Revenge of the barbarous relic

“Let’s try, shall we? 

“Bankers and politicians have had a mutually rewarding relationship for ages. Bankers create money and loan it out at interest, which can be very profitable. Trouble is, creating money electronically or with a printing press, which is what central banks do, is counterfeiting. In return for a share of the newly-created money, government lets banks get away with it. Government gets bigger, bankers get richer. 

“Bank counterfeiting, which is another name for inflation, fuels a great many evils for which it gets little credit, such as wars and depressions. To put an end to this racket we need to establish a free market in banking, which means open it up to competition. What would prevent banks from counterfeiting on a free market? Property right enforcement. All money is someone’s property. If I deposit my money in a bank and pay a fee for the service, I expect to be able to get it back on demand. If the bank can’t provide it because the bank’s loaned it to someone else, it has violated my property rights. If the law respects property rights consistently, the law will hold the bank responsible. In the long run at least, counterfeiting would be unprofitable. Few bankers will find such prospects tempting. 

“Money was founded on the market. At first it was a commodity that was bartered for other commodities or services. But because of the great number of people willing to accept it in trade, it began to be acquired for trading purposes only – as a medium of exchange, or money. 

"Gold won the competition as the most popular money long ago. Gold is very difficult to produce, which is one of the biggest reasons it became the preferred medium of exchange. When a rare commodity such as gold is used for money, the supply remains fairly constant. 

"People have always known that increasing the money supply dilutes the value of each monetary unit. But apparently they didn’t make a connection between this fact and government’s eagerness to adopt a fiat dollar as our monetary standard. When new money is created as a matter of policy, as it has been for generations with the encouragement of leading economists, the dollar is doomed, and so are dollar users. 

“We need to remember, though, that banking as such is crucial to higher civilization. As one commentator has astutely observed, without an international banking system most of us wouldn’t be alive today. Money and banking make possible the division of labor, which has drastically reduced child mortality and raised living standards wherever free markets flourished. 

"But it’s also true that throughout most of banking history, banks promised to redeem their notes in some precious metal, either gold or silver. Though they could keep that promise for only a small fraction of their customers, it still served as a vital check on their propensity to counterfeit. 

“For Americans, the gold standard was killed by presidential decree during the crisis of the Great Depression. In 1971 another president told foreigners they could no longer get gold for American dollars and thus removed the last trace of monetary gold from international trade. Since then all governments have been on a fiat money standard, depreciating their currencies as a matter of policy. 

“The story of gold’s disappearance is part of a larger narrative about the growth of government. Besides being a check on bank counterfeiting, or inflation, gold is also a serious restriction on government expansion. For the advocates of big government, therefore, gold becomes a barbarous relic that stands in their way. 

“The corruption of money began when people started keeping their gold with banks, which would issue deposit receipts, or banknotes, as money-substitutes. Because of the banker’s reputation for trust and propriety, their notes were readily acceptable in trade as substitutes for the gold locked away in their vaults. People knew they could redeem the notes for gold any time they wished. But because of the convenience of carrying and doing business with banknotes rather than coins, people tended to leave their gold in the bank. 

“Bankers became the money centers of their communities, even though most of the money under their protection wasn’t theirs – they could only claim a small percentage of it as a fee for their service. Because money was in their possession, though, businessmen would come to them for loans, and the bankers, seeking additional profit opportunities, found ways to accommodate them. 

“Unfortunately, they turned to counterfeiting as a means of accommodation. What I mean is, they began creating and loaning out deposit receipts that had no gold behind them. The new notes were counterfeit because they were being passed off with the understanding that they were genuine gold substitutes. But in fact the notes only looked like the real thing. The bankers knew, though, that as long as they didn’t issue too many of these counterfeit bills, they would escape detection. 

“In extending loans with counterfeit notes or by creating unbacked deposit accounts, they could point to conspicuous growth in the local economy. According to almost everything we read, bankers weren’t committing fraud, they were helping business grow, putting people to work, helping them earn a living. As businessmen, the bankers could tell themselves they were merely reacting to the demands of the market, in their case a demand for money. And they reacted by simply printing and issuing it. 

“Looking back, most commentators now find little fault with what they were doing. So what if their notes weren’t backed by gold? Today’s financial press would say the bankers were ‘investing’ or ‘accommodating’ or ‘providing liquidity.’ You never hear anyone call it counterfeiting, at least not in mainstream circles. 

“But by issuing banknotes or credit not covered by gold, the bankers were increasing the money supply, a process identical in its effects to counterfeiting. An increase in the supply of money confers no broad social benefits – but it does benefit early users of the new money at the expense of others: the first users have the advantage of buying goods at current prices. Later, when prices have gone up, the inflated money supply doesn’t benefit anyone. We improve the general welfare by increasing the production of goods, not by increasing the production of money. 

“Nevertheless, the banks’ practice of generating unbacked money substitutes prevailed. Invariably, some would go too far and cause depositors to begin doubting their banker’s rectitude. A few would start showing up at teller windows wanting their notes exchanged for gold. Other note holders would catch on, and the bank was soon confronted with a run. But without enough gold to redeem, many of the banks had to shut their doors. As the panic spread, even the more cautious banks would experience massive demands for redemption. 

“For reasons of its own, government took a strong interest in the bankers’ plight and usually issued moratoriums on note redemption. For a period sometimes lasting years, banks were permitted to default on their liabilities to note holders while being allowed to conduct all other banking activities. 

“Helpful as this privilege was, it wasn’t enough. Banks weren’t always allowed to renege on their promises, their easy credit policies created bankruptcies and recessions, and besides, bank runs were embarrassing. No banker liked seeing crowds swarming at his door demanding what was theirs, even if the law was on his side. 

“Fortunately for American bankers and their political allies, Europe provided examples of ingenious solutions to the dilemma of bank counterfeiting. During the early years of the twentieth century U. S. bankers imported some of their ideas and, together with a few powerful politicians, devised a plan for a banking cartel. 

“The cartel would consist of all the national banks of the country organized under the authority of a central bank, which would be endowed by government with a monopoly of the note issue. Furthermore, all the deposits of the member banks would be moved to the central bank and held as reserves, with the central bank dictating to its members what fraction of its reserves they had to maintain when making loans. Historically, banks have been held to a ten percent reserve requirement most of the time, meaning they could extend nine dollars in loans for every dollar held in reserve. By dictating reserve ratios for all members, the central bank would control the rate of monetary inflation in a uniform manner so that any one bank wouldn’t get more reckless than the others and get itself and the rest of the banks in trouble. 

“Americans didn’t like cartels or centralized power, the planners realized, so they called their creature a ‘reserve system’ instead of a banking cartel and dressed it up with regional branches to avoid the appearance of a concentration of power. As John Kenneth Galbraith observed many years later, the regional design was ingenious for serving local pride ‘and for lulling the suspicions of the agrarians.’ Since no cartel will work without government guns, it was natural, perhaps, to attach the name ‘federal’ to it, as well. Thus, the American central bank became known as the Federal Reserve System, or the Fed. 

“Signed into law on December 23, 1913, the Federal Reserve Act was hailed as a major victory of the Progressive Era’s fight against the alleged abuses of concentrated market power, in this case, the Money Trust. Banking was at last rescued from the hands of Wall Street and put under the enlightened care of government. Greed had been tamed by the people through their selfless representatives in Congress and their man in the White House. Government would see that the Fed served the ‘public interest’ and would ensure that it didn’t fail. And with the Fed providing the economy with an ‘elastic currency,’ the ruinous panics and depressions of the past would be gone forever. 

“Those were the beliefs, but the facts reveal a far different story. 

“It was the Morgans and Rockefellers of Wall Street who turned to government to cage their banking competition, especially the growing challenge from non-national banks in the South and West, and came up with a plan for a central bank. It was the big bankers who took the lead in creating a system that would protect them from the hazards of bank counterfeiting and make them a monopoly issuer of bank notes. After the Act became law, it was Morgan bankers who occupied the seats of power in the new system, particularly at the Fed’s New York branch where Benjamin Strong, president of J. P. Morgan’s Bankers Trust Company, ran the money machine from the Fed’s inception in 1914 to his death in 1928. 

“The Fed became an indispensable instrument of profit and power. Beginning in 1914, it cut reserve requirements approximately in half, dropping the ratio from 21 percent to 11 percent, roughly doubling the money supply and permitting both financial aid to the Allies and eventual American entry into the European war. Under the impetus of the war, the Fed became the sole fiscal agent of the Treasury, securing the deposit of all Treasury funds at the Federal Reserve. The Morgans, exploiting its ties with England and its position of power at the New York Fed, became the sole purchasing agent in the U.S. for war materials to be shipped to Britain and France. The Morgans also became the sole underwriter for British and French bonds floated in the U.S. to pay for armaments and other goods the Allies wanted. 

“Government, meanwhile, used the war as an excuse to create what one economic historian has aptly called a ‘garrison economy.’ Among other things government took over railroads and communications industries, seized hundreds of manufacturing plants, fixed prices, intervened in hundreds of labor disputes, raised taxes, and conscripted a million men for military service so they could join the bloodbath over there, in the European trenches. The Supreme Court, the alleged guardian of the Constitution – which itself is our alleged guardian against an aggressive government – ruled most of the war interventions constitutional, including the draft. Merely questioning the constitutionality of the draft could get you thrown in jail. Thus, the federal reserve – a government-protected, government-serving, elaborately-cloaked counterfeiting cartel – played a crucial role in converting a peaceful America into a bellicose, interventionist state. 

“All the belligerents in the war went off the gold standard and resorted to inflation – counterfeiting – to fund the carnage. Taxes were raised, but only so far. Governments that attempt to fund wars by raising taxes often find themselves facing a revolt on the home front. Wars require massive inflation, and the institution responsible for inflation is the government’s central bank. Without government control of the monetary system through its central bank there would’ve been no war, or certainly not one nearly as long or destructive. 

“The war killed over 19 million people, counting both military and civilian deaths. How many of those deaths could have been prevented if the governments did not control the money supplies? If they had engaged in central bank ‘disarmament’ instead of slaughtering one another? 

“Rather than pointing out the inflationary theft of resources that underlies all modern wars, many commentators were instead spellbound by the patriotic fervor and the wonderful command and control economy the war brought in its wake. No doubt it was a heady experience for the elites in command and very lucrative for a few others. In this connection I strongly urge you to read a short book written by two-time Medal of Honor recipient, Major General Smedley D. Butler, called War is a Racket. A racket, General Butler said, is something that is not what it seems to the majority of people. Only a small group of insiders knows what it is about. A racket is conducted for the benefit of the very few at the expense of the very many. 

“We hear voices calling for patriotism during war. But who exactly were the patriots during ‘the war to end all wars’? 

"Was it J. P. Morgan, who repeatedly said, ‘Nobody could hate war more than I do’ as he was amassing commissions totaling $30 million as a purchasing agent of war supplies for England and France? 

"Was it Morgan’s steel, shipbuilding, and powder enterprises that bought controlling interest in, and editorial control over, the country’s 25 most influential newspapers? 

"Was it President Woodrow Wilson who had won reelection with the slogan ‘he kept us out of war’ then five months later asked Congress to join a war that had already killed 5 million men? 

"Was it Senator Robert La Follette of Wisconsin, who rose in the Senate to dissect Wilson’s call for war point by point, arguing that Wilson and his advisors had been colluding with Britain for two years trying to find a pretext for American entry into the fray against England’s enemies? 

"Was it the senators who spoke after La Follette and for five hours hotly denounced him as ‘pro-German’ and ‘anti-American’? 

"Was it the majority of Americans who in spite of a well-orchestrated media campaign against Germany still opposed joining the war? 

"Was it the million men who were conscripted and sent overseas, over 100,000 of whom lost their lives? 

"Was it the industrial firms back home, thousands of miles from the slaughter on the Western Front, whose income tax records showed huge profits during the war years? 

"Was it the millions here who kept their mouths shut about the war because the Espionage Act of 1917 and its successor, the Sedition Act of 1918, hung a 20-year prison sentence over the heads of Wilson’s critics?

“Washington, Jefferson, Madison, and John Quincy Adams are generally considered patriotic, yet they counseled strongly against American entanglement in foreign affairs. ‘Commerce with all nations, alliance with none,’ were Jefferson’s famous words. America ‘well knows that by once enlisting under other banners than her own, the fundamental maxims of her policies would insensibly change from liberty to force,’ John Quincy Adams warned his colleagues in a famous Fourth of July speech to Congress. ‘Of all the enemies of true liberty,’ James Madison wrote, ‘war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few.’