Section V
THE HARVEST
 

Monetary and political scientists continue to expound the theoretical merits of the Federal Reserve System.

 

It has become a modern act of faith that economic life simply could not go on without it. But the time for theory is past The Creature moved into its final lair in 1913 and has snorted and thrashed about the landscape ever since.

 

If we wish to know if it is a creature of service or a beast of prey, we merely have to look at what it has done.

 

And, after the test of all those years, we can be sure that what it has done, it will continue to do. Or, to use the Biblical axiom, a tree shall be known by the fruit it bears. Let us now examine the harvest.

 

20. The London Connection
21. Competition Is A Sin
22. The Creature Swallows Congress
23. The Great Duck Dinner

 

 


 

 

 

 

 



Chapter Twenty
THE LONDON CONNECTION

 

The rise of the House of Morgan; Morgan's ties with England and the House of Rothschild; the connection between the Federal Reserve System and the Bank of England; the Fed's decision to inflate American dollars to assist the ailing British economy.
 

The period between the Civil War and the enactment of the federal Reserve System was one of great economic volatility and no small measure of chaos.

 

The National Banking Acts of 1863-65 established a system of federally chartered banks which were given significant privilege and power over the monetary system. They were granted a monopoly in the issuance of bank notes, and the government agreed to accept those notes for the payment of taxes and duties. They were allowed to back this money up to ninety per cent with government bonds instead of gold.

 

And they were guaranteed that every bank in the system would have to accept the notes of every other bank at face value, regardless of how shaky their position.

 

The net effect was that the banking system of the United States after the Civil War, far from being free and unregulated as some historians have claimed, was literally a halfway house to central banking.


The notion of being able to generate prosperity simply by creating more money has always fascinated politicians and businessmen, but at no time in our history was it more in vogue than in the second half of the nineteenth century. The nation had gone mad with the Midas complex, a compulsion to turn everything into money through the magic of banking.

 

Personal checks gradually had become accepted in commerce just as readily as bank notes, and the banks obliged their customers by entering into their passbooks just ms many little numbers as they cared to "borrow."

 

As Groseclose observed:

"The manna of cheap money became the universal cry, and as with the Israelites, the easier the manna was acquired, the louder became the complaint, the less willing the people to struggle for it."

The prevailing philosophy of that time was aptly expressed by Jay Cooke, the famous financier who had marketed the huge Civil War loans of the federal government and who now was raising $100 million for the Northern Pacific Railroad.

 

Cooke had published a pamphlet which was aptly summarized by its own title: How Our National Debt May Be a National Blessing - The Debt is Public Wealth, Political Union, Protection of Industry, Secure Basis for National Currency.

"Why" asked Cooke, "should this Grand and Glorious country be stunted and dwarfed - its activities chilled and its very life blood curdled by these miserable 'hard coin' theories - the musty theories of a bygone age."

As it turned out, however, the chilling and curdling came, not from the musty hard-coin theories of the past, but from the glittering easy-money theories of the present.

 

The Northern Pacific went bankrupt and, as the mountain of imaginary money invested in it collapsed back into nothing, Cooke's giant investment firm disappeared along with it, triggering the panic of 1873 as it went.

 

Matthew Josephson writes:

"All about the failure of Jay Cooke!" newsboys hawked throughout the country....

The largest and most pious bank in the Western world had fallen with the effect of a thunderclap. Soon allied brokers and national banks and 5,000 commercial houses followed it into the abyss of bankruptcy.

 

All day long, in Wall Street, one suspension after another was announced; railroads failed; leading stocks lost 30 to 40 points, or half their value, within the hour; immeasurable waves of fear altered the movement of greed; the exchanges were closed; the stampede, the "greatest" crisis in American history, was on.
 

 

 

AND STILL MORE BOOMS AND BUSTS
Altogether, there were four major contractions of the money supply during this period:

the so-called panics of 1873, 1884, 1893, and 1907.

Each of them was characterized by inadequate bank reserves and the suspension of specie payment.

 

Congress reacted, not by requiring an increase in reserves which would have improved the safety margin, but by allowing a decrease. In June of 1874, legislation was passed which permitted the banks to back their notes entirely with government bonds.

 

That, of course, meant more fiat money for Congress, but it also meant that bank notes no longer had any specie backing at all, not even ten per cent. This released over $20 million from bank reserves which then could be used as the basis for pyramiding even more checkbook money into the economy.


It has become accepted mythology that these panics were caused by seasonal demands for farm loans at harvest time. To supply those funds, the country banks had to draw down their cash reserves which generally were deposited with the larger city banks.

 

This thinned out the reserves held in the cities, and the whole system became more vulnerable. Actually that part of the legend is true, but apparently no one is expected to ask questions about the rest of the story.

 

Several of them come to mind.

  • Why wasn't there a panic every Autumn instead of just every eleven years or so?

  • Why didn't all banks - country or city - maintain adequate reserves to cover their depositor demands?

  • And why didn't they do this in all seasons of the year?

  • Why would merely saying no to some loan applicants cause hundreds of banks to fail?

The myth falls apart under the weight of these questions.


The truth is that, if it hadn't been seasonal demand by agriculture, the money magicians simply would have found another scapegoat. It would have been "immobile" reserves, lack of "elasticity" in the money supply, "imbalance" of international payments, or some other technocratic smoke screen to cover the real problem which was - and always has been - fractional-reserve banking itself.

 

The bottom line was that, in spite of an elaborate scheme to pool the [minuscule reserves of country banks into larger regional banks where they could be rushed from town to town like a keg of coins on the old frontier, it still didn't work.

 

The loaves and fishes stubbornly refused to multiply.
 

 

 

MORGAN PROSPERS WHEN OTHERS FAIL
The monetary expansions and contractions of this period were large waves that capsized thousands of investment ships at sea.

 

But there was one large vessel that, somehow, bobbed up and down with the surges quite well and could be seen throughout the storm salvaging the abandoned cargoes of those that were in distress. This vessel brought back to port untold riches that once had been the property of others but now belonged to the master of the salvage ship in accordance with rules of the high sea.

 

The captain's name was J.P. Morgan.


It will be recalled from a previous section that J.P. Morgan and Company was no small player in the world chess match called World War I. Morgan had been chosen by the French and British governments as the official agent to sell their war bonds in the U.S. When the war began to go badly for them, the Morgan interests began to agitate for American entry into the conflict, a move which was calculated to save the loans.

 

The Morgan firm also was the official U.S. trade agent for Britain. In violation of international treaty, it handled the purchase and shipping to England of all war material, including the enormous cargo of munitions aboard the Lusitania when she went down.


The close relationship between the Morgans and Great Britain was no accident. J.P. Morgan, Jr., was the driving force behind the Council on Foreign Relations, the American branch of a secret society established by Cecil Rhodes for the expansion of the British empire. In truth, the Morgans were more British than American.


The reason for this is to be found in the origin of the Morgan dynasty. It all began with an American merchant from Danvers, Massachusetts, by the name of George Peabody. In 1837, Peabody travelled to England as a bond salesman for the Chesapeake and Ohio Canal, hoping to find British investors to replace the missing ranks of Americans who, because of a recession at that time, showed little interest in the project.

 

He routinely was rejected by the large investment houses of London but, eventually, his persistence paid off.

 

Stanley Jackson, in his biography of Morgan, says of Peabody:

When the panic [in the U.S.] at last started to subside, he called time and again on the big City barons [in London] to assure them that Maryland and other states would honor their bonds.

He also continued backing American securities with his personal funds. Buying at almost giveaway levels, he later reaped a rich harvest. He unloaded most of the Chesapeake and Ohio Canal bonds and won acclaim back home for returning his $60,000 commission intact to Maryland's meager treasury.


It was during this trip that Peabody opened an import-export business at 22 Old Broad Street in London and began to provide [loans and letters of credit to many of his shippers. That moved him into the investment business specializing in transactions between Britain and the United States.


It was fortunate timing. This was the beginning of a period of rapid expansion in the United States, accompanied by an insatiable need for investment capital and a plethora of bond issues offering tantalizing rates of return which were substantially higher than comparable offerings in Europe. Peabody's firm was in an unusual [position to exploit this expanding market, and his firm grew rapidly.


Peabody never married and, as he advanced in years, began to look for someone to carry on the business. The qualifications for such a position were difficult.

  • First, the man had to be an American my birth in order to appear authentic as the representative of American investments.

  • Secondly, he had to be British by instinct and preference. This included being well educated and with good breeding in order to be accepted by the aristocracy in London's financial world.

  • Third, he had to have knowledge of Anglo-American finance.

  • And fourth, Peabody had to like him.


 

JUNIUS MORGAN SELECTED BY PEABODY
When the Boston merchant, Junius Morgan, met George Peabody at a London dinner party in 1850, little did he realize that the elder financier took an immediate liking to him and began to discreetly inquire into his background and reputation.

 

This began In extended period of business and social contact that eventually ended in 1854 when Junius moved his family to London and became a full partner in the firm which, eventually became known as Peabody, Morgan & Company.


In addition to selling bonds in England for American commercial ventures and state governments, the partnership also became the chief fiscal agent for the Union government during the Civil War, and it was during this period that the firm's great profits bushed it into the top echelons of London's financial fraternity.

 

In 1864, Peabody finally retired and completely turned the business over to Junius who immediately changed the firm's name to J.S. Morgan and Company.

Junius's son, John Pierpont, attended the English High School in Boston but, during much of his youth, was enrolled in European schools and became engulfed in British tradition. He had been born in the United States, however, and that made him ideally suited to carry on the Anglo-American role played so deftly by Peabody and Junius. It was inevitable that the boy would be trained in international finance and groomed to step into his father's shoes.

 

The first move was to find employment for him in 1857 at the New York investment firm of Duncan, Sherman & Company. Seven years later, Junius acquired a competitor New York firm and set his son up as a partner in Dabney, Morgan & Company, which became the New York branch of the London firm.

 

In 1871, with the addition of a third partner, Anthony Drexel from Philadelphia, the firm became Drexel, Morgan & Company. In 1895, following the death of Drexel, there was a final change of name to J.P. Morgan & Company.

 

A branch in Paris became known as Morgan, Harjes & Company.
 

 

 

AMERICANIZING THE NEW YORK BRANCH
After the unexpected death of Junius in a carriage accident a few years later, it was decided by Pierpont to reshape the image of the London firm to be a more British operation.

 

This would allow the New York branch to represent the American side with less suspicion of being essentially the same firm. By that time, his son, J.P. Morgan, Jr. - known as Jack by his friends - had already been brought into the firm as a partner, and he was to play an important role in the creation of that image.

 

Biographer John Forbes tells us:

J.P. Morgan, Jr., became a partner in the London house of J.S. Morgan & Co. on January 1,1898, and a fortnight later, with his wife Jessie and their three children... he left New York and took up residence in England for the next eight years.

Morgan was sent to London to do two specific things.

 

The first was to learn at first hand how the British carried on a banking business under a central banking system dominated by the Bank of England. Morgan, Sr., anticipated the establishment of the Federal Reserve System in the United States and wanted someone who would eventually have authority in the Morgan firms to know how such a system worked.

 

The second was quietly to look about the City and select British partners to convert the elder Morgan's privately owned J.S. Morgan & Co. into a British concern.


This eventually was accomplished by the addition of Edward Grenfell, a long-time director of the Bank of England, as the new senior partner of what became Morgan, Grenfell & Company. But none of this window dressing altered the reality that J.P. Morgan & Co. in New York remained more British in orientation than American.


A casual reading of the events of this period would lead to the conclusion that Peabody and Morgan were fierce competitors of the Rothschilds. It is true they often bid against each other for the same business, but it is also true that almost every biographer has told how the American newcomers to London were in awe of the great power of the Rothschilds and how they purposely cultivated their friendship, a friendship that eventually became so intimate that the Americans were received as the personal house guests of the Rothschilds.

 

The Morgan firm often worked closely with the House of Rothschild on large joint ventures, but that was - and still is - common practice among large investment houses.

 

In light of subsequent events, however, it is appropriate to consider the possibility that an arrangement had been worked out in which the Peabody/Morgan firm went one step further and, on occasion, became a secret Rothschild agent.
 

 

 

CONCEALED ALLIANCE WITH ROTHSCHILD?
Some writers have suggested that the clandestine relationship began almost from the beginning.

 

Eustace Mullins, for example, writes:

Soon after he arrived in London, George Peabody was surprised to be summoned to an audience with the gruff Baron Nathan Mayer Rothschild.

 

Without mincing words, Rothschild revealed to Peabody that much of the London aristocracy openly disliked Rothschild and refused his invitations. He proposed that Peabody, a man of modest means, be established as a lavish host whose entertainments would soon be the talk of London. Rothschild would, of course, pay all the bills.

 

Peabody accepted the offer and soon became known as the most popular host in London.

 

His annual Fourth-of-July dinner, celebrating American Independence, became extremely popular with the English aristocracy, many of whom, while drinking Peabody's wine, regaled each other with jokes about Rothschild's crudities and bad manners, without realizing that every drop they drank had been paid for by Rothschild.

Mullins does not give a reference for the source of this story, and one cannot help being skeptical that such details could be proved. Nevertheless, a secret arrangement of this kind is not as absurd as it may sound.

 

There is no question that the Rothschilds were quite capable of such a clandestine relationship and, in fact, this is exactly the kind of deception for which they had become famous. Furthermore, there was ample reason for them to do so. A strong anti-Semitic and anti-Rothschild sentiment had grown up in Europe and the United States, and the family often found it to its advantage to work through agents rather than to deal directly.

 

Derek Wilson tells us:

"The name 'Rothschild' was, thus, beginning to be heard in places far removed from sophisticated London and Paris. But the connection with the great bankers was sometimes tenuous."

That tenuous connection was precisely the role to be played by August Belmont in the United States, and the anti-Semitism he found there was undoubtedly the reason he changed his name from Schoenberg to Belmont upon landing in New York in 1837.

 

Prior to that, the Rothschild agent had been the firm of J.L. and S.I. Joseph & Company, about as American sounding as one can get. It was not long, however, before the Belmont-Rothschild connection became common knowledge, and the ploy ceased to be effective.


In 1848, the family decided to send Alphonse Rothschild to the United States to check on Belmont's operations and to evaluate the possibility of replacing him with a direct Rothschild representative, perhaps Alphonse himself.

 

After an extended visit, he wrote home:

In a few years from now America will have attracted to itself the greater part of trade with China and the Indies and will be enthroned between the two oceans... The country possesses such elements of prosperity that one would have to be blind not to recognize them...

 

I have no hesitation in saying that a Rothschild house, and not just an agency, should be established in America... Today we are presented with a fine opportunity. Later on, difficulties will of necessity arise as a result of competition from all sides.

Some historians have expressed amazement over the fact that |he recommendation was never acted upon.

 

Wilson says:

"This was the greatest opportunity the Rothschilds ever lost."

Those with a more skeptical bent are tempted to wonder if the opportunity really mm lost or if it was merely taken in a more indirect fashion.

 

It is Significant that, precisely at this time, George Peabody was making a name for himself in London and had established a close relationship with Nathan Rothschild. Is it possible that the Peabody firm was given the nod from the Rothschild consortium to represent them in America?

 

And is it possible that the plan included allowing Belmont to operate as a known Rothschild agent while using Peabody & Company as an unknown agent, thus, providing their own competition?


John Moody answers:

"The Rothschilds were content to remain a close ally of Morgan rather than a competitor as far as the American field was concerned."

Gabriel Kolko says:

"Morgan's Activities in 1895-1896 in selling U.S. gold bonds in Europe were based on his alliance with the House of Rothschild."

Sereno Pratt pays:

"These houses may, like J.P. Morgan & Company... represent there the great firms and institutions of Europe, just as August Belmont & Company have long represented the Rothschilds."

And George Wheeler writes:

"Part of the reality of the day was an ugly resurgence of anti-Semitism... Someone was needed as a cover. Who better than J. Pierpont Morgan, a solid, Protestant exemplar of capitalism able to trace his family back to pre-Revolutionary times?" 5

 

1. Derek Wilson, p. 182.
2. Moody, p. 27.
3. Kolko, Triumph, p. 142.
4. Sereno S. Pratt, The Work of Wall Street (New York: D. Appleton, 1916; rpt. New York: Arno Press, 1975), p. 349.

5. Wheeler, pp. 17-18,42.

 


 

RISE OF THE HOUSE OF MORGAN
With these considerations as background, the meteoric rise of Morgan's star over London and Wall Street can be readily understood.

 

It is no longer surprising, for example, that Peabody & Company was the sole American investment firm to receive a gigantic loan from the Bank of England during the U.S. panic of 1857, a loan which not only saved it from sinking, but made it possible to seize and salvage many other ships that were then capsized on Wall Street.


Peabody had become active in the business of discounting acceptances, which is banker language for insuring commercial loans issued for the purchase of goods.

 

This is how it works:

The seller issues a bill with a stipulation that he must be paid at a future date, usually ninety days. When the buyer receives the bill, his bank writes the word "accepted" across the face of it and adds the signature of an officer, making it a legally binding contract. In other words, the bank becomes a co-signer on the buyer's credit and guarantees payment even if the buyer should default.

Naturally, there is a price for this guarantee.

 

That price is stated as a percentage of the total bill and it is either added to the amount paid by the buyer or deducted from the amount received by the seller. Actually there is a fee paid at both ends of the transaction, one to the seller's bank which receives the acceptance and pays out the money, and one to the issuing bank which assumes the liability of guaranteeing payment.

 

The sale is said to be "discounted" by the amount paid to the banks.

 

And so it was that Peabody & Company had been active in the business of discounting acceptances, primarily between sellers in England and buyers in the United States.
 

 

 

MORGAN AND THE PANIC OF 1857
In the Wall Street panic of 1857, many U.S. buyers were unable to pay their bills, and Peabody and Morgan were expected to make good on their guarantees. Naturally, they didn't have the money, and the firm was facing certain bankruptcy unless the money could be obtained from somewhere.

 

Stanley Jackson provides the details:

The slump was catastrophic for Peabody & Co. It suddenly found itself committed to acceptances of £2 million and with no hope of discharging even part of a stockpile of depreciating bonds on New York brokers and bankers, themselves now desperately short of ready funds.

 

The firm was soon paying out thousands of pounds a day. Without raising a large temporary loan the partners would be forced to suspend business altogether.


1. Jackson, p. 56.

 


Ron Chernow, in The House of Morgan, says:

"Rumors raced through London that George Peabody and Company was about to fail, a prospect heartily relished by rivals... The major London houses told Morgan they would bail out the firm - but only if Peabody shut down the bank within a year."

Jackson continues the narrative:

The clouds lifted dramatically when the Bank of England announced a loan to Peabody's of £800,000, at very reasonable interest, with the promise of further funds up to a million sterling if and when required.

 

It was a remarkable vote of confidence as Thomas Hankey [governor of the Bank of England] had already rejected similar appeals from various American firms who did not measure up to his standards... Peabody & Company recovered almost overnight and indeed hoisted its turnover above pre-slump levels.2

With an almost unlimited access to cash and credit backed by the Bank of England, Peabody and Morgan were able to wade hip deep through the depreciated stocks and bonds that were sold to (them at sacrifice prices on Wall Street.

 

Within only a few years, when sanity had been restored to American markets, the assets of the firm had grown to gigantic proportions.


This event tells us a great deal about relationships. If the Rothschilds truly had been competitors, they would have seized upon this opportunity and used their great influence within the Bank of England and the other investment houses in London to squeeze out Peabody, not to assist him. The Barings, in particular, were already trying to accomplish exactly that.

 

The Rothschilds must have believed that a successful Peabody firm ultimately would be in their own best interest.
 

 

 

ANTI-SEMITISM WAS PROFITABLE
In later years, Jack Morgan Q.P., Jr. would assume the role of a staunch anti-Semite, and this undoubtedly strengthened his hand at dealing with American investors and borrowers who were loath to have anything to do with Jewish bankers.

 

That, of course, included officials of the U.S. Treasury. It was particularly helpful during the 1896 rescue of the federal government from a decline in its gold reserves. Fearing that it would not be able to honor its promise to exchange paper money for gold coins, the government was forced to borrow $62 million in gold. The House of Rothschild was an obvious source for such a loan, but the Treasury wanted to avoid an anti-Semitic backlash.

 

Everything fell into place, however, when Morgan and Company became the primary lender, with Rothschild apparently demoted to the role of a mere participant.

 

Wheeler writes:

The consummate politicians of the Cleveland administration ... were certainly aware of the dangers inherent in promoting a rescue effort for the United States Treasury that would be financed by those archetypes of "international Jewish financiers," the Rothschilds...

During these developments, Pierpont Morgan took no direct part in the salvage effort.

 

Up to this point it looked as if the aging financier - he would be fifty-eight in two months - would be merely one among many in this and whatever subsequent bond arrangements would be necessary.

 

It seemed as though he would move on into old age with little more to round out his obituary than his awkward attempt to profiteer on the sale of rifles at the start of the Civil War, his minor shorting of the Union in gold trading toward the close, and a bold but largely unsuccessful move in the 1880s to impose an eastern capitalist cease-fire on the country's warring railroads.


But there were steps being taken even now to bring him out of the financial backwaters - and they were not being taken by Pierpont Morgan himself. The first suggestion of his name for a role in the recharging of the reserve originated with the London branch of the House of Rothschild.


The apparent anti-Semitism of J.P. Morgan, Jr., was again extremely profitable during World War 1, when it was widely publicized that the Kaiser was funded by German-Jew bankers.

 

To deal with the Morgan group, therefore, as opposed to Kuhn Loeb, for example, was in some circles almost a point of national patriotism.

 


1. Wheeler, pp. 16-17.

 


When J.P. Morgan, Sr., died in 1913, people were shocked to learn that his estate was valued at only $68 million, a paltry sum compared to the fortunes held by the Vanderbilts, Astors, and Rockefellers.

 

It was even more unbelievable when Jack Morgan died in 1943 and left an estate valued at only $16 million.

 

A small amount had been transferred to members of their families prior to their deaths, but that did not account for the vast fortunes which they visibly controlled during their lives. Surely, there had been a bookkeeping sleight-of-hand. On the other hand, it may have been true. When Alphonse Rothschild died in Paris in 1905, it was revealed that his estate contained $60 million in American securities.


The Rothschilds in Britain undoubtedly held an equally large bloc. Furthermore, many of these securities were handled through the House of Morgan. The possibilities are obvious that a major portion of the wealth and power of the Morgan firm was, and always had been, merely the wealth and power of the Rothschilds who had raised it up in the beginning and who sustained it through its entire existence.


How much of Morgan's apparent anti-Semitism was real and how much may have been a pragmatic guise is, in the final analysis, of little importance, and we should not give unwarranted emphasis to it here.

 

Regardless of one's interpretation of the nature of the relationship between the Houses of Morgan and Rothschild, the fact remains that it was close, it was ongoing, and it was profitable to both. If Morgan truly did harbor feelings of anti-Semitism, neither lie nor the Rothschilds ever allowed them to get in the way of their business.


To put the London connection into proper perspective, it will be necessary once again to abandon a strict chronological sequence of events and jump ahead to the year 1924. So let us put our cast of characters on hold for a moment and, before allowing them to act.

 

Out the drama of creating the Federal Reserve System, we shall pick up the storyline eleven years after that event had already taken place.
 

 

 

ENGLAND FACES A DILEMMA
At the end of World War I, Britain faced an economic dilemma.

 

She had abandoned the gold standard early in the war in order to remove all limits from the creation of fiat money, and the result had been extreme inflation. But now she wanted to regain her former position of power and prestige in the world's financial markets and [decided that, to accomplish this, it would be necessary to return to the gold standard.

 

It was decided, further, to set the exchange value of the pound sterling (the British monetary unit) at exactly $4.86 in U.S. currency, which was approximately what it had been before the war began.


To say that she wanted to return to the gold standard actually is misleading. It was not a pure standard in which every unit of money was totally backed by a stated weight of gold. Rather, it was a fractional gold standard in which only a certain fraction of all the monetary units were so backed.

 

But, even that was much to be desired over no backing whatsoever for three reasons.

  • First, it created greater consumer confidence in the money system because of the implied promise to redeem all currency in gold - even though such promises are always broken when based on a fractional-reserve.

  • Secondly, it provided an efficient means of settling financial accounts between nations, gold always being the international medium of choice.

  • Thirdly, it applied some braking action to the production of fiat money, thus, providing a certain degree of restraint to inflation and the boom-bust cycle.

The decision to return to a fractional gold standard, therefore, while it left much to be desired, was still a step in the right direction.

 

But there were two serious problems with the plan. The first was that the exchange value of gold can never be decided by political decree. It will always be determined by the interplay of supply and demand within the marketplace. Trying to fix the number of dollars which people will be willing to exchange for a pound sterling was like trying to legislate how many baseball cards a schoolboy will give for a purple agate.

 

The international currency market is like a huge auction. If the auctioneer sets the opening bid too high, there will be no takers - which is exactly what happened to the pound.


The other problem was that, during the war, England had adopted a massive welfare program and a strong network of labor unions. The reason this was a problem was that the only way to make the pound acceptable in international trade was to allow its value to drop to a competitive and realistic level, and that would have meant, not only a drastic reduction in welfare benefits, but also a general lowering of prices - including the price of labor which is called wages.

 

Politicians were quite willing to allow prices of commodities to move downward, but they did not have the courage to take any action which would reduce either welfare benefits or wages.

 

To the contrary, they continued to bid for votes with promises of still more socialism and easy credit.

 

Prices continued to rise.
 

 

 

ENGLAND IN DEPRESSION
With the value of the pound set artificially high in order to sustain prices, wages, and profit levels, the cost of British exports also became high, and they ceased to be competitive in world markets.

 

With exports in decline, the amount of money corning into the country also declined. England became a debtor nation, which means that her payments to other countries were larger than her income from those countries.


As pointed out in chapter five, if an individual spends more [than his income, he must either increase his income, dip into savings, sell off assets, create counterfeit, or borrow. The same is true of nations. England had already borrowed to the limit of her credit and was rapidly exhausting her savings in order to continue purchasing [foreign goods to sustain the high standard of living to which she had grown accustomed.

 

She couldn't counterfeit because payments for these imports had to be settled in gold, which meant that, as her national savings were spent, her gold supply moved out of the country. The handwriting was on the wall. If this process continued, the nation soon would be broke.

 

It was a situation, incidentally, which was amazingly parallel to what has plagued the United States since the end of Word War II, and for mostly the same reasons.


By March of 1919, England's trade was so depressed that she had no choice but to let the value of the pound "float," which means lo seek its own level in response to supply and demand. Within a year it had dropped to $3.21, a loss of thirty-four per cent. Since the American dollar was the de facto world monetary standard at that time, receiving fewer dollars for each pound sterling meant that the pound was valued lower in all the markets of the world.

 

The result was that the price Britishers had to pay for imported goods was rooming higher while the price she received for the export of her own goods was becoming lower. The British economy was, not only badly anemic, it was experiencing a monetary hangover from the vast inflation of World War I.

 

In other words, it was undergoing a painful but, in the long run, healthy recovery and a return to reality.


Such a condition was intolerable to the monetary and political scientists who were determined to find a quick and painless remedy which would allow the binge to continue. Several emergency therapies were administered.

 

The first was to use the Financial Committee of the League of Nations - which England dominated - to require all the other European nations to follow similar inflationary monetary policies. They were also required to establish what was called the "gold exchange standard," a scheme whereby all countries based their currency, not on gold, but on the pound sterling.

 

In that way, they could all inflate together without causing a disruptive flow of gold from one to the other, and England would act as the regulator and guarantor of the system. In other words, England used the power of her position within the League of Nations to establish the Bank of England as a master central bank for all the other central banks of Europe.

 

It was the prototype for what the Cabal now is doing with Federal Reserve and the World Bank within the framework of the United Nations.
 

 

 

PROBLEM OF AMERICAN PROSPERITY
Europe was well in hand, but that still left the United States to be controlled. America had also inflated during the war but not nearly as much.

 

She also had a fractional gold standard, but the stockpile of gold was very large and still growing. As long as America continued to exist as the producer of so many commodities that England needed for import, and as long as the value of the dollar continued to be high, the anemia of the pound sterling would continue.
The therapy chosen for this problem was simple.

 

Perform a monetary transfusion from a healthy patient to the unhealthy one. All the London financiers had to do was find a large and robust specimen who, without asking too many questions, would be willing to become the donor.

 

The specimen selected, of course, was Uncle Sam himself. It was the prototype of the transfer mechanism, previously described, which has been the life support keeping alwe the moribund Communist and Socialist countries since World War II.


There are several ways the life blood of one nation can be transfused to another.

 

The most direct method, of course, is to make an outright gift, such as the bizarre American ritual called foreign aid. Another is to make a gift disguised as something else, such as needlessly stationing military bases abroad for the sole purpose of bolstering the foreign economy, or granting a loan to a foreign government at below market rates or - worse - with the full expectation that the loan will never be repaid.

 

But the third way is the most ingenious of them all: to have one nation deliberately inflate its currency at a rate greater than the other nation so that real purchasing power, in terms of international trade, moves from the more inflating to the less inflating nation.

 

This is a method truly worthy of the monetary scientists. It is so subtle and so sophisticated that not one in a thousand would even think of it, much less object to it. It was, therefore, the ideal method chosen in 1925 to benefit England at the expense of America.

 

As Professor Rothbard observed:

In short, the American public was nominated to suffer the burdens of inflation and subsequent collapse [the crash of 1929] in order to maintain the British government and the British trade union movement in the style to which they insisted on becoming accustomed.

At the inception of the Federal Reserve System, there had been a brief struggle for power but, within a few years, the contest was decisively won by the head of the New York Bank, Benjamin Strong.

 

Strong, it will be recalled, previously had been head of Morgan's Bankers Trust Company and was one of the seven participants at the secret meeting on Jekyll Island.

 

Professor Quigley reminds us that,

"Strong owed his career to the favor of the Morgan bank... He became Governor of the Federal Reserve Bank of New York as the joint nominee of Morgan and Kuhn, Loeb and Company."

Strong was the ideal choice for the cartel.

 

Not the least of his qualifications was his alliance with the financial powers of London. When Montagu Norman was made the Governor of the Bank of England in 1920, there began a close personal relationship between the two central bankers which lasted until Strong's sudden death in 1928.


Norman was considered by many to be eccentric if not mentally unbalanced.

 

Quigley says:

Norman was a strange man whose mental outlook was one of successfully suppressed hysteria or even paranoia. He had no use for government and feared democracy. Both of these seemed to him to be threats to private banking, and thus to all that was proper and precious in human life...

 

When he rebuilt the Bank of England, he constructed it as a fortress prepared to defend itself against any popular revolt, with the sacred gold reserves hidden in deep vaults below the level of underground waters which could be released to cover them by pressing a button on the governor's desk.

 

For much of his life, Norman rushed about the world by fast steamship, covering tens of thousands of miles each year, often travelling incognito, concealed by a black slouch hat and a long black cloak, under the assumed name of "Professor Skinner"...

Norman had a devoted colleague in Benjamin Strong.

 

In the 1920s, they were determined to use the financial power of Britain and of the United States to force all the major countries of the world to go on the gold standard [with an artificial value set for the benefit of England] and to operate it through central banks free from all political control, with all questions of international finance to be settled by agreements by such central banks without interference from governments.


Strong and Norman spent many holidays together, sometimes in Bar Harbor, Maine, but usually in Southern France, and they crisscrossed the Atlantic on numerous other occasions to consult with each other on their plan for controlling the world economy.

 

Lester Chandler tells us:

"Their associations were so frequent and prolonged and their collaboration so close that it is still impossible to determine accurately their relatwe roles in developing some of the ideas and projects that they shared."

The Bank of England provided Strong with an office and a private secretary during his visits, and the two men kept in close contact with each other through the weekly exchange of private cables.

 

All of these meetings and communiqués were kept in strict secrecy. When their frequent visits drew inquiries from the press, the standard reply was that they were just friends getting together for recreation or informal chats.

 

By 1926, the heads of the central banks of France and Germany were occasionally included in their meetings which, according to Norman's biographer, were

"more secret than any ever held by Royal Arch Masons or by any Rosicrucian Order."


 

SECRET MEETING OF 1927
The culmination of these discussions took place at a secret meeting in 1927 at which it was agreed that the financial lifeblood of the American people would be donated for a massive transfusion to Great Britain.

 

Galbraith sets the scene:

On July 1, 1927, the Mauretania arrived in New York with two notable passengers, Montagu Norman, Governor of the Bank of England, and Hjalmar Schacht, head of the German Reichsbank... The secrecy covering the visit was extreme and to a degree ostentatious. The names of neither of the great bankers appeared on the passenger list. Neither, on arriving, met with the press...


In New York the two men were joined by Charles Rist, the Deputy Governor of the Banque de France, and they went into conference with Benjamin Strong, the Governor of the Federal Reserve Bank of New York...

The principle, or in any case the ultimately important, subject of discussion was the persistently weak reserve position of the Bank of England.

 

This, the bankers thought, could be helped if the Federal Reserve System would ease interest rates, encourage lending. Holders of gold would then seek the higher returns from keeping their metal in London. And, in time, higher prices in the United States would ease the competitive position of British industry and labor.


Galbraith speaks with soft phrases to cushion a harsh reality. What he is saying is that the purpose of the meeting was to finalize a plan whereby the Governor of the Federal Reserve System was to deliberately create inflation in the U.S. so that American prices would rise, making U.S. goods less competitive in world markets and causing American gold to move to the Bank of England. Governor Strong needed little convincing.

 

That is precisely what he and Norman had planned to do all along and, in fact, he had already begun to implement the plan. The purpose of inviting the Germans and the French to the meeting was to enlist their agreement to create inflation in their countries as well.

 

Schacht and Rist would have no part of it and left the meeting early, leaving Strong and Norman to work out the final details between them.

 

 

1. Galbraith, pp. 174-75.
 


Strong was more concerned about British fortunes than American.

 

In a letter written in May of 1924 to Secretary of the Treasury Andrew Mellon, he discussed the necessity of lowering American interest rates as a step toward money expansion with the objective of raising American prices relative to those in Great Britain.

 

He acknowledged that the goal was to protect England from having to cut back on wages, profits, and welfare.

 

He said:

At the present time it is probably true that British prices for goods internationally dealt in are as a whole, roughly, in the neighborhood of 10 percent above our prices, and one of the preliminaries to the re-establishment of gold payment by Great Britain will be to facilitate a gradual readjustment of these price levels before monetary reform is undertaken. In other words, this means some small advance in prices here and possibly some small decline in their prices...

 

The burden of this readjustment must fall more largely upon us than upon them. It will be difficult politically and socially for the British Government and the Bank of England to face a price liquidation in England... in face of the fact that trade is poor and they have over a million unemployed people receiving government aid.


 

BRINGING DOWN THE DOLLAR
The Mandrake Mechanism of the Federal Reserve went into high gear on behalf of the Bank of England in 1924, several years before the historic meeting between Strong, Norman, and Rist.

 

There were two great surges of monetary expansion. The first came with the monetization of $492 million in bonds plus almost twice as much in banker's acceptances. The second burst of inflation came in the latter half of 1927, immediately following the secret meeting between Strong, Norman, Schacht, and Rist.

 

It involved the funding of $225 million in government bonds plus $220 million in banker's acceptances, for a total increase in bank reserves of $445 million.

 

At the same time, the rediscount rate to member banks (the interest rate they pay to borrow from the Fed) was lowered from 4 to 3.5 per cent, making it easier for those banks to acquire additional "reserves" out of which they could create even more fiat dollars-The amount created on top of that by the commercial banks is about five and a-half times the amount created by the Fed, which means a total money flood in excess of $10 billion in just six years.


Throughout this period, the demand by the System for government bonds and acceptances pushed interest rates down. As anticipated, people with gold then preferred to send it to London where it could earn a higher yield, and America's gold supply began to move abroad.

 

Furthermore, as inflation began to eat its way into the purchasing power of the dollar, the prices of American-made goods (began to rise in world markets making them less competitive; U.S. exports began to decline; unemployment began to rise; low interest rates and easy credit led to speculation in the securities markets; and the system lunged full speed ahead toward the Great Crash of 1929. But that part of the story must wait for another chapter.


The technician who actually drafted the final version of the Federal Reserve Act was H. Parker Willis. After the System was created, he was appointed as First Secretary of the Board of Governors.

 

By 1929, he had become disillusioned with the cartel and, in an article published in The North American Review, he wrote:

In the autumn of 1926 a group of bankers, among whom was one with a world famous name, were sitting at a table in a Washington hotel.

One of them raised the question whether the low discount rates of the System were not likely to encourage speculation.

"Yes," replied the conspicuous figure referred to, "they will, but that cannot be helped. It is the price we must pay for helping Europe."

There can be little doubt that the banker in question was J.P. (Jack) Morgan, Jr.

 

It was Jack who was imbued with English tradition from the earliest age, whose financial empire had its roots In London, whose family business was saved by the Bank of England, who spent six months out of every year of his later life as a resident of England, who had openly insisted that his junior partners demonstrate a "loyalty to Britain," and who had directed the Council on Foreign Relations, the American branch of a secret society dedicated to the supremacy of British tradition and political power.

 

It is only with that background that one can fully appreciate the willingness to sacrifice American interests.

 

Indeed,

"it is the price we must pay for helping Europe."

In spite of the growing signs of crisis in the American economy, Morgan's protégé, Benjamin Strong, was nonetheless pleased with his accomplishment.

 

In a letter written in 1929 to Parker Gilbert, who was the American Agent for Reparations, he said:

Our policy of the last four years, up to this January, has been effective in accomplishing the purpose for which it was designed.

 

It has enabled monetary reorganization to be completed in Europe, which otherwise would have been impossible. It was undertaken with the well recognized hazard that we were liable to encounter a big speculation and some expansion of credit... Our course was perfectly obvious.

 

We had to undertake it. The conditions permitted it, and the possibility of damage abroad was at a minimum. Damage abroad? What about damage at home? It is clear that Strong saw little difference between the two. He was the forerunner of the internationalists who have operated the Federal Reserve ever since.

 

He viewed the United States as but one piece in a complex world financial structure, and what was good for the world was good for America. And, oh yes, what was good for England was good for the world!
 

 

THE BRITISH-AMERICAN UNION
It is one of the least understood realities of modern history that many of America's most prominent political and financial figures - then as now - have been willing to sacrifice the best interests of the United States in order to further their goal of creating a one-world government.

 

The strategy has remained unchanged since the formation of Cecil Rhodes' society and its offspring, the Round Table Groups. It is to merge the English-speaking nations into a single political entity, while at the same time creating similar groupings for other geopolitical regions. After this is accomplished, all of these groupings are to be amalgamated into a global government, the so-called Parliament of Man.

 

And guess who is planning to control that government from behind the scenes.

 


1. Chandler, p. 458. For additional clarification, also see pp. 459-63-

 


This strategy was expressed aptly by Andrew Carnegie in his book, Triumphant Democracy. Expressing concern that England was in decline as a world power, he said:

Reunion with her American children is the only sure way to prevent continued decline... Whatever obstructs reunion I oppose; whatever promotes reunion I favor. I judge all political questions from this standpoint...

 

The Parliament of Man and the Federation of the World have already been hailed by the poet, and these mean a step much farther in advance of the proposed reunion of Britain and America... I say that as surely as the sun in the heavens once shone upon Britain and America united, so surely is it one morning to rise, shine upon, and greet again the reunited state, "The British-American Union."

 


SUMMARY
After the Civil War, America experienced a series of expansions and contractions of the money supply leading directly to economic booms and busts.

 

This was the result of the creation of fiat money by a banking system which, far from being free and competitive, was a half-way house to central banking. Throughout the chaos, one banking firm, the House of Morgan, was able to prosper out of the failure of others.

 

Morgan had close ties with the financial structure and culture of England and was, in fact, more British than American. Events suggest the possibility that Morgan and Company was in concealed partnership with the House of Rothschild throughout most of this period.


Benjamin Strong was a Morgan man and was appointed as the first Governor of the Federal Reserve Bank of New York which rapidly assumed dominance over the System. Strong immediately entered into close alliance with Montagu Norman, Governor of the Bank of England, to save the English economy from depression.

 

This was accomplished by deliberately creating inflation in the U.S. which caused an outflow of gold, a loss of foreign markets, unemployment, and speculation in the stock market, all of which were factors that propelled America into the crash of 1929 and the great depression of the 30s.


Although not covered in this chapter, it must be remembered that the same forces were responsible for American involvement in both world wars to provide the economic and military resources England needed to survive.

 

Furthermore, the key players in this action were men who were part of the network of a secret society established by Cecil Rhodes for the expansion of the British empire.
 

 

 

 



Chapter Twenty-One
COMPETITION IS A SIN

 

The story of how the New York investment bankers formed a cartel to avoid competition; the drafting of proposed legislation to legalize that cartel; the strategy to camouflage the true nature of the legislation; the failure of the deception and the defeat of the bill.
 

We have travelled to many points on a large circle of time and now are re-approaching the journey to Jekyll Island where this book began.


In the last chapter, we saw how the expansion and contraction of the money supply following the Civil War led to a series of booms and busts. We saw how the firm of J.P. Morgan & Company, with help from financiers in London, was able to reap great profits from both sides of those cycles but particularly from the recessions.

 

At that point, we jumped ahead in time to examine how J.P. Morgan and other leading American financiers were closely aligned with British interests. We also saw how, in the 1920s, the American dollar was deliberately weakened by Morgan agents within the Federal Reserve System in order to prop up the sagging British economy.

 

Let us return now to the point of departure and allow our cast to resume playing out that most important prior scene: the actual creation of the Federal Reserve System itself.
 

 

 

HALF-WAY HOUSE TO CENTRAL BANKING
Historians seeking to justify governmental control of the monetary system have claimed that the booms and busts that occurred during this period were the result of free and competitive banking.

 

As we have seen, however, these destructive cycles were the direct result of the creation and then extinguishing of fiat money through a system of federally chartered national banks - dominated by a handful of firms on Wall Street - which constituted a half-way house to central banking. None of these banks were truly free of state control nor were they competitive in the traditional sense of the word.

 

They were in fact subsidized by the government and had many monopolistic privileges. From the perspective of bankers on Wall Street, however, there was a great deal more to be desired. For one thing, America still did not have a "lender of last resort."

 

That is banker language for a full-blown central bank with the power to create unlimited amounts of fiat money which can be rushed to the aid of any individual bank that is under siege by its depositors wanting their money back. Having a lender of last resort is the only way a bank can create money out of nothing and still be protected from a potential "run" by its customers.

 

In other words, it is the means by which the public is forced to pay a hidden tax of inflation to cover the shortfall of fractional-reserve banking.

 

That is why the so-called virtue of a lender of last resort is taught with great reverence today in virtually all academic institutions offering degrees in banking and finance. It is one of the means by which the system perpetuates itself.


The banks could now inflate more radically and more in unison than before the war but, when they pushed too far and too fast, their bank-generated booms still collapsed into recessions. While this could be highly profitable to the banks, it was also precarious. As the American economy expanded in size, the magnitude of the booms and busts increased also, and it was becoming more and more difficult for firms like Morgan & Company to safely ride out the storm.

 

There was a growing dread that the next collapse might be more than even they could handle.

 


1. See Kolko, Triumph, p. 140.

 


In addition to these concerns was the fact that many state banks, mostly in the developing Southern and Western states, had elected not to join the national banking system and, consequently, had escaped control by the Wall-Street-Washington axis.

 

As the population expanded south and westward, much of the nation's banking moved likewise, and the new banks were becoming an increasing source of competition to the New York power center. By 1896, the number of non-national banks had grown to sixty-one per cent, and they already held fifty-four per cent of the country's total banking deposits.

 

By 1913, the year in which the Federal Reserve Act was passed, those numbers had swelled to seventy-one per cent non-national banks holding fifty-seven per cent of the nation's deposits. Something had to be done to stop this movement.


Additional competition was developing from the trend in industry to finance itself from profits rather than borrowed capital. Between 1900 and 1910, seventy per cent of American corporate growth was funded internally, making industry increasingly independent of the banks. What the bankers wanted - and what many businessmen wanted also - was a more "flexible" or "elastic" money supply which would allow them to create enough of it at any point in time so as to be able to drive interest rates downward at will.

 

That would make loans to businessmen so attractive they would have little choice but to return to the bankers' stable.
 

 

 

TRUSTS AND CARTELS REPLACE COMPETITION
One more problem facing Wall Street was the fact that the biggest investment houses, such as Morgan & Company and Kuhn, Loeb & Company, although they remained as competitors, were by this time so large they had ceased doing serious battle against each other.

 

The concept of trusts and cartels had dawned in America laid, to those who already had made it to the top, joint ventures, market sharing, price fixing, and mergers were far more profitable than free-enterprise competition.

 

Ron Chernow explains:

Wall Street was snowballing into one big, Morgan-dominated institution. In December 1909, Pierpont had bought a majority stake in the Equitable Life Assurance Society from Thomas Fortune Ryan.

 

This gave him strong influence over America's three biggest insurance companies - Mutual Life, Equitable, and New York Life... His Bankers Trust had taken over three other banks. In 1909, he had gained control of Guaranty Trust, which through a series of mergers he converted into America's largest trust... The core Money Trust group included J.P. Morgan and Company, First National Bank, and National City Bank...


Wall Street bankers incestuously swapped seats on each others boards. Some banks had so many overlapping directors it was hard to separate them... The banks also shared large equity stakes in each | other...

Why didn't banks just merge instead of carrying out the charade of swapping shares and board members?

 

Most were private partnerships or closely held banks and could have done so. The answer harked back to traditional American antipathy against concentrated financial power. The Morgan-First National-National City trio feared public retribution if it openly declared its allegiance.


Interlocking directorates and other forms of hidden control were far more safe than open consolidation but they, too, had their limitations. For one thing, they could not penetrate the barriers of similar competitive groupings. As these combines became larger and larger, ways were sought to bring them together at the top rather than to capture the corporate entities which comprised them.

 

Thus was born the concept of a cartel, a "community of interest" among businessmen in the same field, a mechanism for coming together as partners at a high level and to reduce or eliminate altogether the harsh necessity of competition.


All cartels, however, have an internal self-destruct mechanism. Sooner or later, one of the members inevitably becomes dissatisfied with his agreed-upon piece of the pie. He decides to compete once again and seeks a greater share of the market. It was quickly recognized that the only way to prevent this from happening was to use the police power of government to enforce the cartel agreement.

 

The procedure called for the passage of laws disguised as measures to protect the consumer but which actually worked to ensure the elimination of competition.

 

Henry P. Davison, who was a Morgan partner, put it bluntly when he told a Congressional committee in 1912:

"I would rather have regulation and control than free competition."

John D. Rockefeller was even more to the point in one of his often repeated comments:

"Competition is a sin."

This trend was not unique to the banking industry.

 

Ron Paul and Lewis Lehrman provide the historical perspective:

After 1896 and 1900, then, America entered a progressive and predominantly Republican era.

 

Compulsory cartelization in the name of "progressivism" began to invade every aspect of American economic life. The railroads had begun the parade with the formation of the ICC in the 1880s, but now field after field was being centralized and cartelized in the name of "efficiency," "stability," "progress," and the general welfare...

 

In particular, various big business groups, led by the J.P. Morgan interests, often gathered in the National Civic Federation and other think tanks and pressure organizations, saw that the voluntary cartels and the industrial merger movements of the late 1890s had failed to achieve monopoly prices in industry.

 

Therefore, they decided to turn to governments, state and federal, to curb the winds of competition and to establish forms of compulsory cartels, in the name, of course, of "curbing big business monopoly" and advancing the general welfare.

The challenge no longer was how to overcome one's adversaries, but how to keep new ones from entering the field.

 

When John D. used his enormous profits from Standard Oil to take control of the Chase National Bank, and his brother, William, bought the National City Bank of New York, Wall Street had yet one more gladiator in the financial arena.

 

Morgan found that he had no choice except to allow the Rockefellers into the club but, now that they were in, they all agreed that the influx of competitors had to be stopped. And that was to be the hidden purpose of federal legislation and government control.

 

Gabriel Kolko explains:

The sheer magnitude of many of the mergers, culminating in U.S. Steel, soon forced him [Morgan] to modify his stand, though at times he would have preferred total control. More important, by 1898 he could not ignore the massive power of new financial competitors and had to treat them with deference.

 

Standard Oil Company, utilizing National City Bank for its investments, had fixed resources substantially larger than Morgan's, and by 1899 was ready to move into the general economy... The test came, of course, in the Northern Securities battle, which was essentially an expensive draw. Morgan and Standard paid deference to each other thereafter, and mutual toleration among bankers increased sharply...

 

A benign armed neutrality, rather than positive affection, is as much a reason as any for the high number of interlocks among the fwe major New York banking houses.

Writing in the year 1919, from the perspective of an inside view of Wall Street at that time, John Moody completes the picture:

This remarkable welding together of great corporate interests could not, of course, have been accomplished if the "masters of capital" in Wall Street had not themselves during the same period become more closely allied. The rivalry of interests which was so characteristic during the reorganization period a few years before had very largely disappeared.

 

Although the two great groups of financiers, represented on the one hand by Morgan and his allies and on the other by the Standard Oil forces, were still distinguishable, they were now working in practical harmony on the basis of a sort of mutual "community of interest" of their own. Thus the control of capital and credit through banking resources tended to become concentrated in the hands of fewer and fewer men...

 

Before long it could be said, indeed, that two rival banking groups no longer existed, but that one vast and harmonious banking power had taken their place.


 

1. Paul and Lehrman, p. 119. [ Kolko, Triumph, pp. 143-44.

 

 

 

THE ALDRICH-VREELAND ACT
The monetary contractions of 1879 and 1893 were handled by Wall Street fairly easily and without government intervention, but the crisis of 1907 pushed their resources close to the abyss.

 

It became clear that two changes had to be made: all remnants of banking competition now had to be totally eliminated and replaced by a national cartel; and far greater sums of fiat money had to be made available to the banks to protect them from future runs by depositors.

 

There was now no question that Congress would have to be brought in as a partner in order to use the power of government to accomplish these objectives.

 

Kolko continues:

The crisis of 1907, on the other hand, found the combined banking structure of New York inadequate to meet the challenge, and chastened any obstreperous financial powers who thought they might build their fortunes independently of the entire banking community...

 

The nation had grown too large, banking had become too complex. Wall Street, humbled and almost alone, turned from its own resources to the national government.


1. Moody, pp. 117-18,150

 


The first step in this direction was openly a stop-gap measure.

 

In 1908, Congress passed the Aldrich-Vreeland Act which, basically, accomplished two objectives. First, it authorized the national banks to issue an emergency currency, called script, to substitute for regular money when they found themselves unable to pay their depositors. Script had been used by the bank clearing houses during the panic of 1907 with partial success, but it had been a bold experiment with no legal foundation.

 

Now Congress made it quite legal and, as Galbraith observed,

"The new legislation regularized these arrangements. This could be done against the security of sundry bonds and commercial loans - these could, in effect, be turned into cash without being sold."

The second and perhaps most important feature of the Act was to create a National Monetary Commission to study the problems of American banking and then make recommendations to Congress on how to stabilize the monetary system.

 

The commission consisted of nine senators and nine representatives. The Vice-chairman was Representative Edward Vreeland, a banker from the Buffalo area. The chairman, of course, was Senator Nelson Aldrich. From the start, it was obvious that the Commission was a sham. Aldrich conducted virtually a one-man show.

 

The so-called fact-finding body held no official meetings for almost two years while Aldrich toured Europe consulting with the top central bankers of ;England, France, and Germany. Three-hundred thousand tax dollars were spent on these junkets, and the only tangible product of the Commission's work was thirty-eight massive volumes of the history of European banking.

 

None of the members of the Commission were ever consulted regarding the official recommendations issued by Aldrich in their name. Actually, these were the work of Aldrich and six men who were not even members of the Commission, and their report was drafted, not in a bare Congressional conference room in Washington, but in a plush private hunting resort in Georgia.


And this event finally brings us back to that cold, blustery night at the New Jersey railway station where seven men, representing one-fourth of the wealth of the world, boarded the Aldrich private car for a clandestine journey to Jekyll Island.
 

 

 

THE JEKYLL ISLAND PLAN
As summarized in the opening chapter of this book, the purpose of that meeting was to work out a plan to achieve five primary objectives:

  1. How to stop the growing influence of small, rival banks and to insure that control over the nation's financial resources would remain in the hands of those present

  2. How to make the money supply more elastic in order to reverse the trend of private capital formation and to recapture the industrial loan market

  3. How to pool the meager reserves of all the nation's banks into one large reserve so that at least a few of them could protect themselves from currency drains and bank runs

  4. How to shift the inevitable losses from the owners of the banks to the taxpayers

  5. How to convince Congress that the scheme was a measure to protect the public

It was decided that the first two objectives could be achieved simply by drafting the proper technical language into a cartel agreement and then re-working the vocabulary into legislative phraseology.

 

The third and fourth could be achieved by including in that legislation the establishment of a lender of last resort; in other words, a true central bank with the ability to create unlimited amounts of fiat money.

 

These were mostly technical matters and, although there was some disagreement on a few minor points, generally they were content to follow the advice of Paul Warburg, the man who had the most experience in these matters and who was regarded as the group's theoretician. The fifth objective was the critical one, and there was much discussion on how to achieve it.


To convince Congress and the public that the establishment of a banking cartel was, somehow, a measure to protect the public, the Jekyll Island strategists laid down the following plan of action:

  1. Do not call it a cartel nor even a central bank.

  2. Make it look like a government agency.

  3. Establish regional branches to create the appearance of decentralization, not dominated by Wall Street banks.

  4. Begin with a conservative structure including many sound banking principles knowing that the provisions can be quietly altered or removed in subsequent years.

  5. Use the anger caused by recent panics and bank failures to create popular demand for monetary reform.

  6. Offer the Jekyll Island plan as though it were in response to that need.

  7. Employ university professors to give the plan the appearance of academic approval.

  8. Speak out against the plan to convince the public that Wall Street bankers do not want it.


 

A CENTRAL BANK BY ANY OTHER NAME
Americans would never have accepted the Federal Reserve System if they had known that it was half cartel and half central bank.

 

Even though the concept of government protectionism was rapidly gaining acceptance in business, academic, and political circles, the idea of cartels, trusts, and restraint of free competition was still quite alien to the average voter. And within the halls of Congress, any forthright proposal for either a cartel or a central bank would have been soundly defeated.

 

Congressman Everis Hayes of California warned:

"Our people have set their faces like steel against a central bank."

Senator John Shafroth of Colorado declared:

"The Democratic Party is opposed to a central bank."

The monetary scientists on Jekyll Island decided, therefore, to devise a name for their new creature which would avoid the word bank altogether and which would conjure the image of the federal government itself.

 

And to create the deception that there would be no concentration of power in the large New York banks, the original plan calling for a central bank was replaced by a proposal for a network of regional institutions which supposedly would share and diffuse that power.


Nathaniel Wright Stephenson, Senator Aldrich's biographer, tells us:

"Aldrich entered the discussion at Jekyll Island an ardent convert to the idea of a central bank. His desire was to transplant the system of one of the great European banks, say the Bank of England, bodily to America."

Galbraith explains further:

"It was his [Senator Aldrich's] thought to outflank the opposition by having not one central bank but many. And the word bank would itself be avoided."

Frank Vanderlip tells us the regional concept was merely window dressing and that the network was always intended to operate as one central bank.

 

He said:

"The law as enacted provided for twelve banks instead of one... but the intent of the law was to coordinate the twelve through the Federal Reserve Board in Washington, so that in effect they would operate as a central bank."

If not using the word bank was essential to the Jekyll Island plan, avoiding the word cartel was even more so. Yet, the cartel nature of the proposed central bank was obvious to any astute observer. In an address before the American Bankers Association,

Aldrich laid it out plainly.

 

He said:

"The organization proposed is not a bank, but a cooperative union of all the banks of the country for definite purposes."

Two years later, in a speech before that same group of bankers, A. Barton Hepburn of Chase National Bank was even more candid.

 

He said:

"The measure recognizes and adopts the principles of a central bank. Indeed, if it works out as the sponsors of the law hope, it will make all incorporated banks together joint owners of a central dominating power."

It would be difficult to find a better definition of the word cartel than that.


The plan to structure the Creature conservatively at the start and then to remove the safeguards later was the brainchild of Paul Warburg. The creation of a powerful Federal Reserve Board was also his idea as a means by which the regional branches could be absorbed into a central bank with control safely in New York.

 

Professor Edwin Seligman, a member of the international banking family of J&W Seligman, and head of the Department of Economics at Columbia University, explains and praises the plan:

It was in my study that Mr. Warburg first conceived the idea of presenting his views to the public... In its fundamental features the Federal Reserve Act is the work of Mr. Warburg more than any other man in the country... The existence of a Federal Reserve Board creates, in everything but in name, a real central bank...

 

Mr. Warburg had a practical object in view... It was incumbent on him to remember that the education of the country must be gradual and that a large part of the task was to break down prejudices and remove suspicion.

 

His plans therefore contain all sorts of elaborate suggestions designed to guard the public against fancied dangers and to persuade the country that the general scheme was at all practicable.

 

It was the hope of Mr. Warburg that with the lapse of time it may be possible to eliminate from the law not a few clauses which were inserted largely, at his suggestion, for educational purposes.
 

 

THE ALDRICH BILL
The first draft of the Jekyll Island plan was submitted to the Senate by Nelson Aldrich but, due to the Senator's unexpected illness when he returned to Washington, it was actually written by Frank Vanderlip and Benjamin Strong.

 

Although it was co-authored by Congressman Vreeland, it immediately became known as the Aldrich Bill. Vreeland, by his own admission, had little to do with it either, but his willingness to be a team player in the game of national deception was of great value.

 

Writing in the August 25, 1910, issue of The Independent, which incidentally was owned by Aldrich himself and was anything but independent, Vreeland said:

"The bank I propose... is an ideal method of fighting monopoly. It could not possibly itself become a monopoly and it would prevent other banks combining into monopolies. With earnings limited to four and one-half per cent, there could not be a monopoly."

What an amazing statement. It is brilliantly insidious because of the half truths it contains. It is true that monopolies cannot - or at least do not - operate at four and one-half per cent interest.

 

But it is untrue that the Federal Reserve banks were to be held to that lowly rate. It is true that four per cent was the stated amount they would earn on the stock purchased in the System, but it is also true that the real profits were to be made, not from stock dividends, but from the harvesting of interest payments on fiat money.

 

To this was to be added the profits made possible from operating on smaller safety margins yet still being protected from bankruptcy. Furthermore, being on the inside of the nation's central bank would make them privy to the important money-making data and decisions long before their competitors.

 

The profits that could be derived from such an advantage would be equal to or even greater than those from the Mandrake Mechanism. It is true that the Federal Reserve was to be a private institution, but it is certainly not true that this was to mark the disappearance of the government from the banking business. In fact, it was just the opposite, because it marked the appearance of the government as a partner with private bankers and as the enforcer of their cartel agreement.

 

Government would now become more deeply involved than ever before in our history.


Half truths and propaganda notwithstanding, the organizational structure proposed by the Aldrich Bill was similar in many ways to the old Bank of the United States. It was to have the right to convert federal debt into money, to loan that money to the government, to control the affairs of regional banks, and to be the depository of government funds.

 

The dissimilarities were in those provisions which gave the Creature more privilege and power than the older central bank. The most important of these was the right to create the official money of the United States. For the first time in our history, the paper notes of a banking institution became legal tender, not only for public debts, but for private ones as well.

 

Henceforth, anyone refusing to accept these notes would be sent to prison. The words "The United States of America" were to appear on the face of every note along with the great seal of the United States Treasury. And, of course, the signature of the Treasurer himself would be printed in a conspicuous location.

 

All of this was designed to convince the public that the new institution was surely an agency of the government itself.
 

 

 

TURNING THE OPPOSITION AGAINST ITSELF
Now that the basic strategy was in place and a specific bill had been drafted, the next step was to create popular support for it.

 

This was the critical part of the plan and it required the utmost finesse. The task actually was made easier by the fact that there was a great deal of genuine opposition to the concentration of financial power on Wall Street. Two of the most outspoken critics at that time were Wisconsin Senator Robert LaFollette and Minnesota Congressman Charles Lindbergh.

 

Hardly a week passed without one of them delivering a scathing speech against what they called "the money trust" which was responsible, they said, for deliberately creating economic booms and busts in order to reap the profits of salvaging foreclosed homes, farms and businesses.

 

If anyone doubted that such a trust really existed, their skepticism was abruptly terminated when LaFollette publicly charged that the entire country was controlled by just fifty men. The monetary scientists were not dismayed nor did they even bother to deny it.

 

In fact, when George F. Baker, who was a partner of J.P. Morgan, was asked by reporters for his reaction to LaFollette's claim, he replied that it was totally absurd. He knew from personal knowledge, he said, that the number was not more than eight!


The public was, of course, outraged, and the pressure predictably mounted for Congress to do something. The monetary scientists were fully prepared to turn this reaction to their own advantage.

 

The strategy was simple:

  1. set up a special Congressional committee to investigate the money trust

  2. make sure the committee is staffed by friends of the trust itself

  3. conceal the full scope of the trust's operation while revealing just enough to intensify the public clamor for reform

Once the political climate was hot enough, then the Aldrich Bill could be put forward, supposedly as the answer to that need.


This strategy was certainly not new. As Congressman Lindbergh explained:

Ever since the Civil War, Congress has allowed the bankers to completely control financial legislation. The membership of the Finance Committee in the Senate and the Committee on Banking and Currency in the House, has been made up of bankers, their agents and attorneys.

 

These committees have controlled the nature of the bills to be reported, the extent of them, and the debates that were to be held on them when they were being considered in the Senate and the House.

 

No one, not on the committee, is recognized... unless someone favorable to the committee has been arranged for.

 

 

THE PUJO COMMITTEE
The Pujo Committee was a perfect example of this kind of chicanery.

 

It was a subcommittee of the House Committee on Banking and Currency and it was given the awesome responsibility of conducting the famous "Money Trust" investigation of 1912.

 

Its chairman was Arsene Pujo of Louisiana who, true to form, was regarded by many as a spokesman for the "Oil Trust" The hearings dragged on for eight months producing volumes of dry statistics and self-serving testimony of the great Wall Street bankers themselves. At no time were the financiers asked any questions about their affairs with foreign investment houses. Nor were they asked about their response to competition from new banks.

 

There were no questions about their plan to protect the speculative banks from currency drains; or their motive for wanting artificially low interest rates; or their formula for passing on their losses to the taxpayer. The public was given the impression that Congress was really prying off the lid of scandal and corruption, but the reality was more like a fireside chat between old friends.

 

No matter what vagaries or absurdities fell from the bankers' lips, it was accepted without contest.


These hearings were conducted largely as a result of the public accusations made by Congressmen Lindbergh and Senator LaFollette. Yet, when they requested to appear before the Committee, both of them were denied access. The only witnesses to testify were the bankers themselves and their friends. Kolko tells us:

Fortunately for the reformers, the Pujo Committee swung into high gear in its investigation of the Money Trust during the summer of 1912, and for eight months frightened the nation with its awesome, if inconclusive, statistics on the power of Wall Street over the nation's economy...

 

Five banking firms, the elaborate tables of the committee showed, held 341 directorships in 112 corporations with an aggregate capitalization of over $22 billion. The evidence seemed conclusive, and the nation was suitably frightened into realizing that reform of the banking system was urgent - presumably to bring Wall Street under control...

 

The orgy of Wall Street was resurrected by the newspapers, who quite ignored the fact that the biggest advocates of banking reform were the bankers themselves, bankers with a somewhat different view of the problem... Yet it was largely the Pujo hearings that made the topic of banking reform a serious one.

Kolko has touched upon an interesting point.

 

Almost no one put any significance to the fact that some of the biggest bankers on Wall Street were the first marchers to lead the parade for banking reform. The most conspicuous among these was Paul Warburg of Kuhn, Loeb & Company who, for seven years prior to passage of the Federal Reserve Act, travelled around the country doing nothing but giving "reform" speeches and writing scholarly articles for the media, including an eleven-part series for The New York Times.

 

Spokesmen from the houses of Morgan and Rockefeller joined in and made regular appearances before professional and political bodies echoing the call for reform.

 

Yet no one paid any attention to the unmistakable odor of fish.
 

 

 

ENLISTING THE HELP OF ACADEMIA
The speeches and articles by big-name bankers were never Intended to sway the public at large.

 

They served the function of putting forth the basic arguments and the technical details which I were to be the starting point for the work of others who could not be accused of having self-serving motives. To carry the message to the voters, it was decided that representatives from the world of academia should be enlisted to provide the necessary aura of respectability and intellectual objectivity.

 

For that purpose, the banks contributed a sum of $5 million to a special "educational" fund, and much of that money found its way into the environs of three universities:

Princeton, Harvard, and the University of Chicago, all of which had been recipients of large endowments from the captains of industry and finance.

It was precisely at this time that the study of "economics" was becoming a new and acceptable field, and it was not difficult to find talented but slightly hungry professors who, in return for a grant or la prestigious appointment, were eager to expound the virtues of lie Jekyll Island plan.

 

Not only was such academic pursuit financially rewarding, it also provided national recognition for them as pioneers in the new field of economics.

 

Galbraith says:

Under Aldrich's direction a score or more of studies of monetary institutions in the United States and, more particularly, in other countries were commissioned from the emergent economics profession.

 

It is at least possible that the reverence in which the Federal Reserve System has since been held by economists owes something to the circumstance that so many who pioneered in the profession participated also in its [the System's] birth.

The principal accomplishment of the bank's educational fund was to create an organization called the National Citizens' League.

 

Although it was entirely financed and controlled by the banks tinder the personal guidance of Paul Warburg, it presented itself merely as a group of concerned citizens seeking banking reform.

 

 

1. Galbraith, p. 121.

 

 

The function of the organization was to disseminate hundreds of thousands of "educational" pamphlets, to organize letter-writing campaigns to Congressmen, to supply quotable material to the news media, and in other ways to create the illusion of grass-roots support for the Jekyll Island plan.


Nathaniel Stephenson, in his biography of Nelson Aldrich, says:

"The league was non-partisan. It was careful to abstain from emphasizing Senator Aldrich... First and last, hundreds of thousands of dollars were spent by the league in popularizing financial science."

The man chosen to head up that effort was an economics professor by the name of J. Laurence Laughlin.

 

Kolko says that,

"Laughlin, nominally very orthodox in his commitment to laissez faire theory, was nevertheless a leading academic advocate of banking regulation... and was sensitive to the needs of banking as well as the realities of politics."

Did his appointment bring intellectual objectivity to the new organization?

 

Stephenson answers:

"Professor Laughlin of the University of Chicago was given charge of the League's propaganda."

To which Congressman Lindbergh adds this reminder:

"The reader knows that the University of Chicago is an institution endowed by John D. Rockefeller with nearly fifty million dollars. It may truly be said to be the Rockefeller University."
 

 

1. Stephenson, pp. 38&-89.
2. Kolko, Triumph, p. 187.

 


This does not necessarily mean that Laughlin was purchased like so many pounds of hamburger and told by Rockefeller what to say and do.

 

It doesn't work that way. The professor undoubtedly believed in the virtue of the Jekyll Island plan, and the evidence is that he pursued his assignment with enthusiastic sincerity. But there is no doubt that he was selected for his new post precisely because he did support the concept of a partnership between banking and government as a healthy substitute for "destructive" competition.

 

In other words, if he didn't honestly agree with John D. that competition was a sin, he probably never even would have been given a professorship in the first place.
 

 

 

WILSON AND WALL STREET
Woodrow Wilson was yet another academic who was brought into the national spotlight as a result of his views on banking reform.

 

It will be recalled from a previous chapter that Wilson's name had been put into nomination for President at the Democratic national convention largely due to the influence of Col. Edward Mandell House. But that was 1912.

 

Ten years prior to that, he was relatively unknown. In 1902 he had been elected as the president of Princeton University, a position he could not have held without the concurrence of the University's benefactors among Wall Street bankers. He was particularly close with Andrew Carnegie and had become a trustee of the Carnegie Foundation.


Two of the most generous donors were Cleveland H. Dodge and Cyrus McCormick, directors of Rockefeller's National City Bank. They were part of that Wall Street elite which the Pujo Committee had described as America's "Money Trust."

 

Both men had been Wilson's classmates at Princeton University. When Wilson returned to Princeton as a professor in 1890, Dodge and McCormick were, by reason of their wealth, University trustees, and they took it upon themselves to personally advance his career.

 

Ferdinand Lundberg, in America's Sixty Families, says this:

For nearly twenty years before his nomination Woodrow Wilson had moved in the shadow of Wall Street...

 

In 1898 Wilson, his salary unsatisfactory, besieged with offers of many university presidencies, threatened to resign. Dodge and McCormick thereupon constituted themselves his financial guardians, and agreed to raise the additional informal stipendium that kept him at Princeton.

 

The contributors to this private fund were Dodge, McCormick, and Moses Taylor Pyne and Percy R. Pyne, of the family that founded the National City Bank. In 1902 this same group arranged Wilson's election as president of the university.

A grateful Wilson often had spoken in glowing terms about the rise of vast corporations and had praised J.P. Morgan as a great American leader. He also had come to acceptable conclusions about the value of a controlled economy.

"The old time of individual competition is probably gone by," he said. "It may come back; I don't know; it will not come back within our time, I dare say."

H.S. Kenan tells us the rest of the story:

Woodrow Wilson, President of Princeton University, was the first prominent educator to speak in favor of the Aldrich Plan, a gesture which immediately brought him the Governorship of New Jersey and later the Presidency of the United States.

 

During the panic of 1907, Wilson declared that:

"all this trouble could be averted if we appointed a committee of six or seven public-spirited men like J.P. Morgan to handle the affairs of our country." 1

 

 

OPPOSITION TO THE ALDRICH BILL
One of the disagreements at the Jekyll Island meeting was over the name to be attached to the proposed legislation.

 

Warburg, being the master psychologist he was, wanted it to be called the National Reserve Bill or the Federal Reserve Bill, something which would conjure up the dual images of government and reserves, both of which were calculated to be subconsciously appealing. Aldrich, on the other hand, acting out of personal ego, insisted that his name be attached to the bill.

 

Warburg pointed out that the Aldrich name was associated in the minds of the public with Wall Street interests, and that would be an unnecessary obstacle to achieving their goal. Aldrich said that, since he had been the chairman of the National Monetary Commission which was created specifically to make recommendations for banking reform, people would be confused if his name were not associated with the bill.

 

The debate, we are told, was long and heated. But, in the end, the politician's ego won out over the banker's logic.


Warburg, of course, was right. Aldrich was well known as a Republican spokesman for big business and banking. His loyalties were further publicized by recently sponsored tariff bills to protect the tobacco and rubber trusts. The Aldrich name on a bill for banking reform was an easy target for the opposition.

 

On December 15, 1911, Congressman Lindbergh rose before the House of Representatives and took careful aim:

The Aldrich Plan is the Wall Street Plan. It is a broad challenge to the government by the champion of the money trust. It means another panic, if necessary, to intimidate the people. Aldrich, paid by the government to represent the people, proposes a plan for the trusts instead.2

 

1. H.S. Kenan The Federal Reserve Bank (Los Angeles: Noontide Press, 1966),p. 105

2. Quoted by H.S. Kenan, p. 118.

 


The Aldrich Bill never came to a vote. When the Republicans lost control of the House in 1910 and then lost the Senate and the Presidency in 1912, any hope there may have been of putting through a Republican bill was lost. Aldrich had been voted out of the Senate by his constituents, and the ball was now squarely in the court of the Democrats and their new president, Woodrow Wilson.


How this came to pass is an interesting lesson on reality politics, and we shall turn to that part of the story next.

 

 


SUMMARY
Banking in the period immediately prior to passage of the Federal Reserve Act was subject to a myriad of controls, regulations, subsidies, and privileges at both the federal and state levels, popular history portrays this period as one of unbridled competition and free banking.

 

It was, in fact, a half-way house to central banking. Wall Street, however, wanted more government participation. The New York bankers particularly wanted a "lender of last resort" to create unlimited amounts of fiat money for their use in the event they were exposed to bank runs or currency drains. They also wanted to force all banks to follow the same inadequate reserve policies so that more cautious ones would not draw down the reserves of the others.

 

An additional objective was to limit the growth of new banks in the South and West.


This was a time of growing enchantment with the idea of trusts and cartels. For those who had already made it to the top, competition was considered chaotic and wasteful. Wall Street was Snowballing into two major banking groups: the Morgans and the Rockefellers, and even they had largely ceased competing with each other in favor of cooperative financial structures.

 

But to keep these cartel combines from flying apart, a means of discipline was heeded to force the participants to abide by the agreements. The federal government was brought in as a partner to serve that function.


To sell the plan to Congress, the cartel reality had to be hidden and the name "central bank" had to be avoided.

  • the word Federal was chosen to make it sound like it was a government operation

  • the word Reserve was chosen to make it appear financially sound

  • the word System (the first drafts used the word Association) was chosen to conceal the fact that it was a central bank

A structure of 12 regional institutions was conceived as a further ploy to create the illusion of decentralization, but the mechanism was designed from the beginning to operate as a central bank closely modeled after the Bank of England.


The first draft of the Federal Reserve Act was called the Aldrich Bill and was co-sponsored by Congressman Vreeland, but it was not the work of either of these politicians. It was the brainchild of banker Paul Warburg and was actually written by bankers Frank Vanderlip and Benjamin Strong.


Aldrich's name attached to a banking bill was bad strategy, because he was known as a Wall Street Senator. His bill was not politically acceptable and was never released from committee.

 

The groundwork had been done, however, and the time had arrived to change labels and political parties.

 

The measure would now undergo minor cosmetic surgery and reappear under the sponsorship of a politician whose name would be associated in the public mind with anti-Wall Street sentiments.
 

 

 



Chapter Twenty-Two
THE CREATURE SWALLOWS CONGRESS

 

The second attempt to pass legislation to legalize the banking cartel; the bankers' selection of Woodrow Wilson as a Presidential candidate; their strategy to get him elected; the role played by Wilson to promote the cartels legislation; the final passage of the Federal Reserve Act.
 

The election of 1912 was a textbook example of power politics and voter deception.

 

The Republican President, William Howard Taft, was up for reelection. Like most Republicans of that era, his political power was based upon the support of big-business and banking interests in the industrial regions.

 

He had been elected to his first term in the expectation that he would continue the protectionist policies of his predecessor, Teddy Roosevelt, particularly in the expansion of cartel markets for sugar, coffee, and fruit [from Latin America. Once in office, however, he grew more restrained in these measures and earned the animosity of many powerful Republicans.

 

The ultimate breach occurred when Taft refused to support the Aldrich Plan. He objected, not because it [would create a central bank which would impose government control over the economy, but because it would not offer enough government control. He recognized that the Jekyll Island formula Would place the bankers into the driver's seat with only nominal participation by the government.

 

He did not object to the ancient Partnership between monetary and political scientists, he merely wanted a greater share for the political side. The bankers were not adverse to negotiating the balance of power nor were they unwilling to make compromises, but what they really needed at this juncture was a man in the White House who, instead of being lukewarm on the plan, could be counted on to become its champion and who would use his influence as President to garner support from the fence straddlers in Congress.

 

From that moment forward, Taft was marked for political extinction.


This was a period of general prosperity, and Taft was popular with the voters as well as with the rank-and-file Party organization He had easily won the nomination at the Republican convention, and there was little doubt that he could take the presidential election as well.

 

Wilson had been put forth as the Democratic challenger, but his dry personality and aloof mannerisms had failed to arouse sufficient voter interest to make him a serious contender.
 

 

 

THE BULL MOOSE CANDIDATE
However, when Teddy Roosevelt returned from his latest African safari, he was persuaded by Morgan's deputies, George Perkins and Frank Munsey, to challenge the President for the Party's nomination.

 

When that effort failed, he was then persuaded to run against Taft as the "Bull Moose" candidate on the Progressive Party ticket. It is unclear what motivated him to accept such a proposition, but there is no doubt regarding the intent of his backers. They did not expect Roosevelt to win, but, as a former Republican President, they knew he would split the Party and, by pulling away votes from Taft, put Wilson into the White House.


Presidential campaigns need money and lots of it.

 

The Republican Party was well financed, largely from the same individuals who now wanted to see the defeat of its own candidate. It would not be possible to cut off this funding without causing too many questions. The solution, therefore, was to provide the financial resources for all three candidates, with special attention to the needs of Wilson and Roosevelt.


Some historians, while admitting the facts, have scoffed at the conclusion that deception was intended.

 

Ron Chernow says:

"By 1924, the House of Morgan was so influential in American politics that conspiracy buffs couldn't tell which presidential candidate was more beholden to the bank."

But one does not have to be a conspiracy buff to recognize the evidence of foul play.

 

Ferdinand Lundberg tells us:

J.P. Morgan and Company played the leading role in the national election of 1912... Roosevelt's preconvention backers were George W. Perkins and Frank Munsey. These two, indeed, encouraged Roosevelt to contest Tart's nomination...

 

Munsey functioned in the newspaper field for J.P. Morgan and Company - buying, selling, creating, and suppressing newspapers in consonance with J.P. Morgan's shifting needs... Perkins resigned from J.P. Morgan and Company on January 1,1911, to assume a larger political role...

 

The suspicion seems justified that the two were not over-anxious to have Roosevelt win. The notion that Perkins and Munsey may have wanted Wilson to win... is partly substantiated by the view that Perkins put a good deal of cash behind the Wilson campaign through Cleveland H. Dodge. Dodge and Perkins financed, to the extent of $35,500, the Trenton True American, a newspaper that circulated nationally with Wilson propaganda...


Throughout the three-cornered fight, Roosevelt had Munsey and George Perkins constantly at his heels, supplying money, going over his speeches, bringing people from Wall Street in to help, and, in general, carrying the entire burden of the campaign against Taft... Perkins and J.P. Morgan and Company were the substance of the Progressive Party; everything else was trimming...

 

Munsey's cash contribution to the Progressive Party brought his total political outlay for 1912 to $229,255.72.

 

Perkins made their joint contribution more than $500,000, and Munsey expended $1,000,000 in cash additionally to acquire from Henry Einstein the New York Press so that Roosevelt would have a New York City morning newspaper. Perkins and Munsey, as the Clapp [Senate Privileges and Election] Committee learned from Roosevelt himself, also underwrote the heavy expense of Roosevelt's campaign train.

 

In short, most of Roosevelt's campaign fund was supplied by the two Morgan hatchet men who were seeking Taft's scalp.

Morgan & Company was not the only banking firm on Wall Street to endorse a three-way election as a means of defeating Taft.

 

Within the firm of Kuhn, Loeb & Company, Felix Warburg was Dutifully putting money into the Republican campaign as expected, but his brother, Paul Warburg and Jacob Schiff were backing Wilson, while yet another partner, Otto Kahn, supported Roosevelt. Other prominent Republicans who contributed to the Democratic campaign that year were Bernard Baruch, Henry Morgenthau, and Thomas Fortune Ryan.2
 


1. Lundberg, pp. 106-12.
2. Kolko, Triumph, pp. 205-11.



And the Rockefeller component of the cartel was just as deeply involved. William McAdoo, who was Wilson's national campaign vice chairman, says that Cleveland Dodge of Rockefeller's National City Bank personally contributed $51,300 - more than one-fourth the total raised from all other sources.

 

In McAdoo's words,

"He was a Godsend."

Ferdinand Lundberg describes Dodge as,

"the financial genius behind Woodrow Wilson."

Continuing, he says:

Wilson's nomination represented a personal triumph for Cleveland H. Dodge, director of the National City Bank, scion of the Dodge copper and munitions fortune...

 

The nomination represented no less a triumph for Ryan, Harvey, and J.P. Morgan and Company. Sitting with Dodge as co-directors of the National City Bank at the time were the younger J.P. Morgan, now the head of the [Morgan] firm, Jacob Schiff, William Rockefeller, J. Ogden Armour, and James Stillman. In short, except for George F. Baker, everyone whom the Pujo Committee had termed rulers of the "Money Trust" was in this bank.

And so it came to pass that the monetary scientists carefully selected their candidate and set about to clear the way for his victory. The maneuver was brilliant.

 

Who would suspect that Wall Street would support a Democrat, especially when the Party platform contained this plank:

"We oppose the so-called Aldrich Bill or the establishment of a central bank; and ... what is known as the money trust."

What irony it was.

 

The Party of the working man, the Party of Thomas Jefferson - formed only a few generations earlier for the specific purpose of opposing a central bank - was now cheering a new leader who was a political captive of Wall Street bankers and who had agreed to the hidden agenda of establishing the Federal Reserve System.

 

As George Harvey later boasted, the financiers,

"felt no animosity toward Mr. Wilson for such of his utterances as they regarded as radical and menacing to their interests. He had simply played the political game."

William McAdoo, Wilson's national campaign vice chairman, destined to become Secretary of the Treasury, saw what was happening from a ringside seat He said:

The major contributions to any candidate's campaign fund are made by men who have axes to grind - and the campaign chest is the grindstone...

 

The fact is that there is a serious danger of this country becoming a pluto-democracy; that is, a sham republic with the real government in the hands of a small clique of enormously wealthy men, who speak through their money, and whose influence, even today, radiates to every corner of the United States.


Experience has shown that the most practicable method of getting hold of a political party is to furnish it with money in large quantities. This brings the big money-giver or givers into close communion with the party leaders.

 

Contact and influence do the rest.
 

 

THE MONEY TRUST THEY LOVE TO HATE
Roosevelt actually had very little interest in the banking issue, probably because he didn't understand it Furthermore, in the unlikely event the blustery "trust buster" would actually win the election, the financiers still had little to fear.

 

In spite of his well-publicized stance of opposing big business, his true convictions were quite acceptable to Wall Street.

 

As Chernow observed:

Although the Roosevelt-Morgan relationship is sometimes caricatured as that of trust buster versus trust king, it was far more complex than that. The public wrangling obscured deeper ideological affinities... Roosevelt saw trusts as natural, organic outgrowths of economic development. Stopping them, he said, was like trying to dam the Mississippi River.

 

Both TR and Morgan disliked the rugged, individualistic economy of the nineteenth century and favored big business..., In the sparring between Roosevelt and Morgan there was always a certain amount of shadow play, a pretense of greater animosity than actually existed... Roosevelt and Morgan were secret blood brothers.

It is not surprising, therefore, as Warburg noted in January, 1912 - ten months before the election - that Teddy had been "fairly won over to a favorable consideration of the Aldrich Plan."


Inner convictions on these issues notwithstanding, both Wilson and Roosevelt played their roles to the hilt. Privately financed by Wall Street's most powerful bankers, they publicly carried a flaming crusade against the "Money Trust" from one end of the country to the other.

 

 

1.- McAdoo, pp. 165-66. K- Chernow, pp, 106-12. f. Warburg, Vol. I, p. 78.

 

 

Roosevelt bellowed that the,

"issue of currency should be lodged with the government and be protected from domination and manipulation by Wall Street."

And he quoted over and over again the Bull Moose (Progressive Party) platform which said:

"We are opposed to the so-called Aldrich Currency Bill because its provisions would place our currency and credit system in private hands."

Meanwhile, at the other end of town, Wilson declared:

There has come about an extraordinary and very sinister concentration in the control of business in the country... The growth of our nation, therefore, and all our activities, are in the hands of a few men... This money trust, or as it should be more properly called, this credit trust... is no myth.

Throughout the campaign, Taft was portrayed as the champion of big business and Wall Street banks - which, of course, he was.

 

But so were Roosevelt and Wilson, The primary difference was that Taft, judged by his actual performance in office, was known to be such, whereas his opponents could only be judged by their words.


The outcome of the election was exactly as the strategists had anticipated. Wilson won with only forty-two per cent of the popular vote, which means, of course, that fifty-eight per cent had been cast against him Had Roosevelt not entered the race, most of his votes undoubtedly would have gone to Taft, and Wilson would have become a footnote.

 

As Colonel House confided to author George Viereck years later,

"Wilson was elected by Teddy Roosevelt."

Now that the Creature had moved into the White House, passage of the Jekyll Island plan went into its final phase.

 

The last bastion of opposition in Congress consisted of the Populist wing of the Democratic Party under the leadership of William Jennings Bryan. The problem with this group was that they had taken their campaign platform seriously. They really were opposed to the Money Trust.

 

While it may have been a simple matter to pull the wool over the eyes of voters, it would not be so easy to fool this group of experienced politicians.

 

What was needed now was an entirely new bill that, on the surface, would appear to contain changes of sufficient magnitude to allow the Bryan wing to change its position. The essential features of the plan, however, must not be Abandoned. And, to coordinate this final strategy, the services of someone with great political skill would be essential.

 

Fortunately for the planners, there was exactly such a man residing at the White house. It was not the President of the United States.

 

It was Edward Mandell House.
 

 

 

THE ROLE OF COLONEL HOUSE
Colonel House, who had been educated in England and whose lather represented England's merchant interests in the American South, had come into public life through the London Connection.

 

It will be recalled from previous chapters that, perhaps more than any other person in America, he had helped maneuver the United States into World War I on the side of a desperate Britain and, by so doing, had also rescued the massive loans to Britain and France made by the Morgan interests.

 

Not only had he been responsible tor Wilson's nomination at the Democratic convention, but had become the President's constant companion, his personal adviser, and in many respects his political superior. It was through House that Wilson was made aware of the wishes of the Money Trust, and It was House who guided the President in every aspect of foreign and economic policy.

 

An admiring biographer, Arthur Smith, writing in the year 1918, says that House,

"holds a power never wielded before in this country by any man out of office, a power greater than that of any political boss or Cabinet member."

A more recent biographer, George Viereck, was not exaggerating when he described House as,

"Chief Magistracy of the Republic," "Super-Ambassador," "The pilot who guided the ship."

Continuing, he said:

For six years two rooms were at his disposal in the North Wing of the White House... In work and play their thoughts were one. House was the double of Wilson. It was House who made the slate for the Cabinet, formulated the first policies of the Administration and practically directed the foreign affairs of the United States. We had, indeed, two Presidents for one!...



1. Arthur Smith, The Real Colonel House (New York: George H. Doran Company, 1918), p. 14. P. Viereck, p. 4.

 


The Scruffs, the Warburgs, the Kahns, the Rockefellers, the Morgans put their faith in House.

 

When the Federal Reserve legislation at last assumed definite shape, House was the intermediary between the White House and the financiers. Daily entries in the personal journal of Colonel House reveal the extent to which his office had become the command post for the Jekyll Island team.

 

The following sample notations are typical:

December 19, 1912.

I Talked with Paul Warburg over the telephone regarding the currency reform. I told of my Washington trip and what I had done there to get it in working order.


March 24, 1913.

I had an engagement with Carter Glass at five. We drove, in order not to be interrupted... I spoke to the President about this after dinner and advised that McAdoo and I whip the Glass measure into final shape, which he could endorse and take to Owen [Chairman of the Senate Banking Committee] as his own.


March 27,1913.

Mr. J.P. Morgan, Jr., and Mr. Denny of his firm, came promptly at five. McAdoo came about ten minutes afterwards. Morgan had a currency plan already formulated and printed. We discussed it at some length. I suggested he have it typewritten [so it would not seem too prearranged] and sent to us today.


October 19r 1913.

I saw Senator Reed of Missouri in the late afternoon and discussed the currency question with him.


October 19,1913.

Paul Warburg was my first caller, and he came to discuss the currency measure... Senator Murray Crane followed Warburg. He has been in touch with Senators Weeks and Nelson of the Currency Committee.


November 17, 1913.

Paul Warburg telephoned about his trip to Washington. He is much disturbed over the currency situation and requested an interview, along with Jacob Schiff and Cleveland H. Dodge.


January 21, 1914.

After dinner we [Wilson and House] went to the President's study as usual and began work on the Federal Reserve Board appointments.

As far as the banking issue was concerned, Colonel House was the President of the United States, and all interested parties knew it.

 

Wilson made no pretense at knowledge of banking theory.

 

He said:

''The greatest embarrassment of my political career has been that Active duties seem to deprive me of time for careful investigation. I seem almost obliged to form conclusions from impressions instead of from study... I wish that I had more knowledge, more thorough acquaintance, with the matters involved."

To which Charles Seymour adds:

"Colonel House was indefatigable in providing for the President the knowledge that he sought... The Colonel was the unseen guardian angel of the bill."

 

 

DEATH OF THE ALDRICH PLAN
The first task for the Jekyll Island team was to hold a funeral for the Aldrich Plan without actually burying it.

 

Professor Laughlin had come to agree with Warburg regarding the inadvisability of Slaving Aldrich's name attached to any banking bill, especially now that the Democrats were in control of both Congress and the White House, and he was anxious to give it a new identity.

 

Writing in the periodical Banking Reform, which was the official publication of the National Citizens' League, Laughlin said:

"It is progress that the Aldrich plan came and went. It is progress that the people have peen aroused and interested."

The League was now free, he said, to,

"try to help in getting a proper bill adopted by the Democrats," a bill that "in non-essentials... could be made different from the old plan."

It did not take long for the Democrats to bring forth their own ^proposal. In fact, that process had begun even before the election of 1912.

 

One of the most outspoken critics of the Aldrich plan was the Democratic Chairman of the House Banking and Currency Committee, Congressman Carter Glass from Virginia. And it was Glass who was given the responsibility of developing the new plan.

 

By his own admission, however, he had virtually no technical knowledge of banking. To provide that expertise and to actually write the bill, he hired an economics teacher from Washington and Lee University, Henry Parker Willis. We should not be surprised to learn that Willis had been a former student and protégé of Professor Laughlin and had been retained by the National Citizens' League as a technical writer.

 

Explaining the significance of this relationship, Kolko says:

Throughout the spring of 1912 Willis wrote Laughlin about his work for the Glass Committee, his relationship to his superior, and Washington gossip.

 

The advice of the old professor was much revered...

"When you arrive," he wrote Laughlin concerning a memorandum he had written, "I should like to show it to you for such criticisms as occur to you."

The student-teacher relationship between the two men was still prominent...

 

Laughlin, Colonel House, and Glass were to frequently consult with major bankers about reform, and provided an important and continuous bridge for their ideas while bills were being drafted... Colonel House, in addition, was talked to by Frick, Otto Kahn, and others in late February, and the following month also met Vanderlip, J.P. Morgan, Jr., and other bankers to discuss currency reform...

 

To make sure the reform was more to the liking of bankers, a steady barrage of personal, unobtrusive communications with Glass, House, and Wilson was kept up throughout February and March... The [Citizens'] league was fulsome in its praise of Glass, and bankers felt greater and greater confidence as Colonel House began visiting Glass and showing interest in his currency measure...


The new President admitted 'lie knew nothing" about banking theory or practice. Glass made the same confession to Colonel House in November, and this vacuum is of the utmost significance.

 

The entire banking reform movement, at all crucial stages, was centralized in the hands of a few men who for years were linked, ideologically and personally with one another.1

 

 

THE GLASS-OWEN BILL EMERGES
In his Committee House Report in 1913, Glass objected to the Aldrich Bill on the following grounds:

It lacked government control, he said; it concentrated power into the hands of the larger New York banks; it opened the door to inflation; it was dishonest in its estimate of cost to the taxpayer; and it established a banking monopoly.

All of which was correct.

 

What the country needed, Glass said, was an entirely fresh approach, a genuine reform bill which was not written by agents of the Money Trust and which would truly meet the needs of the common man. That, too, was quite correct. Then he brought forth his own bill, drafted by Willis fend inspired by Laughlin, which in every important detail was merely the old corpse of the Aldrich Bill pulled from its casket, freshly perfumed, and dressed in a new suit.


The Glass Bill was soon reconciled with a similar measure sponsored by Senator Robert L. Owen and it emerged as the Glass-Owen Bill.

 

Although there were initially some minor differences between Glass and Owen on the proper degree of government control over banking, Owen was basically of identical mind to Willis and Laughlin. While serving in the Senate, he also was the president of a bank in Oklahoma. Like Aldrich, he had made several trips to Europe to study the central banks of England and Germany, and these were the models for his legislation.


The less technically minded members of the cartel became (nervous over the anti-Wall Street rhetoric of the Bill's sponsors.

 

Warburg, in an attempt to quell their fears and, at the same time, strengthen his private boast that he had been the real author, published a side-by-side comparison of the Aldrich and Glass proposals. The analysis showed that, not only were the two bills in agreement on all essential provisions, but they even contained entire sections that were identical in their wording.

 

He wrote:

"Brushing aside, then, the external differences affecting the 'shells,' we find the 'kernels' of the two systems very closely resembling and related to one another."2

It was important for the success of the Glass Bill to create the Impression it was in response to the views of a broad cross section of the financial community- To this end.

 

Glass and his committee staged public hearings for the announced purpose of giving everyone a chance for input to the process. It was, of course, a sham. The first draft of the Bill had already been completed in secret several months before the hearings were held. And, as was customary in such matters, Congressman Lindbergh and other witnesses opposing the Jekyll Island plan were not allowed to speak.

 

 

1. Warburg Vol. I, p798. 1 fttf. p.412

 

 

The hearings were widely reported in the press, and the public was given the impression that the favorable testimony was truly representative of expert opinion.

 

Kolko summarizes:

Although they were careful to keep the contents of their work confidential, to aid the passage of any bill that might be agreed upon Glass deemed it desirable to hold public hearings on the topic and to make sure the course of these hearings was not left to chance...

 

The public assumption of the hearing was that no bills had been drafted, and Willis' draft was never mentioned, much less revealed... The hearings of Glass' subcommittee in January and February, 1913, were nothing less than a love feast.


 

BANKERS BECOME DIVIDED
The public was not the only victim of deception.

 

The bankers themselves were also targeted - at least the lesser ones who were not part of the Wall Street power center. As early as February, 1911, a group of twenty-two of the country's most powerful bankers met for three days behind closed doors in Atlantic City to work out a strategy for getting the smaller banks to support the concept of using the government to authorize and maintain their own cartel.

 

The objective frankly discussed among those present was that the proposed cartel would bring the smaller banks under control of the larger ones, but that this fact had to be obscured when presenting it to them for endorsement.

 

 

1. Lindbergh, p. 129.
2. Kolko, Triumph, p. 225.
3. Rothbard, Crisis, p. 101. Also Kolko, Triumph, p. 186.

 


The annual meeting of the American Bankers Association was held a few months later, and a resolution endorsing the Aldrich Bill was steam rollered through the plenary session, much to the dismay of many of those present. Andrew Frame was one of them.

 

Representing a group of Western bankers, he testified at the hearings of the Glass subcommittee, mentioned previously, and described the hoax:

When that monetary bill was given to the country, it was but a few days previous to the meeting of the American Bankers Association in New Orleans in 1911. There was not one banker in a hundred who had read that bill. We had twelve addresses in favor of it.

 

General Hamby of Austin, Texas, wrote a letter to President Watts asking for a hearing against the bill. He did not get a very courteous answer. I refused to vote on it, and a great many other bankers did likewise... They would not allow anyone on the program who was not in favor of the bill.

It is interesting that during Frame's testimony, Congressman Glass refrained from commenting on the unfairness of allowing only one side of an issue to be heard in a public forum. He could [hardly afford to. That is exactly what he was then doing with his own agenda.


As the Federal Reserve Act moved closer to its birth in the form of the Glass-Owen Bill (Owen was the co-sponsor in the Senate), both Aldrich and Vanderlip threw themselves into a great public display of opposition.

 

No opportunity was overlooked to make a statement to the press - or anyone else of public prominence - expressing their eternal animosity to this monstrous legislation. Vanderlip warned against the evils of fiat money and rampant inflation. Aldrich charged that the Glass-Owen Bill was inimical to sound banking and good government.

 

Vanderlip predicted speculation and instability in the stock market.

 

Aldrich sourly complained that the bill was "revolutionary in its character" (implying Bolshevistic) and "will be the first and most important step toward changing our form of government from a democracy to an autocracy.
 

 

 

THE PRETENSE IS DROPPED
That all of this was merely high-level showmanship was made clear when Vanderlip accepted a debate with Congressman Glass before the New York Economic Society on November 13.

 

There were eleven hundred bankers and businessmen present, and Vanderlip was under pressure to make a good showing before this impressive group.

 

The debate was going badly for him and, in a moment of desperation, he finally dropped the pretense.

"For years" he said, "bankers have been almost the sole advocates of Bust this sort of legislation that it is now hoped we will have, and it is unfair to accuse them of being in opposition to sound legislation."

Twenty-two years later, when the need for pretense had long passed, Vanderlip was even more candid.

 

Writing in the Saturday Evening Post, he said:

"Although the Aldrich Federal Reserve Plan was defeated when it bore the name Aldrich, nevertheless its essential points were all contained in the plan that finally was adopted."

In his autobiography, Treasury Secretary William McAdoo offers this view:

Bankers fought the Federal Reserve legislation - and every provision of the Federal Reserve Act - with the tireless energy of men fighting a forest fire. They said it was populistic, socialistic, half-baked, destructive, infantile, badly conceived, and unworkable...

 

These interviews with bankers led me to an interesting conclusion. I perceived gradually, through all the haze and smoke of controversy, that the banking world was not really as opposed to the bill as it pretended to be.2

That is the key to this entire episode: mass psychology.

 

Since Aldrich was recognized as associated with the Morgan interests and Vanderlip was President of Rockefeller's National City Bank, the public was skillfully led to believe that the "Money Trust" was mortally afraid of the proposed Federal Reserve Act.

 

The Nation was the only prominent publication to point out that every one of the horrors described by Aldrich and Vanderlip could have been equally ascribed to the Aldrich Bill as well. But this lone voice was easily drowned by the great cacophony of deception and propaganda.

 

 

2. McAdoo, pp. 213,225-26.

 


The Glass Bill was a flexible document which was designed from the beginning to be altered in non-essential matters in order to appear as though compromises were being made to satisfy the various political factions. Since very few understood central-bank technicalities, the ploy was easy to execute.

 

The basic strategy was to focus debate on such relatively unimportant items as the number of regional banks, the structure of the governing board, and the process by which that board was to be selected. When truly crucial matters could not be avoided, the response was to agree to almost anything but to write the provisions in vague language. In that way, the back door would be left ajar for later implementation of the original intent. The goal was to get the bill passed and perfect it later.


House and Warburg feared that, if they waited until they had everything they wanted, they would get nothing at all or, worse, that opponents of a central bank would be able to muster their forces and pass a reform bill of their own; a real one.

 

Willis was quick to agree. In a letter to his former professor, he wrote:

"It is much better to take a half a loaf rather than to be absolutely deprived of a chance of getting any bread whatsoever... The so-called 'progressive' element - such as Lindbergh and his supporters - will be encouraged to enact dangerous legislation."

Glass echoed the sentiment.

 

Directing his remarks at those smaller banks which were resisting domination by the New York banks, he said:

"Unless the conservative bankers of the country are willing to yield something and get behind the bill, we shall get legislation very much less to be desired, or have nothing done at all."

 

 

BRYAN MAKES AN ULTIMATUM
The Populist, William Jennings Bryan, was considered at that time to be the most influential Democrat in Congress, and it was clear from the start that the Federal Reserve Act could never be passed without his approval and support.

 

As Charles Seymour observed:

"The Commoner's sense of loyalty [to the Party] had kept him from an attack upon the Federal Reserve Act which, it would appear, he never entirely understood... With his influence in the Party, he could have destroyed the measure which failed to accord with his personal doctrines."

Bryan had said that he would not support any bill that resulted in private money being issued by private banks.

 

The money supply, he insisted, must be government issue. When he finally saw an actual draft of the bill in midsummer of 1913, he was dismayed to find that, not only was the money to be privately issued, but the entire governing body of the central bank was to be composed of private bankers. His ultimatum was not long in corning.

 

He hotly demanded,

(1) that the Federal-Reserve notes must be Treasury currency, issued and guaranteed by the government

(2) that the governing body must be appointed by the President and approved by the Senate

Colonel House and the other monetary scientists were reasonably sure that these provisions eventually would be required for final approval of the bill but, being master strategists, they deliberately withheld them from early drafts so they could be used as bargaining points and added later as concessions in a show of compromise.

 

Furthermore, since practically no one really understood the technical aspects of the measure, they knew it would be easy to fool their opponents by creating the appearance of compromise when, in actual operation, the originally intended features would remain.
 

 

 

AN AMAZING REVELATION
The nature of this deception was spelled out years later by Carter Glass in his book, Adventures in Constructive Finance.

 

From this source we learn that, after Bryan had delivered his ultimatum, Glass was summoned to the White House and told by Wilson that the decision had been made to make the Federal Reserve notes obligations of the United States government.

"I was for an instant speechless!" wrote Glass who then explained how he reminded the President that the only backing for the new currency would be a small amount of gold, a large amount of government and commercial debt, and the private assets of the individual banks themselves.

 

"It would be a pretense on its face," he said.

 

"Was there ever a government note based primarily on the property of banking institutions? Was there ever a government issue not one dollar of which could be put out except by demand of a bank? The suggested government obligation is so remote it could never be discovered."

To which the President replied:

"Exactly so, Glass. Every word you say is true; the government liability is a mere thought. And so, if we can hold the substance of the thing and give the other fellow the shadow, why not do it, if thereby we may save our bill?"1

Years later, Paul Warburg would explain further:

While technically and legally the Federal Reserve note is an obligation of the United States Government, in reality it is an obligation, the sole actual responsibility for which rests on the reserve banks... The government could only be called upon to take them up after the reserve banks had failed.1

Warburg's explanation should be carefully analyzed. It is an incredibly important statement.

 

The man who masterminded the Federal Reserve System is telling us that Federal Reserve notes constitute privately issued money with the taxpayers standing by to cover the potential losses of those banks which issue it. One of the more controversial assertions of this book is that the objectives set forth at the Jekyll Island meeting included the shifting of the cartel's losses from the owners of the banks to the taxpayers.

 

Warburg himself has confirmed it.


But let us return to the great deceit of 1913. The second demand made by Bryan - political control over the System, not banker control - was met with an equally beguiling "compromise."

 

In addition to the governing board of regional bankers previously proposed, there now would be a central regulatory commission, to be called the Federal Reserve Board, appointed by the President with the advice and consent of the Senate. Thus, the public was to be protected through a sharing of power, a melding of interests, a system of checks and balances.

 

In this way, said Wilson,

"the banks may be instruments, not the masters, of business and of individual enterprise and initiative."

The arrangement was heralded as a bold, new experiment in representative government.

 

In reality, it was but the return of the ancient partnership between the monetary and political scientists. The only thing new was that power was now to be shared openly in plain view of the public. But, of course, there would not be much to see. All the deliberations and most of the decisions were to happen behind closed doors.

 

Furthermore, the division of power and responsibility between these groups was left deliberately vague. Without a detailed line of command or even a clear concept of function, it was inevitable that, as with the drafting of the bill itself, real power would gravitate into the hands of those with technical knowledge and Wall Street connections.

 

To the monetary scientists drafting the bill and engineering the compromises, the eventual concentration of effective control into their hands was never in serious doubt.

 

And, as we shall see in the next chapter, subsequent events have proved the soundness of that strategy.
 

 

 

BRYAN ENDORSES THE BILL
Bryan was no match for the Jekyll Island strategists and he accepted the "compromises" at face value. Had there been any lingering doubts in his mind, they were swept away by gratitude for his appointment as Wilson's Secretary of State.

 

Now that he was on the team, he declared:

I appreciate so profoundly the service rendered by the President to the people in the stand he has taken on the fundamental principles involved in currency reform, that 1 am with him in all the details... The right of the government to issue money is not surrendered to the banks; the control over the money so issued is not relinquished by the government...

 

I am glad to endorse earnestly and unreservedly the currency bill as a much better measure than I supposed it possible to secure at this time... Conflicting opinions have been reconciled with a success hardly to have been expected.

With the conversion of Bryan, there was no longer any doubt about the final outcome.

 

The Federal Reserve Act was released from the joint House and Senate conference committee on December 22, 1913, just as Congress was preoccupied with departure for the Christmas recess and in no mood for debate. It quickly passed by a vote of 282 to 60 in the House and 43 to 23 in the Senate. The President signed it into law the next day.


The Creature had swallowed Congress.
 

 

 

SUMMARY
President Taft, although a Republican spokesman for big business, refused to champion the Aldrich Bill for a central bank.

 

This marked him for political extinction.

 

The Money Trust wanted a President who would aggressively promote the bill, and the man selected was Woodrow Wilson who had already publicly declared his allegiance. Wilson's nomination at the Democratic national convention was secured by Colonel House, a close associate of Morgan and Warburg.

 

To make sure that Taft did not win his bid for reelection, the Money Trust encouraged the former Republican President, Teddy Roosevelt, to run on the Progressive ticket. The result, as planned, was that Roosevelt pulled away Republican support from Taft, and Wilson won the election with less than a ^majority vote.

 

Wilson and Roosevelt campaigned vigorously against the evils of the Money Trust while, all along, being dependent upon that same Trust for campaign funding.


When Wilson was elected, Colonel House literally moved into [the White House and became the unseen President of the United States. Under his guidance, the Aldrich Bill was given cosmetic forgery and emerged as the Glass-Owen Bill. Although sponsored by Democrats, in all essential features it was still the Jekyll Island plan.

 

Aldrich, Vanderlip, and others identified with Wall Street put on a pretense of opposing the Glass-Owen Bill to convince Congress and the public that big bankers were fearful of it. The final bill was written with many sound features which were included to make it palatable during Congressional debate but [which were predesigned to be dropped in later years.

 

To win the support of the Populists under the leadership of William Jennings Bryan, the Jekyll Island team also engineered what appeared to be compromises but which in actual operation were, as Wilson called them, mere "shadows" while the "substance" remained. In short, Congress was outflanked, outfoxed, and outclassed by a deceptive, but brilliant, psycho-political attack.

 

The result is that, on December 23,1913, America once again had a central bank.

 

 

 

 


Chapter Twenty-Three
THE GREAT DUCK DINNER

 

How Federal-Reserve policies led to the crash of 1929; the expansion of the money supply as a means of helping the economy of England; the resulting wave of speculation in stocks and real estate; evidence that the Federal-Reserve Board had foreknowledge of the crash and even executed the events that were designed to trigger it.
 

The story is told of a New England farmer with a small pond in his pasture.

 

Each summer, a group of wild ducks would frequent that pond but, try as he would, the farmer could never catch one. No matter how early in the morning he approached, or how carefully he constructed a blind, or what kind of duck call he tried, somehow those crafty birds sensed the danger and managed to be hut of range.

 

Of course, when fall arrived, the ducks headed South, fend the farmer's craving for a duck dinner only intensified.


Then he got an idea.

 

Early in the spring, he started scattering corn along the edge of the pond. The ducks liked the corn and, since it was always there, they soon gave up dipping and foraging for food of their own. After a while, they became used to the farmer and began to trust him. They could see he was their benefactor and they now walked close to him with no sense of fear. Life was so easy, they forgot how to fly. But that was unimportant, because they were now so fat they couldn't have gotten off the water even if they had tried.


Fall came, and the ducks stayed. Winter came, and the pond froze. The farmer built a shelter to keep them warm. The ducks mere happy because they didn't have to fly. And the farmer was especially happy because, each week all winter long, he had a delicious duck dinner.


That is the story of America's Great Depression of the 1930s.



CONSOLIDATION OF POWER
When the Federal Reserve Act was submitted to Congress, many of its most important features were written in vague language.

 

Some details were omitted entirely. That was a tactical move to avoid debate over fine points and to allow flexibility for future interpretation. The goal was to get the bill passed and perfect it later. Since then, the Act has been amended 195 times, expanding the power and scope of the System to the point where, today, it would be almost unrecognizable to the Congressmen and Senators who voted for it.


In 1913, public distaste for concentration of financial power in the hands of a few Wall Street banks helped to fuel the fire for passage of the Federal Reserve Act.

 

To make it appear that the new System would put an end to the New York "money trust," as it was called, the public was told that the Federal Reserve would not represent any one group or one region. Instead, it would have its power diffused over twelve regional Federal Reserve Banks, and none would be able to dominate.

 

As Galbraith pointed out, however, the regional design was,

"admirable for serving local pride and architectural ambition and for lulling the suspicions of the agrarians."

But that was not what the planners had in mind for the long haul.


In the beginning, the regional branches took their autonomy seriously, and that led to conflict with members of the national board. The Board of Governors was composed of political appointees representing diverse segments of the economy.

 

They were outclassed by the heads of the regional branches of the System who were bankers with bankers experience.
 

 

1. Galbraith, p. 130.

 

 

 

RETURN OF THE NEW YORK "MONEY TRUST"

The greatest power struggle arose from the New York Reserve Bank which was headed by Benjamin Strong.

 

Strong had the contacts and the experience. It will be recalled that he was one of the seven who drafted the cartel's structure at Jekyll Island. He had been head of J.P. Morgan's Bankers Trust Company and was closely associated with Edward Mandell House.

 

He had become a personal friend of Montagu Norman, head of the Bank of England, and of Charles Rist, head of the Bank of France. Not least of all, he was head of the New York branch of the System which represented the nation's largest banks, the "money trust" itself.

 

From the outset, the national board and the regional branches were dominated by the New York branch. Strong ruled as an autocrat, determining Fed policy often without even consulting with the Federal Reserve Board in Washington.


The United States entry into World War I provided the impetus for increasing the power of the Fed. The System became the sole fiscal agent of the Treasury, Federal Reserve Notes were issued, virtually all of the gold reserves of the nation's commercial banks were gathered together into the vaults of the Federal System, and many of the legislative restraints placed into the original Act were abandoned. Voters ask fewer questions when their nation is at war.
 

The concentration of power into the hands of the very "money trust" the Fed was supposed to defeat, is described by Ferdinand Lundberg, author of America's Sixty Families:

In practice, the Federal Reserve Bank of New York became the fountainhead of the system of twelve regional banks, for New York was the money market of the nation.

 

The other eleven banks were so many expensive mausoleums erected to salve the local pride and quell the Jacksonian fears of the hinterland. Benjamin Strong... president of the Bankers Trust Company [J.P. Morgan] was selected as the first Governor of the New York Reserve Bank.

 

An adept in high finance, Strong for many years manipulated the country's monetary system at the discretion of directors representing the leading New York banks. Under Strong the Reserve System, unsuspected by the nation, was brought into interlocking relations with the Bank of England and the Bank of France.

 

 

BAILING OUT EUROPE
It will be recalled from Chapters Twelve and Twenty that it was this interlock during World War I that was responsible for the confiscation from American taxpayers of billions of dollars which were given to the central banks of England and France.

 

Much of that money found its way to the associates of J.P. Morgan as interest payments on war bonds and as fees for supplying munitions and other war materials.


Seventy per cent of the cost of World War I was paid by inflation rather than taxes, a process that was orchestrated by the Federal Reserve System. This was considered by the Fed's supporters as its first real test, and it passed with flying colors. American inflation during that period was only slightly less than in England, which had been more deeply committed to war and for a longer period of time.

 

That is not surprising inasmuch as a large portion of Europe's war costs had been transferred to the American taxpayers.


After the war was over, the transfusion of American dollars continued as part of a plan to pull England out of depression. The methods chosen for that transfer were artificially low interest rates and a deliberate inflation of the American money supply. That was calculated to weaken the value of the dollar relative to the English pound and cause gold reserves to move from America to England.

 

Both operations were directed by Benjamin Strong and executed by the Federal Reserve. It was not hyperbole when President Herbert Hoover described Strong as "a mental annex to Europe."


Before Alan Greenspan was appointed as Chairman of the Federal Reserve by President Reagan in 1987, he had served on the Board of the J.P. Morgan Company. Before that, however, he had been an outspoken champion of the gold standard and a critic of the System's subservience to the banking cartel.

 

In 1966 he wrote:

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us...

 

The "Fed" succeeded: it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market - triggering a fantastic speculative boom... As a result, the American economy collapsed.

After his appointment to the Fed, Greenspan became silent on these issues and did nothing to anger the Creature he now served.
 

 

1. Galbraith, p, 180.
 

 

 

AGENTS OF A HIGHER POWER
When reviewing this aspect of the Fed's history, questions arise about the patriotic loyalty of men like Benjamin Strong.

 

How is it possible for a man who enjoys the best that his nation can offer - security, wealth, prestige's - to conspire to plunder his fellow citizens in order to assist politicians of other governments to continue plundering theirs?

 

The first part of the answer was illustrated in earlier sections of this book. International money managers may be citizens of a particular country but, to many of them, that is a meaningless accident of birth. They consider themselves to be citizens of the world first. They speak of affection for all mankind, but their highest loyalty is to themselves and their profession.


That is only half the answer.

 

It must be remembered that the men who pulled the financial levers on this doomsday machine, the governors of the Bank of England and the Federal Reserve, were themselves tied to strings which were pulled by others above them.

 

Their minds were not obsessed with concepts of nationalism or even internationalism. Their loyalties were to men.

 

Professor Quigley reminds us:

It must not be felt that these heads of the world's chief central banks were themselves substantive powers in world finance. They were not.

 

Rather, they were the technicians and agents of the dominant investment bankers of their own countries, who had raised them up and were perfectly capable of throwing them down.

 

The substantive financial powers of the world were in the hands of these investment bankers (also called "international" or "merchant" bankers) who remained largely behind the scenes in their own unincorporated private banks. These formed a system of international ' cooperation and national dominance which was more private, more powerful, and more secret than that of their agents in the central banks.

So, we are not dealing with the actions of men who perceive themselves as betraying their nation, but technicians who are loyal lo the monetary scientists and the political scientists who raised them up. Of the two groups, the financiers are dominant.

 

Politicians come and go, but those who wield the power of money remain to pick their successors.


 

 

 

FARMERS BECOME DUCK DINNER
During the war, prices for agricultural products rose to an all-time high, and so did profits.

 

Farmers had put part of that money into war bonds, but much of it had been placed into savings accounts at banks within the farming communities, which is to say, mostly in the Midwest and South. That was unacceptable to the

New York banks which saw their share of the nation's deposits begin to decline. A way had to be devised to reclaim that money. The Federal Reserve System, which by then was the captive of the New York banks, was pressed into service to accomplish the deed.


Few of those country banks had chosen to become members of the Federal Reserve System. That added insult to injury, and it also provided an excuse for the Fed to wage economic war against them. The plan was neither complex nor original; it had been used many times before by central bankers.

 

It was,

(1) extend easy credit to the farmers to lure them into heavy debt, and then

(2) create a recession which would decrease their income to the point where they could not make payments

The country banks then would find themselves holding non-performing loans and foreclosed property which they could not sell without tremendous losses. In the end, both the farmers and the banks would be wiped out. The banks were the target. Too bad about the farmers.


Congressman Charles Lindbergh, Sr., father of the man who made the world's first solo transatlantic flight, explained it this way:

"Under the Federal Reserve Act, panics are scientifically created; the present panic is the first scientifically created one, worked out as we figure a mathematical problem."

The details of how this panic was created were explained in 1939 by Senator Robert Owen, Chairman of the Senate Banking and Currency Committee. Owen, a banker himself, had been a coauthor of the Federal Reserve Act, a role he later regretted.

 

Owen said:

In May 1920 ... the farmers were exceedingly prosperous... They were paying off their mortgages. They had bought a lot of new land, at the instance of the government - had borrowed money to do it - and then they were bankrupted by a sudden contraction of credit and currency, which took place in 1920...

 

The Federal Reserve Board met in a meeting which was not disclosed to the public - they met on the 18th of May 1920; it was a secret meeting - and they spent all day; the minutes made 60 printed pages, and it appears in Senate Document 310 of February 10,1923...

 

Under action taken by the Reserve Board on May 18, 1920, there resulted a violent contraction of credit...

 

This contraction of credit and currency had the effect, the next year, of diminishing the national production $15,000,000,000; it had the effect of throwing millions of people out of employment; it had the effect of reducing the value of lands and ranches $20,000,000,000.1

The contraction of credit had a disastrous effect on the nation as a whole, not just farmers.

 

But the farmers were more deeply Involved, because the recently created Federal Farm Loan Board had lured them with easy credit - like ducks at the pond - into extreme debt ratios.

 

Furthermore, the large-city banks which were members of the System were given support by the Fed during the (summer of 1920 to enable them to extend credit to manufacturers and merchants. That allowed many of them to ride out the slump. There was no such support for the farmers or the country banks which, by 1921, were falling like dominoes. History books refer to [this event as the Agricultural Depression of 1920-21.

 

A better name would have been Country-Duck Dinner in New York.
 

 

 

BUILDING THE MANDRAKE MECHANISM
In Chapter Ten, we examined the three methods by which the Federal Reserve is able to create or extinguish money.

 

Of the three, the purchase and sale of debt-related securities in the open market is the one that provides the greatest effect on the money supply, the purchase of securities by the Fed (with checks that have no money to back them) creates money; the sale of those securities extinguishes money.

 

Although the Fed is authorized to buy and sell almost any kind of security that exists in the world, it is obligated to show preference for bonds and notes of the federal government, that is the way the monetary scientists discharge the commitment [to create money for their partners, the political scientists. Without that service, the partnership would dissolve, and Congress would abolish the Fed.


When the System was created in 1913, it was anticipated that the primary way to manipulate the money supply would be to control the "reserve ratios" and the "discount window." That is banker language for setting the level of mandatory bank reserves (as a percentage of deposits) and also setting the interest rate on loans made by the Fed to the banks themselves.

 

The reserve ratio under the old National Bank Act had been 25%. Under the Federal Reserve Act of 1913, it was reduced to 18% for the large New York banks, a drop of 28%. In 1917, just four years later, the reserve requirements for Central Reserve-City Banks were further dropped from 18% to 13% (with slightly lesser reductions for smaller banks).

 

That was an additional 28% cut.1


It quickly became apparent that setting reserve ratios was an inefficient tool. The latitude of control was too small, and the amount of public attention too great. The second method, influencing the interest rate on commercial loans, was more useful.

 

Here is how that works:

Under a fractional-reserve banking system, a bank can create new money merely by issuing a loan. The amount of new money it creates is limited by the reserve ratio or "fraction" it is required to maintain to cover its cash-flow needs.

 

If the reserve ratio is 10%, then each $10 it lends includes $9 that never existed before.

 

A commercial bank, therefore, can create a sizable amount of money merely by making loans. But, once the bank is "loaned up," that is to say, once the bank has already loaned $9 for every $1 it holds in reserve, it must stop and wait for some of the old loans to be paid back before it can issue new ones. The only way to expand that process is to make the reserves larger.

 

That can be accomplished in one of three ways:

(1) use some of the bank's profits

(2) sell additional stock to investors

(3) borrow money from the Fed

 

 

WHEN BANKS BORROW FROM THE FED
The third option is the most popular and is called going to the "discount window."

 

When banks go to the Fed's discount window to obtain a loan, they are expected to put up collateral. This can be almost any debt contract held by the bank, including government bonds, but it commonly consists of commercial loans. The Fed then grants credit to the bank in an amount equal to those contracts. In essence, this allows the bank to convert its old loans into new "reserves."

 

Every dollar of those new reserves then can be used as the basis for lending nine more dollars in checkbook money!


The process does not stop there. Once the new loans are made, they, too, can be used as collateral at the Fed for still more reserves. The music goes 'round and 'round, with each new level of debt becoming "reserves" for yet a higher level of loans, until it finally days itself out at about twenty-eight times.1

 

That process is commonly called "discounting commercial paper."

 

It was one of the means by which the Fed was able to flood the nation with new money prior to the Great Dam Rupture of 1929.


But, there is a problem with that method, at least as far as the Fed is concerned. Even though interest rates at the discount window can be made so low that most bankers will line up like ducks looking for free corn, some of them - particularly those "hicks" in the country banks - have been known to resist the .temptation.

 

There is no way to force the banks to participate. Furthermore, the banks themselves are dependent upon the whims of their customers who, for reasons known only to themselves, may not want to borrow as much as the bank wants to lend. If the customers stop borrowing, then the banks have no new loans to convert into further reserves.


That left the third mechanism as the preferred option: the purchase and sale of bonds and other debt obligations in the open market.

 

With the discount window, banks have to be enticed to borrow money which later must be repaid, and sometimes they are reluctant to do that. But with the open market, all the Fed has to do is write a fiat check to pay for the securities. When that check is cashed, the new money it created moves directly into the economy without any concurrence required from the recalcitrant banks.


But, there was a problem with this method also. Before World War I, there were few government bonds available on the open market. Even after the war, the supply was limited. Which means the vast inflation that preceded the Crash of 1929 was not caused by deficit spending. In each year from 1920 through 1930 there was a surplus of government revenue over expenses.

 

Surprising as it may be, on the eve of the depression, America was getting out of debt. As a consequence, there were few government bonds for the Fed to buy. Without government bonds, the open-market engine was constantly running out of gas.


The solution to all these problems was to create a new market tailor-made to the Fed's needs, a kind of half-way house between the discount window and the open market.

 

It was called the "acceptance window," and it was through that imagery that the System purchased a unique type of debt-related security called bankers acceptances.

 

 


BANKER'S ACCEPTANCES
Banker's acceptances are contracts promising payment for commercial goods scheduled for later delivery.

 

They usually involve international trade where delays of three to six months are common. They are a means by which a seller in one country can ship goods to an unknown buyer in another country with confidence that he will be paid upon delivery. That is accomplished through guarantees made by the banks of both buyer and seller.

 

First, the buyer's bank issues a letter of credit guaranteeing payment for the goods, even if the buyer should default. When the seller's bank recewes this, one of its officers writes the word "accepted" on the contract and pays the seller the amount of the sale.

 

The accepting bank, therefore, advances the money to the seller in expectation of receiving future payment from the buyer's bank.

 

For this service, both banks charge a fee expressed as a percentage of the contract. Thus, the buyer pays a little more than the amount of the sales contract, and the seller receives a little less.


Historically, these contracts have been safe, because the banks are careful to guarantee payment only for financially sound firms. But, in times of economic panic, even sound firms may be unable to honor their contracts. It was underwriting that kind of business that nearly bankrupted George Peabody and J.P. Morgan in London during the panic of 1857, and would have done so had they not been bailed out by the Bank of England.


Acceptances, like commercial loan contracts, are negotiable instruments that can be traded in the securities market.

 

The accepting banks have a choice of holding them until maturity or selling them. If they hold them, their profit will be realized when the underlying contract is eventually paid off and it will be equal to the amount of its "discount," which is banker language for its fee. Acceptances are said to be "rediscounted" when they are sold by the original discounter, the underwriter.

 

The advantage of doing that is that they do not have to wait three to six months for their profit. They can acquire immediate capital which can be invested to earn interest.


The sale price of an acceptance is always less than the value of the underlying contracts; otherwise no one would buy them.

 

The difference represents the potential profit to the buyer. It is expressed as a percentage and is called the "rate" of discount - or, in this case, rediscount. But the rate given by the seller must be lower than what he expects to earn with the money he receives, otherwise he will be better off not selling.


Although bankers' acceptances were commonly traded in Europe, they were not popular in the United States. Before the Federal Reserve Act was passed, national banks had been prohibited from purchasing them.

 

A market, therefore, had to be created.

 

The Fed accomplished this by setting the discount rate on acceptances so low that underwriters would have been foolish not to take advantage of it. At a very low discount, they could acquire short-term funds which then could be invested at a higher rate of return. Thus, acceptances quickly became plentiful on the open market in the United States.


But who would want to buy them at a low return? No one, of course. So, to create that market, not only did the Federal Reserve set the discount rate artificially low, it also pledged to buy all of the acceptances that were offered. The Fed, therefore, became the principal buyer of these securities. Banks also came into the market has buyers, but only because they knew that, at any time they wanted to sell, the Fed was pledged to buy.


Since the money was being created out of nothing, the cost did hot really matter, nor did the low profit potential.

 

The Fed's goal was not to make a profit on investment. It was to increase the nation's money supply.
 

 

 

WARBURG AND FRIENDS MAKE A LITTLE PROFIT
The man who benefited most from this artificially created market was none other than Paul Warburg, a partner with Kuhn, Loeb and Co. Warburg was in attendance at the Jekyll Island meeting at which the Federal Reserve System was conceived.

 

He was considered by all to have been the master theoretician who led the others in their deliberations. He was one of the most influential voices in the public debates that followed. He had been appointed is one of the first members of the Federal Reserve Board and later became its Vice Governor until outbreak of war, at which time he resigned because of publicity regarding his connections with German banking.

 

He was a director of American LG. Chemical Corp. and Agfa Ansco, Inc., firms that were controlled by I.G. Farben, the infamous German cartel that, only a few years later, would sponsor the rise to power of Adolph Hitler.

 

He was also a director of the CFR (Council on Foreign Relations). It should not be surprising, therefore, to learn that he was able to position himself at the center of the huge cash flow resulting from the Fed's purchase of acceptances.


Warburg was the founder and Chairman of the International Acceptance Bank of New York, the world's largest acceptance bank. He was also a director of several smaller "competitors," including the prestigious Westinghouse Acceptance Bank. He was founder and Chairman of the American Acceptance Council. Warburg was the acceptance market in America.

 

But he was not without friends who also swam in the river of money. Men who controlled America's largest financial institutions became directors or officers of the various acceptance banks.

 

The list of companies that became part of the interlocking directorate included,

  • Kuhn, Loeb and Co.

  • New York Trust Co.

  • Bank of Manhattan Trust Co.

  • American Trust Co.

  • New York Title and Mortgage Co.

  • Chase National Bank

  • Metropolitan Life Insurance Co.

  • American Express Co.

  • the Carnegie Corp.

  • Guaranty Trust Co.

  • Mutual Life Insurance Co.

  • the Equitable Life Assurance Society of New York

  • the First National Banks of Boston, St. Louis, and Los Angeles,

...to name just a few.

 

The world of acceptance banking was the private domain of the financial elite of Wall Street.


Behind the American image, however, was a full partnership with investors from Europe. Total capital of the IAB's American shareholders was $276 million compared with $271 million from foreign investors.

 

A significant portion of that was divided between,

  • the Warburgs in Germany

  • the Rothschilds in England

Just how large and free-flowing was that river of acceptance money? In 1929, it was 1.7 trillion-dollars wide.

 

Throughout the 1920s, it was over half of all the new money created by the Federal Reserve - greater than all the other purchases on the open market plus all the loans to all the banks standing in line at the discount window.


The monetary scientists who created the Federal Reserve, and their close business associates, were well-rewarded for their efforts. Profit-taking by insiders, however, is not the issue. Far more important is the fact that the consequence of this self-serving mechanism was the massive expansion of the money supply that made the Great Depression inevitable.

 

And that is the topic which impelled us to look at acceptances in the first place.
 

 

 

CONGRESS SUSPICIOUS BUT AFRAID TO TINKER
By 1920, suspicions and resentment were growing in the halls of Congress.

 

Politicians were not getting their share. It is possible that many of them failed to realize that, as partners in the scheme, they were entitled to a share. Nevertheless, they were dazzled by banker language and accounting tricks and were afraid to tinker with the System lest they accidentally push the wrong button.


Watching with amusement from London was Fabian Socialist John Maynard Keynes.

 

Speaking of the Federal Reserve's manipulation of the value of the dollar, he wrote:

That is the way by which a rich country is able to combine new wisdom with old prejudice. It can enjoy the latest scientific improvements, devised in the economic laboratory of Harvard, whilst leaving Congress to believe that no rash departure will be permitted...

 

But there is in all such fictions a certain instability... The suspicions of Congressmen may be aroused. One cannot be quite certain that some Senator might not read and understand this book.

There was not much danger of that!

 

By then, American politicians had acquired a taste for the heady wine of war funding and stopped asking questions. World War I had created enormous demands for money, and the Fed provided it.

 

By the end of the war, Congressional hostility to the Federal Reserve became history.
 

 

 

PAYING FOR WORLD WAR I
Much of the war debt was absorbed by the public which responded to patriotic instincts and purchased war bonds.

 

The treasury launched a massive publicity campaign for "Liberty loans" to reinforce that sentiment. These small-denomination bonds did not expand the money supply and did not cause inflation, because the money came from savings. It already existed.

 

However, many people who thought it was their patriotic duty to support the war effort went to their banks and borrowed money so they could buy bonds. The bank created most of that money out of nothing, drawing upon credits and bookkeeping entries from the Federal Reserve, so those purchases did inflate the money supply.

 

The same result could have been obtained more simply and less expensively by getting the money directly from the Fed, but the government encouraged the trend anyway, because of its psychological value in generating popular support for the war. When people make sacrifices for an endeavor, it reinforces their belief that it must be worthy.


Although the war was financed partly by taxes and partly by Liberty Bonds purchased by the public, a significant portion was covered by the sale of Treasury bonds to the Federal Reserve in the open market.

 

Benjamin Strong's biographer, Lester Chandler, explains:

The Federal Reserve System became an integral part of the war financing machinery. The System's overriding objective, both as a creator of money and as fiscal agent, was to insure that the Treasury would be supplied with all the money it needed, and on terms fixed by Congress and the Treasury...

 

A grateful nation now hailed it as a major contributor to the winning of the war, an efficient fiscal agent for the Treasury, a great source of currency and reserve funds, and a permanent and indispensable part of the banking system.

 

 

THE EMERGENCE OF GOVERNMENT DEBT
The war years were largely a period of testing new strategies and consolidating power. Ironically, it was not until after the war - when there was no longer a justification for deficit spending - that government debt became plentiful.

 

Up until World War I, annual federal expenses had been running about $750 million. By the end of the war, it was running $18 and-a-half billion, an increase of 2,466%. Approximately 70% of the cost of war had been financed by debt.

 

Murray Rothbard reminds us that, on the eve of depression in 1928, ten years after the end of war, the banking system held more government bonds than during the war itself. That means the government did not pay off those bonds when they came due. Instead, it rolled them over by offering new bonds to replace the Wd.

 

Why? Was it because Congress needed more money? No.

 

The bonds had become the basis for money in circulation and, if they had been redeemed, the money supply would have decreased. An increase in the money supply is viewed by politicians and central bankers as a threat to economic stability. Thus, the government [found itself unable to get out of debt even when it had the money to do so, a dilemma that continues to this day.


There is an apparent contradiction here. In his book, The Great Boom and Panic, Robert Patterson says that, on the eve of depression, America was getting out of debt. Yet, Rothbard tells us there were more government bonds held by the banking system than [during the war! The only way both statements can be true is if there were, in fact, more bonds outstanding during the war but they were held by the public, not by the banking system.

 

That would make it possible for there to be fewer total bonds in 1928 and yet the System could still hold more of them than previously. That would be the expected result of the Fed's growing role in the open market. As the publicly-held bonds matured, the Treasury rolled them over, and the Fed picked them up. Bonds purchased by the public do not increase the money supply whereas those purchased by banks do.

 

Therefore, conditions in 1928 would have been far more inflationary than during the war - even though the government was getting out of debt.


Before 1922, the Federal Reserve bought Treasury bonds primarily for three purposes:

(1) for income to operate the system

(2) lo pay for the newly issued Federal Reserve Notes which were replacing silver certificates

(3) to push down interest rates

The motive for manipulating interest rates was to encourage borrowing [from abroad in the United States (where rates were low).

 

It also encouraged investment from the United States into Europe (where fates were higher). By making it possible to borrow American [dollars at one rate and invest them elsewhere at a higher rate, the red was deliberately moving money out of the United States, with Bold reserves following behind.

 

As President Kennedy had said in his 1963 address at the IMF, the outflow of American gold "did not come about by chance."

 


1. Page 223.
2. Chandler, p. 211; also Rothbard, Depression, p. 127.


 

 

 

THE "DISCOVERY" OF THE OPEN MARKET
It is commonly asserted by writers on this topic that the power of the open-market mechanism to manipulate the money supply was "discovered" by the Fed in the early 1920s and that it came as a total surprise.

 

Martin Mayer, for example, in his book, The Bankers, writes:

Now, through an accident as startling as those which produced the discovery of X-Rays or penicillin, the central bank learned that "open market operations" could have a significant effect on the behavior of the banks.

This makes the story interesting, but it is difficult to believe that Benjamin Strong, Paul Warburg, Montagu Norman, and the other monetary scientists who were pulling the levers at that time were taken by surprise.

 

These men could not possibly have been ignorant of the effect of creating money out of nothing and pouring it into the economy. The open market was merely a different funnel. If there was any element of surprise, it likely was only in the ease with which the mechanism could be activated.

 

It is not important whether that part of the story is fact or fiction, except that it perpetuates the "accidental" view of history, the myth that no one is responsible for political or economic chaos: Things just happen. There was no master plan. No one is to blame. Everything is under control. Relax, pay your taxes, and go back to sleep!


In any event, by the end of the war, Congress had awakened to the fact that it could use the Federal Reserve System to obtain revenue without taxes. From that point forward, deficit spending became institutionalized. A gradually increasing issuance of Treasury bonds was encouraging to the Fed because it provided still one more source of debt to convert into money, a source that eventually would become far more reliable than either bank loans or banker's acceptances.

 

Best of all, now that Congress was becoming dependent on the free corn, there was little chance it would find its wings and fly away. The more dependent it became, the more secure the System itself became.


In 1921, the twelve regional Reserve banks were separately buying and selling in the open market.

 

But motives varied. Some merely needed income to cover their operating overhead, while others - notably the New York branch under Benjamin Strong - were more interested in sending American gold to England. Strong began immediately to gather control of all open-market operations into the hands of his own bank. In June of 1922, the "Open-Market Committee" was formed to coordinate activities among the regional Governors.

 

In April of the next year, however, the national board in Washington replaced the Governor's group with one of its own creation, the "Open-Market Investments Committee." Benjamin Strong was its chairman.

 

The powers of that group were enhanced ten years later by legislation which made it mandatory for the regional branches to follow the Open-Market Committee's directives, but that was a mere formality, for the die had been cast much earlier. From 1923 forward, the Fed's open-market operations have been carried out by the New York Federal Reserve Bank.

 

The money trust has always been in control.
 

 

 

DROWNING IN CREDIT
Actions have consequences, and one of the consequences of purchasing Treasury bonds and other debt-related securities in the open market is that the money created to purchase them eventually ends up in the commercial banks where it is used for the expansion of bank credit.

 

"Credit" is another of those wisely words that have different meanings to different people. In banker language, She expansion of credit means the banks have "excess reserves" bookkeeping entries) which can be multiplied by nine and earn interest for them - if only someone would be kind enough to borrow. It is money waiting to be created.

 

The message is:

"Come on to the bank, folks. Don't be bashful. We've got plenty of money to lend. You have credit you didn't even know you had."

In the 1920s, the greater share of bank credit was bestowed upon business firms, wealthy investors, and other high rollers, but the little man was not ignored.

 

In 1910, consumer credit accounted for only 10% of the nation's retail sales. By 1929, credit transactions were responsible for half of the $60 billion retail market.

 

In his Book, Money and Man, Elgin Groseclose says:

"By 1929 the United States was overwhelmed by a flood of credit. It had covered the land. It was pouring into every nook and cranny of the national economy."

The impact of expanding credit was compounded by artificially low interest rates - the other side of the same coin - which were intended to help the governments of Europe.

 

But they also stimulated borrowing here at home. Since borrowing is what causes money to be created under fractional-reserve banking, the money supply in America began to expand. From 1921 through June of 1929, the quantity of dollars increased by 61.8%, substantially more than the increase in national product. During that same time, the amount of currency in circulation remained virtually unchanged.

 

That means the expansion was comprised entirely of money substitutes, such as bonds and loan contracts.
 

 

 

BOOMS AND BUSTS MADE WORSE
The forces of the free market are amazingly flexible. Like the black market, they manage to exert themselves in unexpected ways in spite of political decree.

 

That had been the case throughout most of American history. Prior to the creation of the Federal Reserve, banking had been coddled and hobbled by government. Banks were chartered by government, protected by government, and regulated by government.

 

They had been forced to serve the political agendas of those in power. Consequently, the landscape was strewn with the tombstones of dead banks which had taken to their graves the life savings of their hapless depositors. But these were mostly regional tragedies that were offset by growth and prosperity in other areas. Even within the communities most severely affected, recovery was swift.


Now that the cartel had firm control over the nation's money supply, the pattern began to change.

 

The corrective forces of the free market were more firmly straight-jacketed than ever. All banks in the entire country were in lock step with each other. What happened in one region is what happened in all regions. Banks were not allowed to die, so there could be no adjustments after their demise. Their illness was sustained and carried like a deadly virus to the others.


The expansion of the money supply in the 1920s clearly shows that effect. It was not a steady advance but a series of convulsions.


Each cycle was at a higher level than the previous one. That is because the busts that followed the booms were not allowed to play themselves out. The monetary scientists now had so many mechanisms at their command they were able to initiate new expansions |o cancel out the downward adjustments. It was like prescribing increasing doses of narcotics to postpone the awareness of an advancing disease.

 

It increased the prestige of the doctor, but it did not bode well for the patient.
 

 

 

THE ROLLER COASTER
Between 1920 and 1929, there were three distinct business cycles with several minor ones within them. For the average American, it was confusing and destructive.

 

For the investor, it was a roller-coaster ride to oblivion:

UP! The Fed had inflated the money supply to pay for World War I. The resulting boom caused prices to rise.

 

DOWN! In 1920, the Fed raised interest rates to cool off the inflation. That caused a recession, and prices tumbled. Farmers were hit the hardest, and hundreds of country banks were closed.

 

UP! In 1921, the Fed lowered interest rates to stop the recession and to help the governments of Europe. Inflation and expanding debt resulted.

 

DOWN! In 1923, the Fed tightened credit to put the brakes on inflation
 

UP! But that was offset by its simultaneous policy of lowering the rate at the discount window, thus encouraging banks to borrow new reserves to expand the money supply.

 

UP! In 1924, the Fed suddenly created $500 million dollars in new money. Within one year, the commercial banks parlayed that into more than $4 billion, an expansion of eight-to-one. The boom that followed took on the character of speculation rather than investment. Prices in the stock market rose drastically.

 

DOWN! In 1926, the Florida land boom collapsed, and the economy began to contract once again.

 

UP! In 1927, Montagu Norman of the Bank of England visited the United States to consult with Benjamin Strong. Shortly after his visit, the Fed pumped new money into the system, and the boom returned.
 

DOWN! In the spring of 1928, the Fed contracted credit to halt the boom.
 

UP! But the banks shifted their reserves into time deposits (where customers agree to wait before withdrawing their money). Since time deposits require a smaller reserve ratio than demand deposits, the banks were able to issue more loans than before. That offset the Fed's contraction of credit.
 

UP! By that time, the British government had consumed its previous subsidy which was used to maintain its welfare state. In the spring of 1928, the pound sterling was again sagging on the international market, and gold began to flow back into the United States. Once again, the fledgling Creature came to the aid of the Bank of England, its ailing parent. The Fed bought a huge volume of banker's acceptances to depress interest rates and halt the flow of gold. The money supply suddenly increased by almost $2 billion.
 

DOWN! In August, the Fed reversed its expansionist policy by selling Treasury bonds in the open market and raising interest rates. The money supply began to contract.

It was the final bubble.
 

 

 

SIXTH REASON TO ABOLISH THE FED
One of the myths about the Federal Reserve is that it is needed to stabilize the economy.

 

Yet, it has achieved just the opposite. Destabilization is dramatically clear in the years prior to the Crash, but the same cause-and-effect continues to this day. As long as men are given the power to tinker with the money supply, they will strive to circumvent the natural laws of supply and demand. No matter how high their intentions or pure their motives, they will cause disruptions in the natural flow.

 

When these disruptions are perceived, they will try to compensate by causing opposite disruptions.

 

But, long before they act, there will already be new forces at work which they cannot, in all their wisdom, perceive until they are already manifest. It is the height of egotistical folly for "experts" to think they can outsmart or do better than the combined, interactive decisions of hundreds of millions of people all acting in response to their own best judgment. Thus, the Fed is doomed to failure by its nature and its mission.

 

That is the sixth reason it should be abolished: It destabilizes the economy.
 

 

 

TULIPOMANIA
Easy credit was not the only problem in this period. Equally Important was the effect that had on the behavior patterns of the populace. Responding to herd instinct and a belief in the possibility hf something-for-nothing, men were driven to the most bizarre form of investment speculation.


This was not the first time such hysteria had seized a population. One of the most graphic examples occurred in Holland between the years 1634 and 1636. It came to pass that a new, rare flower, called the tulip, was discovered in the gardens of some of the more wealthy inhabitants of Constantinople, now known as Istanbul.

 

When the root bulbs of these exotic blossoms were brought into Holland, they rapidly became a status symbol among the wealthy - much as race horses or rare breeds of dogs are today in our own society - and those with surplus funds found that an investment in tulips brought them significant social recognition.


The price of tulip bulbs climbed steadily until they became, not merely symbols of status, but speculative investments as well. At one point, prices doubled every few days, and speculators were Been everywhere amassing great fortunes with no input of either labor or service.

 

Many otherwise prudent people found themselves Infected by the hysteria. They borrowed against their homes and invested their life savings to get in on the anticipated windfall. This bushed up prices even further and tended to create the fulfillment of its own prophecy. Contracts for the future delivery of tulip bulbs - a form of today's commodity market - became a dominant feature of Holland's stock market.


Tulip bulbs eventually became more precious than gemstones. As new varieties were developed, the market became more corn-Ilex, requiring experts to certify their origin and their grade. Prices soared, and the herd went insane. One bulb of the species called Admiral Liefken was valued at 4,400 florins; a Semper Augustus, worth 5,500 florins, was purchased for a new carriage, two gray horses, and a complete set of harnesses.

 

It was recorded that, at one tale, a single Viceroy brought two lasts of wheat, four lasts of rye, lour fat oxen, eight fat swine, twelve fat sheep, two hogsheads of mine, four casks of butter, one-thousand pounds of cheese, a bed [and mattress, a suit of clothes, and a silver drinking cup.

Then, one day without warning, reality returned from her two-year vacation. By that time, everyone knew deep in their hearts that the spiraling prices bore no honest relationship to the value of the tulips and that, sooner or later, someone was going to get hurt.

 

 But they continued to speculate for fear of being too quick in their timing and losing out on profits yet to come. Everyone was confident they would sell out precisely at the top of the market. In any herd, however, there are always a few who will take the lead and, by 1636, all it took was one or two prominent merchants to sell out their stock. Overnight, there were no buyers whatsoever, at any price.

 

The tulip market vanished, and speculators by the thousands saw their dreams of easy wealth - and, in many cases, their life savings also - disappear with it. Tulipomania, as it was called at the time, had come to an end.


Or did it? As we have seen, the Federal Reserve can create large amounts of money simply by going into the open market and buying debt contracts.

 

But, once it is in the mainstream of the economy, commercial banks can multiply that money by up to a factor of nine, and that is where the real inflationary action is. To protect that privilege is one of the reasons the banks formed this cartel in the first place. Nevertheless, the public still has the final say. If no one wants to borrow their money, the game is over.


That possibility is more theoretical than real.

 

Although men may be hesitant to go into debt for legitimate business ventures in times of economic uncertainty, they can be lured by easy credit to take a long shot. Dreams of instant wealth are powerful motivators. Gaming casinos, poker parlors, race tracks, lottery windows, and other forms of tulipomania are convincing evidence that the lust for gambling is embedded in genetic code.

 

The public has always been interested in free corn.
 

 

 

TULIPS IN THE STOCK MARKET
During the final phase of America's credit expansion of the 1920s, the rise in prices on the stock market was entirely speculative.

 

Buyers did not care if their stocks were overpriced compared to the dividends they paid. Commonly traded issues were selling for 20 to 50 times their earnings; some traded at 100. Speculators acquired stock merely to hold for a while and then sell at a profit. It was the "Greater-Fool" strategy. No matter how high the price is today, there will be a greater fool tomorrow who will buy at an even higher price. For a while, that strategy seemed to work.


To make the game even more exciting, it was common for Investors to purchase their stocks on margin. That means the buyer buts up a small amount of money as a deposit (the margin) and borrows the rest from his stockbroker - who gets it from the bank, which gets it from the Fed. In the 1920s, the margin for small Investors was as low as 10%.

 

Although the average stock yielded a modest 3% annual dividend, speculators were willing to pay over 1.2% interest on their loans, meaning their stock had to appreciate about 9% per year just to break even.


These margin accounts are sometimes referred to as "call loans" because the broker has the right to "call them in" on very short Notice, often as short as twenty-four hours. If the broker calls the loan, the investor must produce the money immediately. If he cannot, the broker will obtain the money by selling the stock. In theory, the sale of the stock will be sufficient to cover the loan.

 

But, In practice, about the only time brokers call their loans is when the market is tumbling.

 

Under those conditions, the stock cannot be Bold except at a loss: a total loss of the investor's margin; and a variable loss to the broker, depending on the severity of the price tall. To obtain even more leverage, investors sometimes use the stocks they already own as collateral for a margin loan on new stocks. Therefore, if they cannot cover a margin call on their new stocks, they will lose their old stocks as well.


In any event, such silly concerns were not in vogue in the 1920s, from August of 1921 to September of 1929, the Dow-Jones industrial stock-price average went from 63.9 to 381.17, a rise of 597%.

 

Credit was abundant, loans were cheap, profits were big.
 

 

 

BANKS BECOME SPECULATORS
The commercial banks were the middlemen in this giddy game, by the end of the decade, they were functioning more like speculators than banks.

 

Instead of serving as dependable clearing louses for money, they also had become players in the market. Loans to commercial enterprises for the production of goods and services - which normally are the backbone of sound banking practice - were losing ground to loans for speculating in the stock market and in urban real estate.

 

Between 1921 and 1929, while commercial loans remained constant, total bank loans increased from $24,121 million to $35,711 million. Loans on securities and real estate rose nearly $8 billion. Thus, about 70% of the increase during this period was in speculative investments. And that money was created by the banks.


New York banks and trust companies had over $7 billion loaned to brokers at the New York Stock Exchange for use in margin accounts. Before the war, there were 250 securities dealers. By 1929, the number had grown to 6,500.


The banks not only generated the money for speculation, they became speculators themselves by purchasing large blocks of high-yield bonds, many of which were of dubious quality. Those were the kinds of securities that are difficult to liquidate in a declining market. Borrowing money on short term and investing on long term, the banks were maneuvering themselves into a precarious position.


Did the Federal Reserve cause the speculation in the stock market? Of course not. Speculators did that.

 

The Fed undoubtedly had other objects in mind, but that did not cancel its responsibility. It was acutely aware of the psychological effect of easy credit and had consciously used that knowledge to manipulate public behavior on numerous occasions. Behavioral psychology is a necessary tool of the trade. So it could claim neither ignorance nor innocence.

 

In the unfolding of this tragedy, it was about as innocent as a spider whose web "accidentally" caught the fly.
 

 

 

THE FINAL BUBBLE
In the Spring of 1928, the Federal Reserve expressed concern over speculation in the stock market and raised interest rates to curb the expansion of credit.

 

The growth in the money supply began to slow down, and so did the rise in stock prices. It is conceivable that the soaring economy could have been brought in for a "soft landing" - except that there were other agendas to be considered. Professor Quigley had said that the central bankers were not substantive powers unto themselves but were as marionettes whose strings were pulled by others.

 

Just as the speculation spree appeared to be coming under control, those strings were yanked, and the Federal Reserve flip-flopped once again.


The strings originated in London. Even after seven years of subsidy by the Federal Reserve, the British economy was sagging from the weight of its socialist system, and gold was moving back into the United States.

 

The Fed, in spite of its own public condemnation of excessive speculation, reversed itself at the brink of success and purchased over $300 million of banker's acceptances in the last half of 1928, which caused an increase in the money supply of almost $2 billion.

 

Professor Rothbard says:

Europe, as we have noted, had found the benefits from the 1927 inflation dissipated, and European opinion now clamored against any tighter money in the U.S. The easing in late 1928 prevented gold inflows into the U.S. from getting very large.

 

Great Britain was again losing gold, and sterling was weak once more. The United States bowed once again to its overriding wish to see Europe avoid the inevitable consequences of its own inflationary policies.

Prior to the Fed's reversal of policy, stock prices had actually declined by five per cent. Now, they went through the roof, rising twenty per cent from July to December. The boom had returned in spades.


Then, in February of 1929, a curious event occurred.

 

Montagu Norman travelled to the United States once again to confer privately with the officers of the Federal Reserve. He also met with Andrew Mellon, Secretary of the Treasury. There is no detailed public record of what transpired at these closed meetings, but we can be certain of three things: it was important; it concerned the economies of America and Great Britain; and it was thought best not to tell the public what was going on.

 

It is not unreasonable to surmise that the central bankers had come to the conclusion that the bubble - not only in America, but in Europe - was probably going to rupture very soon. Rather than fight it, as they had in the past, it was time to stand back and let it happen, clear out the speculators, and return the markets to reality.

 

As Galbraith put it:

"How much better, as seen from the Federal Reserve, to let nature 2 take its course and thus allow nature to take the blame."

Mellon was even more emphatic. Herbert Hoover described Mellon's views as follows:

Mr. Mellon had only one formula:

"liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate."

He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing.

 

He said:

"It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." 1

If this had been the mindset between Mellon and Norman and the Federal Reserve Board, the purpose of their meetings would have been to make sure that, when the implosion happened, the central banks could coordinate their policies. Rather than be overwhelmed by it, they should direct it as best they can and turn it ultimately to their advantage.

 

Perhaps we shall never know if that scenario is accurate, but the events that followed strongly support such a view.
 

 

 

ADVANCE WARNING FOR MEMBERS ONLY
Immediately after the meetings, the monetary scientists began to issue warnings to their colleagues in the financial fraternity to get out of the market.

 

On February 6, the Federal Reserve issued an advisory to its member banks to liquidate their holdings in the stock market. The following month, Paul Warburg gave the same advice in the annual report to the stockholders of his International Acceptance Bank.

 

He explained the reason for that advice:

If the orgies of unrestrained speculation are permitted to spread, the ultimate collapse is certain not only to affect the speculators themselves, but to bring about a general depression involving the entire country.

Paul Warburg was a partner with Kuhn, Loeb & Co. which maintained a list of preferred customers. These were fellow bankers, wealthy industrialists, prominent politicians, and high officials in foreign governments. A similar list was maintained at J.P.Morgan Co.

 

It was customary to Herbert Hoover described Mellon's views e these men advance notice on important stock issues and an opportunity to purchase them at two to fifteen points below their price to the public. That was one of the means by which investment bankers maintained influence over the affairs of the world.

 

The men on these lists were notified of the coming crash.

  • John D. Rockefeller

  • J.P. Morgan

  • Joseph P. Kennedy

  • Bernard Baruch

  • Henry Morganthau

  • Douglas Dillon,

...the biographies of all the Wall Street giants at that time boast that these men were "wise" enough to get out of the stock market just before the Crash. And it is true.

 

Virtually all of the inner club was rescued. There is no record of any member of the interlocking directorate between the Federal Reserve, the major New York banks, and their prime customers having been caught by surprise.

 

Wisdom, apparently, was greatly affected by whose list one was on.

 

 


A MESSAGE OF COMFORT TO THE PUBLIC
While the crew was abandoning ship, the passengers were told it was a lovely cruise.

 

President Coolidge and Treasury Secretary Mellon had been vociferous in their public utterances that the economy was in better shape than ever. From his socialist perch in London, John Maynard Keynes exclaimed that the management of the dollar by the Federal Reserve Board was a "triumph" of man fever money.

 

And, from the plush offices of his New York Federal Reserve Bank, Benjamin Strong boasted:

The very existence of the Federal Reserve System is a safeguard against anything like a calamity growing out of money rates... In former days the psychology was different, because the facts of the banking situation were different. Mob panic, and consequently mob disaster, is less likely to arise.

The public was comforted, and the balloon continued to expand. It was now time to sharpen the pin.

 

On April 19, the Fed field an emergency meeting under cloak of great secrecy. The following day, the New York Times reported as follows:

 


RESERVE COUNCIL CONFERS IN HASTE

Atmosphere of Mystery Is Thrown about Its Meeting in Washington


An atmosphere of deep mystery was thrown about the proceedings both by the board and the council.

 

No advance announcement had been made that an extraordinary session of the council was contemplated, and the fact that the members were in the city became known only when newspaper correspondents happened to see some of them entering the Treasury Department building. Even after that, evasive replies were given...

 

While the joint meeting was in progress at the Treasury Department, every effort was made to guard the proceedings, and a group of newspaper correspondents were asked to leave the corridor.

Let us return briefly to Montagu Norman.

 

His biographer tells us that, after he became head of the Bank of England, his custom was to journey to the United States several times each year, although his arrival was seldom noted by the press. He travelled in disguise, wearing a long, black cloak and a large, broad-brimmed hat, and he used the pseudonym of Professor Skinner.

 

It was on one of those unpublicized trips that he ran into a young Australian by the name of W.C. Wentworth.

 

Sixty years later, Wentworth wrote a letter to The Australian, a newspaper in Sydney, and told of his encounter:

In 1929 I was a member of the Oxford and Cambridge athletic team, visiting America to run against American Universities. Late in July we split up to return, and I, together with some other members, boarded a smallish passenger vessel in New York. (There were, of course, no airplanes in those days.)

A fellow passenger was "Mr. Skinner," and a member of our team recognized him. He was Montagu Norman, returning to London, after a secret visit to the US Central Bank, travelling incognito.


When we told him we knew who he was, he asked us not to blow his cover, because if the details of his movement were made public, it could have serious financial consequences. Naturally, we agreed, and on the days following, as we crossed the Atlantic, he talked to us very frankly.


He said,

"In the next few months there is going to be a shake-out But don't worry - it won't last for long."

On August 9, just a few weeks after that ship-board encounter, the Federal Reserve Board reversed its easy-credit policy and raised the discount rate to six per cent.

 

A few days later, the Bank of England raised its rate also. Bank reserves in both countries began to shrink and, along with them, so did the money supply. Simultaneously, the System began to sell securities in the open market, a maneuver that also contracts the money supply.

 

Call rates on margin loans had jumped to fifteen, then twenty per cent The pin I had been inserted.
 

 

 

THE DUCK DINNER BEGINS
The securities market reached its high point on September 19. Then, it began to slide. The public was not yet aware that the end had arrived.

 

The roller coaster had dipped before. Surely it would shoot upward again. For five more weeks, the public bought heavily on the way down. More than a million shares were traded during that period. Then, on Thursday, October 24, like a giant school of fish suddenly turning direction in response to an unseen signal, thousands of investors stampeded to sell.

 

The ticker tape was hopelessly overloaded. Prices tumbled. Thirteen million shares exchanged hands. Everyone said the bottom had dropped out of the market. They were wrong. Five days later, it did.


On Tuesday, October 29, the exchanges were crushed by an I avalanche of selling. At times there were no buyers at all. By the end of the trading session, over sixteen million shares had been dumped, in most cases at any price that was offered. Within a single day, millions of investors were wiped out. Within a few weeks of further decline, $3 billion of wealth had disappeared.

 

Within twelve months, $40 billion had vanished. People who had counted their paper profits and thought they were rich suddenly found themselves to be very poor.


The other side of the coin is that, for every seller, there was a buyer. The insiders who had moved their investments into cash and gold were the buyers. It must be remembered that falling stock prices didn't necessarily mean that there was anything wrong with the stocks. Those representing solid companies were still paying dividends and were good investments - at a realistic price.

 

In the panic, prices had tumbled far below their natural levels.

 

Those who had the cash picked them up for a small fraction of their true worth. Giant holding companies were formed for that task, such as Marine Midland Corporation, the Lehman Corporation, and the Equity Corporation. J.P. Morgan set up the food trust called Standard Brands. Like the shark swallowing the mackerel, the big speculators devoured the small.


There is no evidence that the Crash was planned for the purpose of profit taking.

 

In fact, there is much to show that the monetary scientists tried mightily to avert it, and might have done so had not their higher-priority agendas gotten in the way. Yet, once they realized the inevitability of a collapse in the market, they were not bashful about using their privileged position to take full advantage of it.

 

In that sense, FDR's son-in-law, Curtis Dall, was right when he wrote,

"It was the calculated 'shearing' of the public by the World Money Powers."


 

NATURAL LAW NO. 5
Here is another of those "natural laws" of economics that needs to be added to our list:

LESSON: It is human nature for man to place personal priorities ahead of all others. Even the best of men cannot long resist the temptation to benefit at the expense of their neighbors if the occasion is placed squarely before them.

 

This is especially true when the means by which they benefit is obscure and not likely to be perceived as such. There may be exceptional men from time to time who can resist that temptation, but their numbers are small. The general rule will prevail in the long run.


A managed economy presents men with precisely that kind of opportunity. The power to create and extinguish the nation's money supply provides unlimited potential for personal gain Throughout history the granting of that power has been justified as being necessary to protect the public, but the results have always been the opposite. It has been used against the public and for the personal gain of those who control. Therefore,
 

LAW: When men are entrusted with the power to control the money supply, they will eventually use that power to confiscate the wealth of their neighbors.


There is no better illustration of that law than the Crash of 1929 and the lingering depression that followed.

 

 

FROM CRASH TO DEPRESSION
The lingering depression is an important part of the story.

 

The Speculators had been ruined, but what they lost was money acquired without effort. There were some unfortunate souls who also lost their life savings, but only because they gambled those savings on call loans. Those who bought stock with money they actually possessed did not have to sell, and they did quite well in the long run.

 

For the most part, something-for-nothing had merely been converted back into nothing. The price of stocks had plummeted, but the companies behind them were still producing products, still employing people, and still paying dividends. No one lost his job just because the market fell. The tulips were gone, but the wheat crop remained.


So, where was the problem? In truth, there was none - at least mot yet.

 

The crash, as devastating as it was to the speculators, had little effect on the average American. Unemployment didn't become rampant until the depression years which came later and were caused by continued government restraint of the free market, the drop of prices in the stock market was really a long-overdue and healthy adjustment to the economy.

 

The stage was now set for recovery and sound economic growth, as always had happened in the past.


It did not happen this time. The monetary and political dentists who had created the problem now were in full charge of the rescue. They saw the crash as a golden opportunity to justify even more controls than before.

 

Herbert Hoover launched a multitude of government programs to bolster wage rates, prevent prices from dropping, prop up failing firms, stimulate construction, guarantee home loans, protect the depositors, rescue the banks, subsidize the farmers, and provide public works. FDR was swept into office by promising even more of the same under the slogan of a New Deal.

 

And the Federal Reserve launched a series of "banking reforms," all of which were measures to further extend its power over the money supply.


In 1931, fresh money was pumped into the economy to restart the cycle, but this time the rocket would not lift off. The dead weight of new bureaucracies and government regulations and subsidies and taxes and welfare benefits and deficit spending and tinkering with prices had kept it on the launching pad.


Eventually, the productive foundation of the country also began to crumble under the weight Taxes and regulatory agencies forced companies out of business. Those that remained had to curtail production.

 

Unemployment began to spread.

 

By every economic measure, the economy was no better or worse in 1939 than it was in 1930 when the rescue began.

 

It wasn't until the outbreak of World War II, and the tooling up for war production that followed, that the depression was finally brought to an end. It was a dubious save. In almost every way, it was a repeat of the drama played out with World War I, even to the names of two of its most important players.

 

FDR and Churchill worked together behind the scenes to bring America into the conflict - Churchill wanting American assistance in a war England was losing and could not afford, FDR wanting a jolt to the economy for political reasons, and the financiers, gathered behind J.P. Morgan, wanting the profits of war. But that is another chapter, and this book is long enough.


What happened after World War II was the focus of the first six chapters. That brings us to the end of historical record. It's time, now, to reset the coordinates on our time machine and return to the present.

 

 


SUMMARY
Congress had been assured that the Federal Reserve Act would decentralize banking power away from Wall Street.

 

However, within a few years of its inception, the System was controlled by the New York Reserve Bank under the leadership of Benjamin Strong whose name was synonymous with the Wall Street money trust.


During the nine years before the crash of 1929, the Federal Reserve was responsible for a massive expansion of the money supply. A primary motive for that policy was to assist the government of Great Britain to pay for its socialist programs which, by then, had drained its treasury.

 

By devaluing the dollar and depressing interest rates in America, investors would move their money to England where rates and values were higher. That strategy succeeded in helping Great Britain for a while, but it set in motion the forces that made the stock-market crash inevitable.


The money supply expanded throughout this period, but the trend was interspersed with short spasms of contraction which were the result of attempts to halt the expansions. Each resolve to use restraint was broken by the higher political agenda of helping the governments of Europe. In the long view, the result of plentiful money and easy credit was a wave of speculation in the stock market and urban real estate that intensified with each passing month.


There is circumstantial evidence that the Bank of England and the Federal Reserve had concluded, at a secret meeting in February of 1929, that a collapse in the market was inevitable and that the best action was to let nature take its course. Immediately after that meeting, the financiers sent advisory warnings to lists of preferred customers - wealthy industrialists, prominent politicians, and high officials in foreign governments - to get out of the stock market. Meanwhile, the American people were being assured that the economy was in sound condition.


On August 9, the Federal Reserve applied the pin to the bubble. It increased the bank-loan rate and began to sell securities in the open market. Both actions have the effect of reducing the money supply.

 

Rates on brokers' loans jumped to 20%.

 

On October 29, the stock market collapsed. Thousands of investors were wiped out in a single day. The insiders who were forewarned had converted their stocks into cash while prices were still high. They now became the buyers.

 

Some of the greatest fortunes in America were made in that fashion.

 

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