THE US FEDERAL RESERVE SYSTEM

George Porter

In writing this article it was assumed that readers will have already read the preceding article The Secret Government which provides background necessary for an appreciation of the nature and significance of the US Federal Reserve System. The System refers to the US Federal Reserve Bank as well as those banks that own the Federal Reserve itself.

The founding of the Federal Reserve, the Central US Bank, has proved to be one of the most significant events in world history. This single move resulted in the massive accumulation of wealth in the hands of a small number of individuals, financial institutions and corporations whose combined power allows them to exercise effective control of the US and the world economy, and in turn to exercise political leverage sufficient to determine the course of history.

While this overwhelming concentration of power continues, nothing can change the direction of the world economy. The world is not in the hands of a people-centred democratic system, but of a small oligarchy holding power and passing it on from generation to generation.

How to bring world government under democratic governance must become the central mission of civil society leaders over the next decade.

This whole question of the control of the world economy is a complex and fascinating subject. It has taken authors on the subject up to 600 pages to do justice to the issues involved. This article can do little more than summarise the main issues involved and whet your appetite to seek out one or more of the books listed in the bibliography at the end of this site.

Recently, there has been a flood of publications based on extensive research into the Federal Reserve System and those exercising control over world monetary policy. It is only recently that widespread interest in the history of the US Federal Reserve has been aroused.

The US Central Bank is a banking system in which a single bank has a monopoly on the issue of currency. It exists as a result of government favours which is the key to its power. Such a bank has a direct inflationary effect.

Pressure for a US Central Bank was building up around the turn of the 19th century. In 1908, President Theodore Roosevelt, responding to public concern over the continuing instability of the US monetary system and to lobbying by influential bankers, set up the National Monetary Commission to report on the establishment of a central bank to control the issue of currency, determine interest rates and related matters crucial to economic policy.

The leading bankers of the day supported the concept of a central bank, but they had their own agenda — a central bank with the power of a government bank, financed and owned by private interests under private control. Senator Nelson Aldrich, a leading banker, was appointed chairman of the Commission which duly recommended a central bank along the lines favoured by his accomplices on the Commission.

As a ‘central bank’ was not popular at the time, the term was dropped in favour of Federal Reserve, but a central bank it was to be. Capital was subscribed by a chain of new regional Federal Reserve Banks whose capital was subscribed to by private banks controlled by the same bankers who promoted the formation of a central bank.

The Federal Reserve, established in 1913, was made to look respectable by placing it under the control of a Board appointed by the President. The President appointed the Chairman to a 14 year term — a device to ensure his political independence. In effect, of course, the Fed was owned by the commercial banks that owned the shares. These were the five main New York banks. Also influential was the Bank of England whose shareholders owned the majority of the stock of the New York banks.

Accordingly, the Federal Reserve Bank of New York sets interest rates and directs market operations. It controls the daily supply and price of money throughout the US. Its stockholders are the real directors of the entire system and include the wealthy financiers who have controlled the US and world political and economic destinies since 1914.

The system now has deep roots worldwide through layers of secret societies such as the Mount Pelerin Society, the Business Roundtable, the Bilderburg Group, and the Freemasons, all based in London.

The original capital of US$143 million was subscribed by the shareholders of the Federal Reserve Banks. Only about one half was subscribed in cash, if at all — perhaps just book entries.

David Icke, in his book ‘. and the Truth Shall set You Free’. describes the Federal Reserve System in the following words:

The Federal Reserve is a cartel of private banks, of which the Bank of New York is the most powerful. To this day it controls the U.S . economy and thereby affects all of our lives. Through its U.S. offshoots and connections like J.P. Morgan and Kuhn, Loeb, and Co. the Rothschild empire controlled the principal New York banks and, through them, the Bank of New York. This gave them control of the Federal Reserve System and the American Economy. This Federal Reserve cartel is nominally controlled by the government-appointed Federal Reserve Board, which is another way of saying the Elite control it. The cartel lends money that doesn’t exist to the U.S. government and has thus ensured that the country — and therefore the people — are drowning in debt to the banks. By 1910, the behaviour of the banks had made them deeply unpopular with the people. The Elite had to think of a way of persuading the public to accept a banking coup on the American nation while thinking the power of the banks was being curtailed. So when the bill the bankers had written was introduced by their front politicians they publicly and vehemently opposed it. This gave the impression that the bill was bad news for the banks and it was passed into law in 1913, in the belief that it curtailed the power of the money manipulators. It didn’t. It gave them total control. Just to be safe, the Federal Reserve Bill was put before Congress shortly before Christmas, 1913, when many Congressmen were already at home with their families for the holiday.

Now the Elite controlled the U.S. government’s borrowing and interest rates, and it could create booms and busts whenever it wished. The way they introduced the Federal Income Tax was even more outrageous, although you have to admire their cheek. For this to be passed into law, it required the consent of at least thirty-six states because there had to be an amendment, the sixteenth, to the United States Constitution. Only two states agreed. In a democracy you would think this bill would be ditched. Not so. This is no democracy! The Secretary of State, Filander Knox, informed Congress that the necessary agreement had been achieved and Federal Income Tax became ‘law’. Or rather, in reality, it didn’t. The Internal Revenue Service (IRS), the private company which collects Federal Income Tax and takes away the property of those who do not pay, has been stealing from the American people for decades and continues to do so. The forced collection of Federal Income Tax is illegal to this day. It was never properly passed into law.

The power over political and human events on this planet was increased by leaps and bounds as this funny money system expanded its grip on the world. This gave the Elite’s bankers the power to manipulate wars and revolutions, almost at will, in league with other elements within the Brotherhood network, which expanded and became even more focussed on its goals during the same period that the banking system emerged.

Edward Griffin in his book The Creature from Jekyll Island has also highlighted the manipulative cunning of the banking cartel:

The final solution on behalf of the banking cartel is to have the federal government guarantee payment of the loan should the borrower default in the future. This is accomplished by convincing Congress that not to do so would result in great damage to the economy and hardship for the people. From that point forward, the burden of the loan is removed from the bank’s ledger and transferred to the taxpayer. Should this effort fail and the bank be forced into insolvency, the last resort is to pay off the depositors. The FDIC is not insurance, because the presence of moral hazard makes the thing it supposedly protects against more likely to happen. A portion of the FDIC funds are derived from assessments against the banks. Ultimately, however, they are paid by the depositors themselves. When these funds run out, the balance is provided by the Federal Reserve System in the form of freshly created new money. This floods through the economy causing the appearance of rising prices but which, in reality, is the lowering of the value of the dollar. The final cost of the bailout, therefore, is passed to the public in the form of a hidden tax called inflation.

Tools of the Trade

In economists’ and bankers’ talk, the official purpose of the Federal Reserve, as enshrined in the Federal Reserve Act, is to provide elasticity to the supply of money: to increase supply, to counter underlending and, conversely, decrease supply to counter overlending.

The Federal Reserve has three main tools to help it provide such elasticity. The first is the power to raise or lower the ‘reserve ratio’ which determines the amount of money banks must hold in reserve to meet their obligations to their borrowers. For instance, if a bank has $100,000 and the reserve ratio is set at 20%, the bank must hold $20,000 in reserve in case its depositors want their money back. Whereas previously, the reserve ratio had been raised in times of over-lending to encourage banks to reduce lending, the Federal Reserve lowered it, and has kept it to a steady 16 or so percent ever since. But even this can be avoided by banks through the use of the Federal Reserve Market. The ‘Federal Reserve Market’ refers to bank to bank borrowing of surplus reserves to meet the Federal Reserves weekly audit of banks’ reserve ratios. If a bank has lent too much, it simply borrows from a bank which has a reserve surplus, or from the Federal Reserve itself. Such loans are only temporary, usually overnight, and their purpose is simply for the sake of keeping up appearances.

The Federal Reserve’s two other tools for controlling seasonal and cyclical elasticity are the ‘discount rate’ and ‘direct market operations’.

The discount rate is the rate at which the Federal Reserve sells or lends money to banks. In theory the rate should be lowered when business is good to prevent banks from over-lending, and then raised again when economic times are bad to prevent them from lending too little. Hence, in theory, when economic times are good, banks don’t over-lend and cause inflation, and when economic times are bad banks keep lending to keep the wheels of the economy turning to speed recovery.

In practice, the so called ‘discount window’ has, with few exceptions, always been jammed wide open, allowing banks to buy and borrow money cheaply. In this process cheap Federal Reserve money is multiplied many times over through inter-bank lending and borrowing. In Secrets of the Temple: how the Federal Reserve Runs the Country. William Greider gives the following description of this process.

If the Fed injected $1 billion in new reserve deposits, the banking system could immediately commit $840 million of it to new loans, setting aside 16 percent to satisfy the reserve requirement. The $840 million in new loans would instantly create $840 million in new deposits. It didn’t matter which banks got the deposit accounts; the new deposits would immediately be the basis for new lending. The banks would set aside 16 percent of the $840 million and lend out another $706 million. Those loans would immediately become new deposits again and permit still more new lending, another $593, and so on in diminishing sums. This multiplying process in which new credit became new money continued until the banks exhausted the additional lending capacity created for them by the new reserves added by the Fed. The original $1 billion injected by the Federal Reserve became more than $5 billion in new deposits.

Open market operations involve injecting money directly into the economy to enable borrowers to pay back old loans and take out new loans. The Federal Reserve does this by buying government securities, such as bonds, from non-bank sources. Hence, a government bond which deprived the economy of a thousand dollars in return for only fifty dollars interest per year, can, in theory, be converted back into a thousand dollars again.

How the Federal Reserve pays for the government securities it buys is especially interesting. It uses the securities it buys as assets to offset the cost of buying them in the first place.

Hence, the Federal Reserve can afford to buy as many government securities as it likes because it can balance the liability incurred by buying them against their worth, or, to put it more simply, pay for what it has bought with what it has bought.

So the Federal Reserve effectively buys government securities with money it never had in the first place. Even bankers will refer to such transactions as magic and alchemy; they would certainly be deemed illegal if practised by a private enterprise.

But in reality open market operations simply mask an even uglier truth. Whenever the United States government wants to spend or pay back more money than it has, it simply prints more. It does this indirectly through the Federal Reserve but the effect for the average American is the same, inflation.

This is how it works. The government wants more money so it prints off some bonds which it sells to the public and other non-bank sources. Demand is high for government securities, so the government not only sells all the bonds it printed, but gets a good price for them as well. The reason why demand is so high is that the Federal Reserve will in turn buy these bonds off the people who originally bought them from the government, for more than they were originally worth. It will also buy bonds directly off the government when supply threatens to exceed demand and lower prices.

It may now come as no surprise that the Federal Reserve is the biggest buyer of government securities. And since supply regularly outpaces demand, this inevitably creates more money than existed in the first place as the Federal Reserve pays for bonds without diminishing its own reserves of money, but makes the unseemly spectacle of printing money to pay off bills invisible. Hence the cause of inflation is conveniently hidden.

The speculative buying and selling of government securities to the Federal Reserve has become so profitable that the ‘government securities market’ is now the largest financial market in the world. So what appears to be a way of directly supplying the real economy with cash has also, to some extent, become a way of supplying government security brokers and speculators with yet more paper profit.

By now a general theme should be emerging; the ‘reserve ratio’, ‘discount rate’ and ‘open market operations’ have not been used to counter harmful expansions of lending, as was officially intended. A low reserve ratio and a high discount rate have allowed banks to borrow and lend to their heart’s content while open market operations have allowed the United States Government to pay its bills by artificially increasing demand for its bonds and other securities. The ultimate result of this is inflation. While the banks can compensate for inflation by buying and borrowing greater amounts of cheap money (which, incidentally, causes even more inflation) and increasing loan interest rates, the average American cannot. Hence, as the amount of money in circulation grows, so the proportion of money owned by the average American decreases.

Another important factor should not be overlooked here. The United States Government is selling debt (government securities) to get out of debt; trading its way out of short term debt by creating even larger long term debt. Each year it must sell more bonds than it sold in the previous year, to pay out the interest owed on the growing generations of older bonds. Each year the Federal Reserve must buy more bonds than it bought in the previous year, creating more money than existed before.

A Lasting Contribution to History

The Federal Reserve’s most famous contribution to world economic history was the Great Depression. In the roaring twenties, contrary to the expectations of those who were told that the Federal Reserve would encourage investment in the real economy and, conversely, discourage over investment on Wall Street, farmers continued to struggle to survive under high interests rates while the supplies of money which should have increased demand for their commodities poured into Wall Street.

When, on top of this, the Federal Reserve simultaneously lowered the discount rate, and bought $340 million worth of government securities, most of the resulting glut of money inevitably ended up on the New York Stock Market, causing the bubble that had been built up over the previous decade to burst.

As the New York Stock Market crashed in 1924, vast sums of investors money simply disappeared, depriving the economy of investment. Banks raised their interest rates to make up for their losses, discouraging borrowers. Then, when even conventional Federal Reserve wisdom would have suggested that a massive injection of money was needed to keep the economy’s monetary circulation from collapsing, the Federal Reserve sat back and did absolutely nothing. The Federal Reserve Board of Governors decided, instead, to let economic natural selection take its course. Consequently, the Great Crash turned into the Great Depression.

Why did the Federal Reserve sit back and watch such hardship unfold; why didn’t it counter the imbalance which it had been responsible for creating in the first place?

The answer is that the crash was inevitable, there was simply too much money with nowhere to go. But this did not mean that the banks of the Federal Reserve System, the supposedly vital organs of the economy, had to suffer. The greed which spread from loan happy banks to borrowers was paid for by the borrowers, while the banks, always ones for making the best out of every opportunity, bought what was still worth buying at bargain basement prices.

Economic natural selection or survival of the fittest in this case meant survival of the bankers. This explains why the major New York banking houses came out of the depression owning more of the United States economy than ever before while the majority of Americans and came out of the depression owning less than ever before.

Superficially, the fact that even banks went broke during the Great Depression seems to contradict this explanation but most of these broke banks were banks who had either been foolish enough not to join the Federal Reserve System in the first place, or too small in the scheme of things to matter, such as the small rural banks of the United States hinterland.

Over-lending has become so institutionalised that many banks seem to lend intentionally to borrowers who cannot afford to pay them back, in the hope that the government will bail out their client with government-backed loan guarantees. In The Creature from Jekyll Island. a classical example is summarised as follows.

In 1970 Penn Central Railway became bankrupt, the banks which loaned the money had taken over its board of directors and had driven it further into the hole, all the while extending bigger and bigger loans to cover the losses. Directors concealed reality from the stockholders and made additional loans so that the company could pay dividends to keep up the false front. During this time, the directors and their banks unloaded their stock at unrealistically high prices. When the truth became public, the shareholders were left carrying the bag. The bail-out, which was engineered by the Federal Reserve, involved government subsides to other banks to grant additional loans. Then Congress was told that the collapse of Penn Central would be devastating to the public interest. Congress responded by granting $125 in loan guarantees so that banks would not be at risk. The railway failed anyway, but the bank loans were covered.

The US Federal Reserve System has facilitated control over the world economy by the ‘Elite’. In the process, through causing inflation and the oversupply of money, there has been, and will continue to be, a massive transfer of ‘wealth’ to those who are already rich, at the expense of the rest of society. The gap between the excessively wealthy and the poor is escalating and will continue to do so while the current economic ‘system’ continues.

The world economy is, accordingly, unstable and at risk.

Who Pulls The Strings

The initial drive to create an American central bank came from Europe, where old banking dynasties such as the House of Rothschild had profited greatly from the existence of central banks such as the Bank of England, Banque de France and Reichsbank of Germany.

Paul Warburg, a representative of the Rothschild banking dynasty, came over to America from Germany and became the unofficial architect of the Federal Reserve. His blue-print for the Federal Reserve was elaborated and discussed with other bankers on a private island owned by J. P Morgan .Jr, who, in addition to being a member of the global banking elite in his own right, was also a representative of the interests of the House of Rothschild in America.

Morgan once directed the Council on Foreign Relations, a branch of a secret society dedicated to British cultural and political supremacy, and insisted that his junior partners show allegiance to Britain in their financial dealings.

Benjamin Strong, Morgan’s protйgй and one of the bankers present at the highly secret meeting on Morgan’s private island, became the first Governor of the Reserve Bank of New York (he was the joint nominee of Morgan and ‘Kuhn, Loed and Company’, the Banking house which Paul Warburg had joined upon arriving in America). Within a relatively short time this branch of the Federal Reserve became its unofficial headquarters. When Norman Montagu became the Governor of the Bank of England, he and Strong joined forces, frequently visiting one another and spending their holidays together.

In 1927 Norman secretly came to Strong with a problem. While he could instantly flood the underground vaults of the Bank of England by pressing a button on his desk in the event of an attempted theft, he could not stop the Bank of England’s gold reserves from being whittled away by a high American dollar and interest rates. A higher American dollar and interest rates encouraged gold owners to, in effect, take their gold out of the Bank of England’s vaults and deposit it in American banks instead. Strong agreed to reverse this trend by causing inflation to erode the strength of the American dollar.

Hence the Federal Reserve simultaneously lowered the discount rate, and bought $340 million worth of government securities at a time when a glut of money already existed, which caused gold to flow back to England and inadvertently (or so we are lead to believe) caused the stock market crash which sparked off the Great Depression.

The US Federal Reserve system has facilitated control over the world economy by an ‘Elite’. In the process, through causing inflation and the oversupply of money, there has been, and will continue to be, a massive transfer of ‘wealth’ to those who are already rich at the expense of the rest of society. The gap between the excessively wealthy and the poor is escalating and will continue to do so while the current economic ‘system’ continues.

The world economy is, accordingly, unstable and at risk.