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90 Years and Going Strong? An Evaluation of the Federal Reserve: Its Motivation and Founding

Next year the Federal Reserve Bank will be 90 years old. The large majority of Americans regard the Federal Reserve with high esteem because they believe it has served their economic interests well by controlling harmful boom/bust cycles and protecting the integrity of the U.S. dollar and the value of people's savings.

  • Tom Rose,
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his is the interpretation of the thing: . . .

Thou art weighed in the balances, and art found wanting.   Daniel 5:26-27

Next year the Federal Reserve Bank will be 90 years old. The large majority of Americans regard the Federal Reserve with high esteem because they believe it has served their economic interests well by controlling harmful boom/bust cycles and protecting the integrity of the U.S. dollar and the value of people's savings. Furthermore, the chairman of the Federal Reserve Board is often quoted as speaking authoritatively on one topic or another. Would the news media and our government mislead the public into believing something that isn't true?

Let us investigate the early history of the Federal Reserve.

The Panic of 1907
The Federal Reserve System grew out of the "Rich Man's Panic" of 1907, which some economic historians believe resulted from the anti-business vendetta so actively pursued by President Theodore Roosevelt.

When the financial panic hit in October, 1907, J. P. Morgan quickly became the focal point of the efforts to keep failing financial institutions from going under. Night after night he would summon the leading bankers and financiers in New York City to his library where they would work until early morning hours to transfer needed funds from one institution to another as the public made "runs" on banks that had run short of liquid funds. Commitments to transfer money from one institution to another were based on the personal integrity and mutual trust of the financial leaders involved, with everyone looking to J. P. Morgan for leadership. Elgin Groseclose in his book, Fifty Years of Managed Money, explained it thus:

If it [The Panic of 1907] was the product of the open market, the natural outcome of the private enterprise system, the fruit of the misdeeds of the financial community, it was in these areas that the issue was met and mastered, the problem solved, the penance paid and the battle won. The panic may have been precipitated by financial manipulators, but they assumed the responsibility and leadership for arresting its spread and restoring stability. There was no hesitancy. And among them all, authorities agree that Morgan was chief. (34)
Let me make something clear: The Panic of 1907 was not a natural product of the private free-enterprise system. Elgin Groseclose would certainly agree with me on this. It certainly was the result of misdeeds by the financial community, but it is also true that the members of the financial community themselves, at great personal risk, quickly took steps to keep the panic from spreading. To a man, Morgan and his associates felt that the immediate problem facing them was the lack of liquidity, so they consulted with each other to "ration" available funds and funnel them to financial institutions that needed funds most, but which they also deemed were savable. So if the panic was not a natural result of the free-market system, then what was the cause?
The panic was the direct result of fractional-reserve banking! Under a banking system based on fractional reserves, banks actually create money when customers borrow money, and money is destroyed when loans are repaid. Thus, fractional-reserve bankers engage in the continual process of systemically inflating and deflating the economy with credit-based money. Since banks earn their greatest profits by extending loans (creating credit), bankers have a natural tendency to err on the side of creating more credit than they should. More bank credit means more newly created money chasing a limited supply of goods and labor, thus prices eventually start to rise faster than real goods are produced. This induces some business entrepreneurs to over-extend their credit, thereby generating losses instead of profits. Cutbacks and lay-offs result. The public then becomes concerned and withdraws funds from financial institutions thereby precipitating a "credit crunch." It is from this credit-induced cycle that booms and financial panics are born. It becomes evident then that boom-bust cycles are actually inherent in the system of fractional-reserve banking rather than the result of private capitalism.

This explains why Morgan and his associates focused on the symptom of "short liquidity" rather than the real underlying cause (excessive credit creation) that generated the symptom. The outcome of Morgan's efforts to curtail the panic aroused public concern over the existence of an eastern "Money Trust" and this led Congress to establish the National Monetary Commission (NMC) in 1908 to study the problem of periodic panics. Senator Nelson W. Aldrich of Rhode Island, who had close business ties with J. P. Morgan, was chosen to head the NMC.

All the leading bankers and financiers spoke with a unified voice favoring a currency that was "flexible" (meaning flexible upward!). They also pushed the idea of a "lender of last resort" that would stand ready to bail out banks in the eventuality of "liquidity" problems. Of course, they really meant to bail out the big banks; and the so-called "liquidity problems" were of their own making from excessive credit creation! Needless to say, the real underlying cause would never be mentioned publicly.

Falsely Accusing the Free Market
The public would be led falsely to believe that periodic boom-bust cycles were endemic to the free-market system. The men who conspired to create the Federal Reserve System did not believe in competitive capitalism; rather, they believed in oligarchical (rule by a few persons) control of business and credit. The National Monetary Commission spent hundreds of thousands of tax dollars doing their "research" in Europe and eventually produced a tentative bill for a central bank.

In the fall of 1910 Senator Aldrich invited a few men to a secret meeting. They were to meet Aldrich at 10:00 P.M. on November 10 at his private railroad car parked on a siding at Hoboken, New Jersey. They were requested to come one-by-one and to use only their first names to avoid publicity. Their destination was Jekyll Island, off the coast of Georgia, where they would be cloistered for nine days making final changes to the NMC bill. Because of the American people's historic aversion to central banks, the final version of the bill would be disguised as a decentralized reserve institution. At all costs, the group wanted to avoid any mention of a central bank, which is exactly what the Federal Reserve System is!

Newspaper reporters in the small coastal town of Brunswick, Georgia, got wind of visitors, but were told the group was on a "duck hunting" trip. Here is a roster of the Jekyll Island "duck hunting" group:

  • Sen. Nelson W. Aldrich (RI), Chairman of the National Monetary Commission, business associate of J. P. Morgan, and father-in-law to John D. Rockefeller, Jr.
  • Abraham P. Andrew, Assistant Secretary, U.S. Treasury.
  • Frank A. Vanderlip, President, National City Bank of New York, a Rockefeller bank and connected with the investment banking firm of Kuhn, Loeb, and Company.
  • Henry P. Davidson, Senior Partner, J. P. Morgan Company.
  • Charles D. Norton, President of J. P. Morgan's First National Bank of New York.
  • Benjamin Strong, head of J. P. Morgan's Bankers Trust Company, who later would be appointed as the first "governor" of the Federal Reserve Board.
  • Paul M. Warburg, partner in Kuhn, Loeb and Company. He represented the Rothschild banking dynasty in England and France and was brother to Max Warburg, who headed the Warburg banking consortium in Germany and the Netherlands. He was the key "monetary expert" who guided the group's discussions.

Much behind-the-scenes planning and molding of public opinion went into the effort of selling the Federal Reserve System to the American public. Murray N. Rothbard, in The Case Against the Fed, writes:

The Panic galvanized the big bankers to put on a concerted putsch [a secret plot leading to a coup] for a Lender of Last Resort in the shape of a central bank. The big bankers realized that one of the first steps in the march to a central bank was to win the support of the nation's economists, academics, and financial experts. Fortunately for the reformers, two useful organizations for the mobilization of academics were near at hand: the American Academy of Political and Social Science (AAPSS) of Philadelphia, and the Academy of Political Science of Columbia University (APS), both of which comprised leading corporate liberal businessmen, financiers, and corporate attorneys, as well as academics. Each of these organizations ... held symposia on monetary affairs during the winter of 1907-1908, and each called for the establishment of a central bank. The Columbia conference was organized by the distinguished Columbia economist E. R. A. Seligman, who not coincidentally was a member of the family of the prominent Wall Street investment bank of J. & W. Seligman and Company. (108-109)

Rothbard points out that numerous NMC reports "poured forth onto the market" in 1910:

The object was to swamp public opinion with a parade of impressive analytic and historical scholarship, all allegedly "scientific" and "value-free," but all designed to further the agenda of a central bank. (114)

Eustace Mullins in The Secrets of the Federal Reserve, relates that the House version of the Federal Reserve Act passed the House of Representatives on September 18, 1913, and the Senate passed its version on December 19, 1913. More than forty important differences remained to be settled:

The Congressmen prepared to leave Washington for the annual Christmas recess, assured that the Conference bill would not be brought up until the following year. Now the money creators prepared and executed the most brilliant stroke of their plan. In a single day, they ironed out all forty of the disputed passages in the bill and quickly brought it to a vote. On Monday, December 22, 1913, the bill was passed by the House 282-60 and the Senate 43-23. (27)

Charles A. Lindbergh, Sr., congressman from Minnesota, spoke on the House floor that day:

This Act establishes the most gigantic trust on earth. When the President signs this bill, the invisible government by the Monetary Power will be legalized.... Wall Streeters could not cheat us if you Senators and Representatives did not make a humbug of Congress ... The greatest crime of Congress is its currency system. The worst legislative crime of the ages is perpetrated by this banking bill. The caucus and the party bosses have again operated and prevented the people from getting the benefit of their own government. (ibid., 28)

G. Edward Griffin writes in The Creature from Jekyll Island: A Second Look at the Federal Reserve:

The centralization of control over financial resources was far advanced by 1910. In the United States, there were two main focal points of this control: the Morgan group and the Rockefeller group. Within each orbit was an intricate maze of commercial banks, acceptance banks, and investment firms. In Europe, the same process of financial concentration had proceeded even further and had coalesced into the Rothschild group and the Warburg group. (5-6)

Griffin also points out that the big banks in 1910 were facing growing competition from small banks springing up in the South and West, out of the area of control of the eastern banks, and that a new type of competition was rearing its ugly head:

Competition also was coming from a new trend in industry to finance future growth out of profits rather than from borrowed capital.... Consequently, between 1900 and 1910, seventy percent of the funding for American corporate growth was generated internally, making industry increasingly independent of the banks....

Here was another trend that had to be halted. What the bankers wanted and what many businessmen wanted also was to intervene in the free market and tip the balance of interest rates downward, to favor debt over thrift. To accomplish this, the money supply simply had to be disconnected from gold and made more plentiful or, as they described it, more elastic....

Here, then, were the main challenges that faced that tiny but powerful group assembled on Jekyll Island:

  • 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;
  • 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;
  • How to pool the meager reserves of the nation's banks into one large reserve so that all banks will be motivated to follow the same loan-to-deposit ratios. This would protect at least some of them from currency drains and bank runs;
  • Should this lead eventually to the collapse of the whole banking system, then how to shift the losses from the owners of the banks to the taxpayers. (ibid., 12-13, 16)

Summary and Evaluation
My purpose in relying primarily on other authors was to avoid any built-in bias against the Federal Reserve that I may have personally developed through many years of teaching courses in economics and money and banking. The more I have investigated the FRS, the more I have come to the certainty that it was conceived in a spirit of deception and came into being through secret collusion of highly-placed anti-free-market oligopolists (a few entities that together control a market) whose only allegiance was to themselves, to the institutions they controlled, and to the international banking cartel whose ideas the oligopoly finally succeeded in planting here in America.

Their goal was to establish a government-approved monopoly to foster massive and continued monetary inflation in pursuit of ever rising profits while, at the same time, being shielded from the adverse effects of their own inflationary policies by a tax-payer-provided "lender of last resort." Thus, viewed solely from the viewpoint of judging its deceptive conception and birth, there is only one judgment possible regarding the Federal Reserve System: "Thou art weighed in the balances, and art found wanting" (Dan. 5:27).

  • Tom Rose

Tom is a retired professor of economics, Grove City College, Pennsylvania. He is author of seven books and hundreds of articles dealing with economic and political issues. His articles have regularly appeared in The Christian Statesman, published by the National Reform Association, Pittsburgh, PA, and in many other publications. He and his wife, Ruth, raise registered Barzona cattle on a farm near Mercer, PA, where they also write and publish economic textbooks for use by Christian colleges, high schools, and home educators. Rose’s latest books are: Free Enterprise Economics in America and God, Gold and Civil Government.

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