrace it for so many years was that they had no choice. As long as the Soviets held control of the weapons and the means of communication, the people had to accept their fate.
Lenin and Trotsky were on the closest of terms with these moneyed interests - both before and after the Revolution. Those hidden liaisons have continued to this day and occasionally pop to the surface when we discover a David Rockefeller holding confidential meetings with a Mikhail Gorbachev in the absence of government sponsorship or diplomatic purpose.
While Americans are prepared to accept such deception on a football field, they cannot believe that world financiers and politicians are capable of it. The concept is rejected out of hand as a "conspiracy theory."
It is agreed this cannot happen until hostility between world systems is replaced by political convergence. It is agreed that future conflict is wasteful and dangerous to all parties. Therefore, it is finally agreed that the Soviet bloc must abandon its posture of global aggression while the Western nations continue to move toward socialism, necessary steps for the long-range goal of merger into a world government.
But, in doing so, it must be insured that the
existing Communist leaders retain control over their respective states.
COMMUNISTS BECOME SOCIAL DEMOCRATS
They speak out against the brutal excesses of their predecessors and they offer greater freedom of expression in the media. A few dispensable individuals among their ranks are publicly purged as examples of the demise of the old order. States that once were held captive by the Soviet Union are allowed to break away and then return on a voluntary basis. If any leaders of the newly emancipated states prefer true independence instead of alignment with Russia, they are replaced.
Socialism remains the economic system of choice and, although lip service may be given to free^market concepts, the economy and all means of production remain under state control. The old Communists are now Social Democrats and, without exception, they become the leaders in the new system.
Russian leaders spoke as long-time enemies of the old regime. Perestroika was here. Communism was dead. It was not killed by an enemy. It voted itself out of existence. It committed suicide!
There was no revolution or counterrevolution, no long period of fragmentation, no bloody surges between opposing forces. Poof! It just happened. True, there was blood in the streets in those areas where opposing groups vied for power, but that was after Communism had departed, not before. Such an event had never occurred in history.
Until then, it had been contrary to the way governments act; contrary to the very nature of power which never surrenders without a life-and-death struggle. This, indeed, is a great curiosity - which should cause people to think.
So, now that we have stated it, we shall leave
it behind merely as a clarification °f the author's point of view so the
reader can step around it if he wishes.
EASTERN EUROPE
The truth, however, is that the money did not improve the economy and did not show the people a better way of life. In fact, it did not help the people in any way. It went directly to their governments and was used for government priorities. It strengthened the ruling parties and enabled them to solidify their control.
Polish-built tanks fought in the Vietnam war; 20% of the Soviet merchant marine was built in Poland; 70% of Poland's computer and locomotive production and 80% of her communications equipment was shipped to the Soviets; American grain purchased by Poland with money borrowed from American banks was sent to Cuba. Poland was merely a middle man, a conduit to Russia and her satellites.
The banks were really funding Russia.
That was unacceptable, because it would make their balance sheets look as bad as they really were. So the Treasury agreed to bend the rules and make payments without requiring the loans to be in default. That was eventually stopped by an irate Congress, but not until the Reagan Administration had stalled long enough to pay $400 million directly to the banks on behalf of Poland.
This was a problem, because the policy of the World Bank was to make development loans only to countries that had per-capita GNPs of less than $2,650. Not to worry. In 1981, the Hungarian government simply revised its statistics downward from $4,180 to $2,100.1
1- "World Bank Courts Eastern Europe,"
by Jerry Lewis, Wall Street Journal August 30, 1984.
That was a drop of 50% in one year, surely one of the sharpest depressions in world history. Everyone knew it was a lie, but no one raised an eyebrow. It was all part of the game.
By 1989, the Bush Administration had granted
"most favored nation" trade status to the Hungarian government and
established on its behalf a special $25 million development fund.
RUSSIA
In 1985, after the public had lost interest in Afghanistan, banks of the "free world" reopened their loan windows to the Soviets.
A $400 million package was put together by a consortium of First National of Chicago, Morgan Guaranty, Bankers Trust, and Irving Trust - plus a London subsidiary of the Royal Bank of Canada.
The loan was offered at unusually low interest rates "to buy American and Canadian grain."
Who could possibly object to having the money
come right back to our own farmers and merchants in the form of profits? And
who could fault a project that provided food for the hungry? The deception is subtly appealing. It is true that the money will be used - in part at least - to buy grain or other locally produced commodities.
But the borrowing nations are like a homeowner who increases the mortgage on his house "to enlarge his living room." He probably will make the addition, but he borrows twice as much as he needs so he can also buy a new car. Since the government allows a tax deduction on mortgage interest, in effect he now gets a tax deduction for the interest paid on his car as well.
Likewise, the borrowing nations usually borrow more than they need for the announced purchase, but they receive all the money at favorable rates.
In other words, Russia had to have the grain, with or without the loan, Without it, she would have had to curtail spending somewhere else to obtain the money, most likely in her military. By giving her the money "to buy grain" we actually allowed her to spend more money on armaments.
As we have seen, the name of the game is
bailout, and it is as certain as the setting sun that, somewhere down the
line, Russia will not be able to make her payments, and the taxpayers of the
industrialized nations will be put through the IMF wringer one more time to
squeeze out the transferred purchasing power.
BUSINESS VENTURES IN RUSSIA INSURED BY U.S.
Meanwhile, the U.S. Overseas Private Investment Corporation was providing free "insurance" to private companies that were willing to invest in the ex-Soviet state. In other words, it was now doing for industrial corporations what it had been doing all along for banks: guaranteeing that, if their investments turned sour, the government - make that taxpayers - would compensate them for their losses.
The limit on that insurance had been $100 million, a generous figure, indeed. But, to encourage an even greater flow of private capital into Russia, the Bush Administration authorized unlimited protection for "sound American corporate investments."
If these truly were sound investments, they would not need foreign-aid subsidies or government guarantees.
What is really happening in this play is a triple score:
There you have it:
You know what the taxpayers get!
Writing in the New York Times, columnist Leslie H. Gelb gave the numbers:
1- "The Russian Sinkhole," by Leslie H. Gelb, New York Times, March 30, 1992, p.
The interesting thing about this report is that Leslie Gelb has been a member of the CFR since 1973.
Why would a CFR spokesman blow the whistle on one of their most important Maneuvers toward The New World Order? The answer is that he is doing just the opposite.
Actually he is making a plea for more loans and more outright aid on the basis that the need is so great! lie advocates the prioritizing of funding with first attention to aiding Russia's nuclear-power facilities, agriculture, and industrial capacity. At the end of his article, he writes:
Congress hears and obeys. In spite of the fact that all the preceding billions have "disappeared without a trace or a dent," the transfusion continues.
In 1993 the World Bank advanced another half-billion-dollar loan to Russia; before leaving office, President Bush arranged for another $2 billion loan through the Export-Import Bank; and Congress authorized hitting the voters with another $Z5 billion in foreign aid earmarked specifically for Russia.
In July, at the Tokyo summit meeting of the Group-of-Seven industrialized nations, another $24 billion was promised, half of which will come from the IMF.
As this book goes to print, there is no end in sight.
We must choose between two paths. Either we conclude that Americans have lost control over their government, or we reject this information as a mere distortion of history. In the first case, we become advocates of the conspiratorial view of history. In the latter, we endorse the accidental view. It is a difficult choice.
The process is well coordinated across national lines and perfectly dovetails with the actions of other leaders who are doing the same thing to their respective countries. Furthermore/ these leaders regularly meet together to better coordinate their activities.
Could anything that complex be accomplished by accident? Or would some kind of a plan be required?
The answer is they are not following that plan. They are following a different one: one which has been very successful from their point of view. Otherwise, we must conclude that the leaders of the industrialized nations are, to a man, just plain stupid. We do not believe it.
Under those circumstances, they must conceal their plan from public view. If their fellow citizens really knew what they were doing, they would be thrown out of office and, in some cases, might even be shot as traitors.
Add all that together and it spells CONSPIRACY.
By contrast, the evidence for the accidental
theory of history is - a blank page.
SUMMARY
The differences are:
Otherwise, the rules are basically the same.
Therefore, through "loans" that will never be paid back, the IMF/World Bank directs the massive transfer of wealth from the industrialized nations to the less developed nations. This ongoing process eventually drains their economies to the point where they also will be in need of assistance. No longer capable of independent action, they will accept the loss of sovereignty in return for international aid.
Loans from the IMF/World Bank are used primarily to perpetuate themselves and their ruling parties in power - and that is exactly what the IMF/World Bank intends.
Rhetoric about helping the poor notwithstanding, the true goal of the transfer of wealth disguised as loans is to get control over the leaders of the less developed countries. After these despots get used to the taste of such an unlimited supply of sweet cash, they will never be able to break the habit.
They will be content - already are content - to become little gold-plated cogs in the giant machinery of world government. Ideology means nothing to them: capitalist, communist, socialist, fascist, what does it matter so long as the money keeps coming. The IMF/World Bank literally is buying these countries and using our money to do it.
Now that Latin America and Africa have been "purchased" into the New World Order, this is the final frontier.
In a relatively short time span, China, Russia, and the Eastern European countries have now become the biggest borrowers and already, they are in arrears on their payments.
This is where the action will lie in the months ahead.
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