The debate over central banking was waged throughout the history of our republic but it wasn’t until the coup of 1913 that we were cursed with the Federal Reserve (the Fed), which continues to harm us down to present day through its inflationary policies.

A brief and basic introduction to the topic of both fractional reserve banking and central banking is required before reviewing the history of the birth of the Federal Reserve. Banks have, throughout history, been given privileges by government to lend out more money than they actually have on hand – that is, they can lend out money while keeping only a fraction of what they lend out available on reserve. This process results in the banks being able to collect interest on money that does not actually exist. Therefore the banks receive much higher profits than they would if they were allowed to loan out only what they had available. The state involvement in the process gives protections to the banks for what, in any other profession, would be considered fraud. In addition, once the government creates a central bank to act as a “lender of last resort,” it enables the government to manage the artificial expansion of credit through a pyramid fractional reserve scheme and use this newly created money to fund government action. This credit expansion has the direct effect of increasing or “inflating” the money supply. The new money pumped into the system eventually loses value which causes the purchasing power of the currency to degrade over time. The process of inflating the money supply is beneficial for government because it allows them to raise revenue for themselves through means other than direct taxation therefore masking what is actually taking place.

Since our nation’s inception, there were usually two sides to the debate over central banking. One side included advocates of a limited national government restrained by the Constitution who argued for a currency redeemable in specie (hard commodities), usually gold and silver, with as little government involvement as possible. In the early days of our Republic, they were referred to as Jeffersonian Republicans and in later years as Jacksonian Democrats. Regardless of the name, their message was mostly the same — government was not to be trusted with something as powerful as control of the money supply and a monopoly on the nation’s currency. Austrian Economist Murray Rothbard recounts this libertarian tradition of the early republic.

“The Jeffersonian and Jacksonian movements, … explicitly strived for the virtual elimination of government from American life. It was to be a government … without debt and with no direct federal or excise taxes and virtually no import tariffs — that is, with negligible levels of taxation and expenditure; a government that does not engage in public works or internal improvements; a government that does not control or regulate; a government that leaves money and banking free, hard, and uninflated; in short, in the words of H. L. Mencken's ideal, ‘a government that barely escapes being no government at all.’” (Emphasis added)

On the opposing side of the debate were advocates of a strong national government that was empowered to vigorously intervene in the domestic economy. These proponents felt that a more “liquid” (read – more easily inflatable) money supply would assist in funding the mass expenditures required for such “robust” government action. They were known as Hamiltonian Federalists in the early years and were later called Whigs and Republicans before the inflationist view came to dominate both sides of the debate toward the end of the 19th century.

It was at the dawn of the early 20th century that our nation’s banking structure was effectively cartelized by the passage of the Federal Reserve Act. The National Banking System, put in place shortly after the Civil War, left the leading Wall Street bankers frustrated because it lacked the centralized control they sought as well as a much desired “lender of last resort.” The problem wasn’t that they couldn’t inflate their money supply under this structure. They could and did. Rather it was that when the bills came due and people started calling on banks to redeem their deposits, many faced the prospect of bank runs due to their insolvency. Wall Street bankers also saw their influence erode under the system as state banks and other cities became more powerful in the financial world. To counteract these developments, Wall Street sought the creation of a central bank to centralize everything under their control.

The establishment view of the history of the creation of the Fed tells us that an “impartial” authority, such as the Fed, was needed to curb the various commercial banks from over-expanding, but in reality, it was nothing more than an effort to coordinate the inflation without incurring any penalties and to eliminate market competition. Anyone interested in the subject is encouraged to read Murray Rothbard’s The Case Against the Fed, which is available for free online. As Rothbard explained, “Rather than to create an institution to curb their own profits on behalf of the public interest, the banks sought [the Fed] to enhance their profits by permitting them to inflate far beyond the bounds set by free-market competition.”

How were the special interests on Wall Street going to accomplish this when a majority of Americans distrusted centralization of power as well as the big banks? The bankers found their salvation in the Progressive Era that was manufactured by the special interests in an effort to cartelize business and industries across America. Again, Rothbard explains, “It should be clear that the Federal Reserve System, established in 1913, was part and parcel of that Progressive movement … the big bankers cartelized banking through the Federal Reserve System.”

In order to accomplish this, the special interests that still dominate our nation today formed an alliance with the establishment “opinion-molding classes” –  media, academia, philanthropists, etc. – which were already highly statist in nature (statist meaning belief in the use of government force to effect societal change). The propaganda was that government action was required to save the free market and more government controls needed to protect the public interest. Even though these new initiatives were being promoted by the very same special interests, Big Banking, which they were supposed to protect the common individual against, the public was told that these leaders were simply enlightened and acting in the best interest of the public.

The special interests, now firmly in control of both major parties, faced little political resistance to achieving their goals. Senator Nelson Aldrich was tasked with writing the bill although he had help from the very Big Banks who worked so hard to enable the legislation. The famous J.P. Morgan set up a lush retreat for the project at an exclusive club in Jekyll Island, Georgia. Using assumed names and under a cloak of secrecy, Aldrich and a handful of influential companions took a privately chartered railroad to the event. The attendees looked like a who’s who list of the Wall Street banking elite. What they created there was to eventually become the Federal Reserve Act of 1913.

So, is it too sensational to refer to the creation of the Fed as an American coup? Before answering that, consider this quote from big banker A. Barton Hepburn speaking to the American Bankers Association about the Federal Reserve Act in late August 1913:

“The measure recognizes and adopts the principles of a central bank. Indeed, if it works out as the sponsors of the law hope, it makes incorporated banks together joint owners of a central dominating power.” (Emphasis added.)
 

Patrick Krey, M.B.A., J.D., L.L.M., is an attorney in New York.

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Pat Henry said:

End the FED ... while ignoring it in practice Yes, we must educate the public and lobby Congress to obey the Constitution ("shall not emit bills of credit" - enshrining the lesson learned from the fiat paper "Continental"). But at the SAME time, we can take voluntary action to make the Fed irrelevant even if Congress won't listen. In his article on the Continental (excellent short history at http://www.mises.org/story/2340 ), Thomas Woods shows that the Continental contained the seeds of it own destruction. And that, because colonial America understood and refused to use Continentals (or valued them properly). We can do likewise. How? Begin to use gold, silver, copper, platinum, etc. (specie) in payment for goods and services, and contract to receive the same for what you produce of value. Make an end run on the Federal Reserve Note, and it will fall to its rightful value. A calculator to help affect this in terms of current nominal price fluctuations (because folks are still accustomed to using falsely-named FRN "dollars") is found here: www.SilverAndGoldAreMoney.com . Those who do this before the inevitable price inflation gets down the pipeline stand to gain the most. At least, you will lose less than waiting until the devaluation of your dollar-denominated assets reaches half of less of current value (based on the guvmint having already doubled the currency, equal to the current GNP ... and counting).

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June 26, 2009
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Pat Henry said:

What can they do if we ignore them (as they deserve)? If you get likeminded individuals to already start trading in gold and silver, the inflation that devalues your "dollars" (because prices rise to consume it) will not affect you! "Specie" retains actual value. A well-tailored man's suit cost about a troy ounce of gold in Washington's day, in Lincoln's day, in FDR's day, and even in Obama's day today. That's because the value of materials and labor and desirability is roughly the same - and the gold's actual value is roughly the same, in real terms (not "nominal" terms that FRN "dollars" falsely impress upon us). While you must still keep (or trade back into) enough "dollars" at hand to pay your taxes, you can make voluntary contracts between buyers and sellers to pay each other in silver and gold. http://www.silverandgoldaremoney.com/ gives a daily-updated calculator that makes it easy to convert FRN "dollar" prices into specie value. And Goldmoney.com gives a way to make electronic transactions based on actual gold holdings kept secure in an audited vault.

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June 26, 2009
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Pat Henry said:

	JBS can lead here too ShopJBS could help take the lead in ending the use of inflatable Federal Reserve Notes by making payment through GoldMoney.com a visible option. Further, keeping holdings there would reduce exposure to hyper-inflation - before it hits prices fully. See http://goldmoney.com/index.html for details.
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