|Federal Reserve System|
It was a conspiracy theorists’ dream come true: a group of wealthy bankers, supported by academics and politicians, skulking off to a secluded island to concoct a complete transformation of the U.S. banking system. The meeting in November 1910 on Jekyll Island, Georgia, which established the blueprint for the Federal Reserve System, played to long-held Populist fears of “Eastern Money Interests,” Jews, and large banks. When the plan was presented to Congress, it effectively increased the authority of the federal government—at least, indirectly—over the nation’s banking system.
Ever since concerns about “foreign interests” in the First and Second Banks of the United States, some Americans had viewed banks suspiciously. Writers such as William Gouge and politicians such as Thomas Hart “Old Bullion” Benton advocated a metallic standard of gold and silver coin only. These “hard money” proponents supported Andrew Jackson’s “war” on the Bank of the United States and distrusted all forms of paper money.
Although “hard money” advocates were in the minority in most states, they appealed to farmers and laborers who distrusted moneyed elites. After the Civil War, ironically, this same distrust evidenced itself in a demand for paper money (“Greenbackism”) and/or for coinage of silver, a position best associated with William Jennings Bryan.
By the late 1800s, however, although most Americans were satisfied with the nature of the banking system, they realized that important weaknesses existed. The banking system was not sufficiently “elastic,” meaning that it could not expand or contract the money supply when economic conditions changed.
Another concern for those familiar with the financial sector was that in several panics—1873, 1893, and 1907—a single banker, J. P. Morgan, had stepped in with a consortium of bankers to rescue the system. After the 1907 panic, even Morgan admitted that any future bank runs might be beyond his ability to contain.
A series of commissions and studies by the American Bankers Association and the federal government produced a number of recommendations, most notably the need for a central bank and nationwide interstate branch banking. (Many states did not permit intrastate branch banking, and interstate branch banking was viewed as illegal, although no express challenges to interstate banking had occurred.)
Virtually all of these studies concluded that any reforms in the banking system would require a powerful national bank capable of acting as a “lender of last resort” and tasked with providing liquidity to the banking system as a whole to allow for greater “elasticity.”
An unstated, but widely held, goal of many of the reformers was also to limit or reduce the power of the New York banks, such as National City Bank, J. P. Morgan, and Kuhn, Loeb, and Company. Despite the fact that Morgan himself and most of the officers of National City were Protestants, a widely held suspicion existed in the rural United States that the New York banks were dominated by Jews. (The presence of Paul Warburg of Kuhn, Loeb among the Jekyll Island group of “conspirators” reinforced the fear of “powerful New York Jews.”)
|Federal reserve building|
Whether many Americans indeed feared a Jewish element in the “money power” or not, a popular conception was that banks in New York wielded inordinate power. Thus, the reformers’ plans also involved different strategies for minimizing the influence of the New York banks.
By 1913, the United States had what is termed a “dual banking” system consisting of state-chartered banks (which could not issue money), and national banks, chartered by the federal government, which could issue banknotes. The comptroller of the currency had authority over all national banks, while state authorities (bank examiners and such) supervised the state banks. There was no central bank or “lender of last resort,” or any national source of credit expansion.
Following J. P. Morgan’s formation of a consortium of banks to bail out the banking system during the panic of 1907, concerns arose over the “consolidation” of banking power, especially in New York. Congressman Arsene Pujo’s House Banking and Currency Committee, which convened in 1911, investigated Morgan and First National’s George F. Baker, and concluded that New York banks controlled far more financial assets than they actually owned through various investments, interlocking directorates, and trust companies. New York, Pujo claimed, controlled 43 percent of the money in the United States.
When the Jekyll Island meeting took place, all of these concerns played upon the reforms to which the participants agreed. The central individuals who drafted the basis of the Federal Reserve Bank system were Senator Nelson Aldrich (head of the National Monetary Commission); Henry P. Davison of J. P. Morgan; Charles D. Norton of First National Bank; Paul Warburg of Kuhn, Loeb; and Colonel Edward House (one of President Woodrow Wilson’s closest advisors).
Not only was this a small group, but conspiracy-minded people could point to the fact that Warburg was Jewish, or that House had connections to London banks and that he had written a futuristic novel Philip Dru, Administrator, a story in which Marxist socialism triumphed. Worse, the meeting took place in secret. Aldrich, especially, was concerned that if a plan was not drafted in secret, “special interest” lobbyists would nitpick it to death.
Aldrich’s presence convinced some that John D. Rockefeller was manipulating the meeting. Morgan, according to one conspiracy view, was a “Rockefeller stooge”—an astonishing claim about one of the richest men in the world. Morgan controlled the Fed bill through Aldrich, his “floor broker in the Senate”.
Rockefeller then used the Fed, according to this view, to “bankroll” the Bolshevik Revolution in Russia, manipulate stock prices through inflation, and push the agenda of the Council on Foreign Relations (CFR) and Trilateral Commission in later years.
There is no question among historians that the Jekyll Island meeting resulted in the essence of the Federal Reserve Act, introduced by Congressman Carter Glass of Virginia, chairman of the House Committee on Banking. Far from being drafted in secrecy, the Federal Reserve Act was debated extensively and was subjected to much compromise before being passed overwhelmingly by the House (298 to 60) and the Senate (43 to 25).
Under the act, twelve Federal Reserve District Banks were established in different regions across the United States. Each of these banks was a corporation owned by the member banks in its district, and while all national banks had to be members, state banks were not required to join the Federal Reserve System.
Member banks had to place 6 percent of their capital and surplus in the district bank. One of the significant factors of the act was the location of the district banks: New York, of course, had one, as did Philadelphia and Boston.
But Minneapolis, Dallas, San Francisco, Chicago, Atlanta, Cleveland, and Richmond all had district banks, and the state of Missouri—the heart of the Midwest—had two (St. Louis and Kansas City). Clearly, Congress had gone out of its way to dilute the “money power” of New York.
Any district bank could act to stop runs by providing emergency cash from its vaults, and in theory, if one entire district was in trouble, other districts would come to its aid. The “elasticity” problem was addressed through the Fed’s manipulation of discount rates to lend money to member banks to either expand, or contract, credit.
In reality, though, New York retained its power through its overall influence, its dominant leadership, and its connections to corporate America. Congress intended that a Federal Reserve Board of Governors should be instituted, made up of five members appointed by the president and confirmed by the Senate, as well as the comptroller and the secretary of the Treasury.
The Banking Act of 1935 changed this by moving key decisions to the Federal Open Market Committee, composed of seven members of the Board of Governors and five of the twelve district bank presidents, including the New York president.
The Federal Reserve Act was established on the assumption that the nation’s money supply would remain tied to gold, and thus its open-market activities were always balanced with an eye toward the gold stockpiles. When the stock market crashed in 1929, many contended that the Federal Reserve had encouraged the stock market “boom” by providing “easy credit.”
Subsequent research has shown that if anything the Fed failed to expand the money supply in proportion to the rapid growth in the industrial sector, and that a slow but destructive deflation had occurred. After 1930, the Federal Reserve engaged in a deliberate massive credit contraction that helped plunge the nation into the Great Depression, still under the assumption that the Great Bull Market had resulted from “loose money.”
The contraction also ensued, however, because as other nations left the gold standard, and as the gold backing of U.S. banks eroded, depositors withdrew funds at an alarming rate. President Franklin Roosevelt took the United States off the gold standard, stabilizing the banks. But his prohibition of individual gold ownership in 1934 was viewed as part of the conspiracy to place all financial power in the hands of the Federal Reserve System.
The entire gold standard controversy pits a number of conspiracy theories against one another. For example, if the Bank of England sought control over the U.S. economy, it might have attempted to weaken the economy by leaving the gold standard. With the United States left as the only nation in the world whose currency was still tied to gold, U.S. gold reserves would have flooded out, and U.S. banks would have collapsed—as nearly happened.
On the other hand, the solution, and the path taken by Franklin Roosevelt, was to secure the banking system’s gold asset base by prohibiting individual gold ownership, except for jewelers and dentists. Yet this is viewed by other conspiracy theorists as evidence of Roosevelt’s plan to centralize the economy and make citizens dependent on worthless paper money.
In fact, only a perfectly coordinated international conspiracy, assisted by the deliberate actions of totalitarian states that hated each other—Germany and the Soviet Union—could have possibly manipulated such events. Not only would the Bank of England and the Federal Reserve System have needed to operate in unison, but so would the Bank of France, the Reichsbank, and virtually every other central bank in the world, all coordinating vastly different command-and-control structures, governance systems, and national goals.
Over these conspiracies, one can stretch yet another layer, namely that of “international Jewry,” which was manipulating economic developments to its own ends, some in concert with, and some antithetical to scenarios involving the British or a Roosevelt dictatorship.
Since World War II, some have been convinced that the Federal Reserve’s open-market activities were designed to ensure that those presidents favored by the Fed maintained their office, and those who displeased the Fed lost theirs. Despite the Fed’s supposed independent status, many argue that it has conveniently lowered rates to support the economy of leaders to whom it was favorably disposed.
Yet one of the most despised presidents of modern times, Bill Clinton (whom conspiracists have accused of being a “Trilateralist and Bilderberger”), witnessed multiple interest-rate hikes by the Fed during his two-term presidency. Thus, either he had no control over the Fed, or the Fed was working in direct opposition to the ends of the Trilateral Commission, the Council on Foreign Relations, and the Bilderberger group.
In the post–World War II era, the Bretton Woods agreement pegged foreign currencies to the dollar, and although the dollar was legally required to be convertible into gold, it was nevertheless pegged to gold in price. That system collapsed in 1968 after consistent federal budget deficits made it impossible for the dollar to hold its value. After that, the world’s currencies entered a more competitive era in which they “floated,” or competed, against each other.
A more consistent criticism of the Federal Reserve is that it has virtually eliminated gold and silver coinage, supposedly in violation of the Constitution. With all paper money in the control of the federal government, the economy would be at the mercy of either the White House or the Fed, and individuals would become slaves to “fiat money.” For more than two decades after the Great Depression, the prohibition against holding gold remained in place, but in the early 1970s, the government once again allowed individuals to buy and sell gold coins.
Although the value of Canadian Maple Leafs and other popular gold coins fluctuated wildly with the price hikes in oil emanating from OPEC, in the 1980s the Fed’s anti-inflation policies nearly eliminated any premium on gold. For the next twenty years, gold hovered steadily at historically low prices, causing consternation among those who pointed to gold as a key indicator of government-generated inflation.
If anything, the Fed has consistently lost control of the banking system and seen its influence over the economy weakened. The appearance of electronic funds transfers and high-speed satellite transmissions made information on financial markets available anywhere in the world, instantaneously.
No government could hide weaknesses in its monetary or fiscal policy for more than a few hours. Meanwhile, the speed of banking transactions brought the United States— and the world—increasingly closer to competitive money, if not in actual paper form, at least in electronic form and in credit/debit card substitutes.