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In spite of its success in bestowing wealth on some men while funding an unnecessary war, [1] the National Banking System proved unsatisfactory to financial
leaders. (See “Who Paid for the Civil War?”) Even with laws discouraging or restricting redemption, crises
still occurred, and banks had to contract and deflate to survive. They were
unable to inflate their way out of recession because they lacked a
centralized lender who could provide them emergency funding. In addition,
people, especially those who kept their savings outside the banking system,
generally saw the notes that circulated as mere substitutes for the real
thing, which financier Jay Cooke disparaged as a “musty [relic] of a
bygone age,” a sentiment no doubt shared by a certain Scottish adventurer of the early 18th century. [2] Even if the system had a centralized
lender it would still be subject to market retribution because people cannot
arbitrarily create gold or silver coin. Money was still the most marketable
commodity, rather than tickets or digits a centralized lender could issue at
will, as the Fed does today. [3]
Another problem the national banks faced was the growing competition of
private and state banks, neither of which had the national system’s
high capital requirements. After 1873, total bank deposits were shifting in
favor of non-national banks, as were clearings outside of New York.
Furthermore, in 1887, St. Louis and Chicago bumped New York from its monopoly
position as the base of the National Banking System’s inverted pyramid,
and the two newcomers gained an alarming share of the percentage of total
deposits of all three cities from 1880 to 1912. [4]
For bankers and government alike, the ideal monetary situation would seem to
be a permanent state of specie suspension; even better would be a world in
which everyone thought of money as only paper or deposits redeemable in
paper, with specie relegated to the status of a collector’s item. The
ideal in banking would be a government-enforced banking cartel that would
ensure a uniform rate of monetary inflation to prevent currency drains and
bank runs. With this power it could inflate its way out of recessions and
bail out the big commercial banks as an emergency lender. And for its part,
the government would have a reliable market for its debt in peacetime and war.
To bring this about the big bankers leveraged the rising tide of Progressive
ideology. They began by hiring agents to promote the idea that banking crises
were the result of inadequate regulation and an “inelastic”
currency. As Rothbard has written, they formed an
alliance with trained economists and other opinion-molders, many of whom
already favored bureaucratic control of business from their exposure to Bismarckian statism while
acquiring their doctorates in Germany. In the U.S., the National Civic Federation, founded in 1900, became the chief forum for promoting the “the
new ideals of civic cooperation and social efficiency” for the purpose
of “correcting” the rampant individualism of American society.
The academics were eager to use the state to license membership into their
own professional organizations and thereby restrict competition and raise
members’ incomes. They also saw themselves acquiring lucrative grants
and filling vital government posts in running the bureaucracies. The public
already had a deep distrust of Wall Street’s enormous concentration of
wealth, and the task facing J. P. Morgan and other banking elites was to get
opinion-molders to convince everyone that the big bankers needed
public-spirited bureaucrats to reign in their power.
[5]
Their push for a central bank, initiated by Morgan and Rockefeller forces,
began following Republican William McKinley’s defeat of Democrat
William Jennings Bryan in 1896 and ended with passage of the Federal Reserve
Act in 1913. Bryan expunged the laissez-faire heritage of his party with his opposition to sound money and his proposal for a bold inflation of silver, an inflation that
circumvented the banking system. In his famous “Cross of Gold” speech, Bryan said his party was “opposing the national
bank currency” and stood “against the encroachments of aggregated
wealth.” McKinley campaign manager Mark Hanna had no trouble raising a record amount of money from the Morgan-Rockefeller
alliance to defeat Bryan.
Though the McKinley victory secured the gold standard, gold served mostly as
a camouflage behind which the elite bankers could set up a system of
inflation they controlled. [6]
A Banker’s Dream Comes True
When the next fractional-reserve breakdown occurred in 1907, Thomas Woodrow
Wilson, then president of Princeton, endeared himself to the banking movement
by declaring 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.” [7] Colonel Edward Mandell
House, a close Morgan associate who served as shadow president when Wilson
was elected to the White House, became the “unseen guardian angel of
the [banking] bill” that emerged in 1913. [8] Originally drafted at a secret meeting of banking elites at Morgan’s hunting lodge on Jekyll Island,
Georgia in November, 1910, the Glass-Owen Bill, as it was finally called,
overwhelmingly passed the House and Senate on December 22, 1913 and was
signed into law by Wilson the following day. [9] The Fed began operations in
November, 1914, with Morgan men occupying key positions.
The new law gave the bankers what they wanted: a monopoly of the note issue.
Commercial banks could only issue demand deposits redeemable in Fed notes or
nominally in gold. National banks were compelled to join the System but had
the legal option of becoming state banks, which were not required to join
though many state banks chose to do so in 1917 when federal regulations were
relaxed. [10] Critically, gold coin and bullion were moved further away from
the public when member banks shipped their gold to the Fed in exchange for
reserves. [11]
The inflationary potential of the system is revealed by its structure: The
Fed inflated by pyramiding on its gold, member banks by pyramiding on its
reserves at the Fed, and nonmembers by pyramiding on its deposits at member
banks. Furthermore, after a few years the Fed began withdrawing fully-backed
U.S. Treasury gold certificates from circulation and substituting Federal
Reserve Notes instead. With Fed notes requiring only 40 percent backing of
gold certificates, more gold was available on which to pyramid reserves.
Also, with the advent of the Fed, reserve requirements for demand deposits
were cut approximately in half, moving from a 21.1 percent average under the
National Banking System to 11.6 percent, then lower still to 9.8 percent in
June, 1917, after the U.S. had joined the war. Reserve requirements for time
deposits dropped from the same 21.1 percent average to 5 percent, then 3
percent in 1917. Commercial banks developed a policy of shifting borrowers
into time deposits to inflate even further. [12]
Thus, the country now had a government-privileged central bank called the
Federal Reserve. By hoarding gold as its pyramidal base, the Fed was weaning
the public from the use of gold coins, making them easier to confiscate later
on. Through the Fed, member banks would be inflating at a uniform rate to
avoid trouble with redemption demands.
Did this new system bring the big bankers in line? Did the Federal Reserve
Act provide “a circulating medium absolutely safe,” as the Report
of the Comptroller of the Currency of 1914 stated? How accurate
was the report’s
claim that
Under the operation of this law such financial and commercial crises,
or "panics," as this country experienced in 1873, in 1893, and
again in 1907, with their attendant misfortunes and prostrations, seem to be
mathematically impossible. [13]
Did the Morgan men running the banking
cartel create a better world for most Americans?
They indeed have if you believe wars, depressions, massive debt, depreciating
helicopter money, and unaccountable government constitute improvements in our
quality of life.
References:
1. See Thomas J. DiLorenzo, The Real Lincoln: A New Look at
Abraham Lincoln, His Agenda, and an Unnecessary War, Prima Publishing, Roseville, CA, 2002
2. Murray N. Rothbard, The Mystery of Banking, Mises Institute, Auburn, AL, 2008, p. 230
3. Carl Menger, Principles of Economics, Mises Institute, Auburn, AL, 2007, pp.
257-260; Ludwig von Mises, The Theory of Money and Credit,
The Foundation for Economic Education, Inc., Irvington-on-Hudson, New York,
1971, pp. 30-33.
4. Murray N. Rothbard, “The Federal Reserve as a
Cartelization Device,” from Money in Crisis: The Federal
Reserve, the Economy, and Monetary Reform, edited by Barry N. Siegel, San Francisco, CA: Pacific Institute for
Public Policy Analysis, 1984, pp. 91-93
5. Murray N. Rothbard, The Case Against the Fed,
Mises Institute, Auburn, AL, 1994, pp. 84-90
6. Murray N. Rothbard, A History of Money and Banking in the United
States: The Colonial Era to World War II, Mises Institute, Auburn, AL, 2002, p. 189
7. G. Edward Griffin, The Creature from Jekyll Island: A
Second Look at the Federal Reserve,
Fourth Edition, American Media, Westlake Village, CA, 2002, p. 448
8. Ibid, p. 459
9. Ibid., p. 468
10. Rothbard, Money in Crisis, p. 112
11. The Case Against the Fed, p. 119
12. Mystery, pp. 238-239
13. Annual Report of the Comptroller
of the Currency, December 7, 1914,
Vol. 1, p. 10
George F. Smith
Read his book : The
Flight of the Barbarous Relic
Visit his website
Read his blog
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