Journey to Jekyll IslandSubmitted by Goldspan on Sat, 10/12/2013 - 05:35
Those that follow Ron Paul, we obsess with the thought of the day in which the Creature will meet its maker, a United States Congress with the back bone to drive the final stake through its heart. Unfortunately the Maker maybe be worst then the Creature. Many of us were introduced to the corruption of the Federal Reserve System when G. Edward Griffin published his wonderful work The Creature of Jekyll Island. He described the elite banking interested that boarded a train for Georgia on Nov. 22, 1910 as the men who seized America’s economy. But what motivated these men to the point that they willing to meet in such a clandestine manner in such a faraway placed? Was it as simple as good old fashion greed? Was it their place in a more surreptitious plan? Or could it be at the hands of a demiurge, a subordinate deity who is the creator of the material world? What was happening in the world that moved them to act now? Was this the first time they met or was it to be the time to put the plan into action. In order to know you have to set the stage…..what was going on at this time?
Prior to the Civil War there was a period of hard money and free banking after the charter of the Second Bank of the United States had lapsed without congressional approve to renew it. What was known as a time of liberty from the State corruption of the national banking system was short lived with the onset of war.
War is an expensive business and governments are always under the strain to fund these expeditions. The Republican administration and congress met these challenges by passing two important pieces of inflationary banking legislation to alleviate the burden.
The first was the introduction of the Greenback. This was a purely fait currency that was printed and spent directly into the economy by buying the armament and supplies of war. Once in the economy, these Greenbacks would depreciate by half and took until 1879 to be replaced by a gold standard.
The second was to set up a loosely ordered cartel of National Banks that were given the privilege of issuing National Banks Notes. These National Bank Notes became legal tender and the reserve base upon which the State Charted Banks could inflate. Because the National Banks were protected by law, that all National Banks Notes were redeemable at par and did not have to be redeemed in species, they were free from market forces that would have restricted the over issue of bank notes.
The National Banking Acts of 1860’s, as usual with a cartel, destroyed the free market competition and the depreciating deposits of shaky and inflationary state issued bank notes. The federally chartered National Banks, mainly centered on Wall Street, concentrated the issue of bank notes in the hands of a few large banks. The main goal of this act was to create a single national currency and to eradicate the problem of notes from multiple banks circulating all at once. The National Banking Acts served to create the (federal-state) dual structure that is now a defining characteristic of the U.S. banking system and economy.
Under the provisions of this system a grant of authority to operate a bank in the newly established National Bank System was issued as long as all agreed to meet certain capital and other regulatory requirements. While the right to issue such notes was discretionary with the bank, rather than mandatory, a federal charter was quite literally a license to create wealth and money from nothing. At the same time, the issuing privilege had the effect of creating new money that hadn’t existed before, i.e. it made possible an increase in the money supply to finance war needs. But just how does this relate to the needs of the government to finance its war operations?
The National Currency Act was a provision that enabled the National Banks to purchase federal government bonds and then federally chartered banks could then issue their own money. The security for this pledge was the value of the federal bonds purchased by the issuing bank, which was authorized to print National Bank Notes up to 90% of the value of the federal securities left on deposit with the government as security to back the bank issues.
Because the National banks could now issue currency locally (or create loans) the local economy did not suffer in a contraction of the money supply when the National Banks purchase treasury bonds. This allows the National Banks to collect interest on the same money twice, providing a considerable incentive to actually issue National Bank Notes.
To further control the currency, the Act taxed notes issued by state and local banks, essentially pushing non-federally issued paper out of circulation. But this did not discourage the State banks from participating in the inflation. Because National Banks Notes were considered backed by the purchase of the treasury bonds of the National Banks, the State Banks could use the National Bank Notes as a reserve to further inflate their business through loans in National banks Notes.
The money supply more than doubled during the war because of the incentives of this system. It guaranteed a customer base to purchase government bonds to finance the war and allowed the National Banks a virtual licenses to steal by collecting interest not only on the actual money it had but also on money it was able to create. Over the entire war, the money supply rose from $745.4 million to $1.773 billion, an increase of 137.9 percent, or 27.69 percent per annum.
This is way the federal government through the Wall Street establishment was able to control the banking system, and inflate the supply of notes and deposits in a coordinated manner to finance the needs of the federal government. But it also left the Wall Street banking establishment vulnerable to the hysterical whims of market forces in the form of banks runs when the banking system acted irresponsible by over issuing National Bank Notes. By the end of the 19th century the National Banks were feeling the effects. The centralization was only limited, and, above all, there was no governmental central bank to coordinate inflation, and to act as a lender of last resort, bailing out banks in trouble. The complaints of the big banks were summed up in one word: “inelasticity.” The national banking system, they charged, did not provide for the proper “elasticity” of the money supply; that is, the banks were not able to expand money and credit as much as they wished, particularly in times of recession.
In short, the national banking system did not provide sufficient room for inflationary expansions of credit by the nation’s banks.
By the turn of the century the political economy of the United States was dominated by two generally clashing financial aggregations: the previously dominant Morgan group, which had begun in investment banking and expanded into commercial banking, railroads, and mergers of manufacturing firms; and the Rockefeller forces, which began in oil refining and then moved into commercial banking, finally forming an alliance with the Kuhn, Loeb Company in investment banking and the Harriman interests in railroads. Although these two financial blocs usually clashed with each other, they were as one on the need for a central bank. Even though the eventual major role in forming and dominating the Federal Reserve System was taken by the Morgan’s, the Rockefeller and Kuhn, Loeb forces were equally enthusiastic in pushing, and collaborating on, what they all considered to be an essential monetary reform.
Business became increasingly competitive during the late nineteenth century, and various big-business interests, led by the powerful financial house of J.P. Morgan and Company, had tried desperately to establish cartels over the free market. To ensure their continued economic dominance and high profits J.P. Morgan and Company had taken the lead by attempting a voluntary cartelization, but was hampered by market forces. It then became clear to these big-business interests that the only way to establish a cartelized economy, would be to use the powers of government to establish and maintain cartels by coercion. To transform the economy from roughly laissez-faire to centralized and coordinated statism. Fortunately for the cartelists, a solution to this vexing problem lay at hand. Monopoly could be put over in the name of opposition to monopoly!
For this intellectual shell game, the cartelists needed the support of the nation’s intellectuals, the class of professional opinion molders in society. The Morgans needed a smoke screen of ideology,
setting forth the rationale and the apologetics for the New Order. Again, fortunately for them, the intellectuals were ready and eager for the new alliance. The enormous growth of intellectuals,
academics, social scientists, technocrats, engineers, social workers, physicians, and occupational “guilds” of all types in the late nineteenth century led most of these groups to organize for a
far greater share of the pie than they could possibly achieve on the free market. These intellectuals needed the State to license, restrict, and cartelize their occupations, so as to raise the incomes for the fortunate people already in these fields. In return for their serving as apologists for the new statism, the State was prepared to offer not only cartelized occupations, but also ever increasing
and cushier jobs in the bureaucracy to plan and propagandize for the newly statized society. And the intellectuals were ready for it, having learned in graduate schools in Germany the glories of statism and organicist socialism, of a harmonious “middle way” between dog-eat-dog laissez-faire on the one hand and proletarian Marxism on the other. Instead, big government, staffed by intellectuals and technocrats, steered by big business and aided by unions organizing a subservient labor force, would impose a cooperative commonwealth for the alleged benefit of all.
The nature of the American political party system was drastically changing: previously a tightly fought struggle between hard-money, free-trade, laissez-faire Democrats on the one hand, and protectionist, inflationist, and statist Republicans on the other. The presidential election of 1896 will be the great national referendum.
The early 1890s the Rockefeller forces, dominant in their home state of Ohio and nationally in the Republican Party, had decided to quietly ditch prohibition as a political embarrassment and as a grave deterrent to obtaining votes from the increasingly powerful bloc of German-American voters.
By the summer of 1896, anticipating the defeat of the gold forces at the Democratic convention, the Morgans, previously dominant in the Democratic Party, approached the McKinley–Mark Hanna–Rockefeller forces through their rising young star, Congressman Henry Cabot Lodge of Massachusetts. Lodge offered the Rockefeller forces a deal: The Morgan’s would support McKinley for president and neither sit home nor back a third, Gold Democrat party, provided that McKinley pledged himself to a gold standard. The deal was struck, and many previously hard-money Democrats shifted to the Republicans.
The Morgans were strongly opposed to Bryanism, which was not only Populist and inflationist, but also anti–Wall Street bank; the Bryanites, much like Populists of the present day, preferred
congressional, greenback inflationism to the more subtle, and more privileged, big-bank-controlled variety. The Morgans, in contrast, favored a gold standard as opposed to the free silver or bi- metallism. At that time the market price of silver to gold was 32-1 but the William Jennings Bryan was determined to reestablish the old rate to 16-1.
But, once gold was secured by the McKinley victory of 1896, they wanted to press on to use the gold standard as a hard-money camouflage behind which they could change the system into one less nakedly inflationist than populism but far more effectively controlled by the big-banker elites. In the long run, a controlled Morgan-Rockefeller gold standard was far more malicious to the cause of genuine hard money than a candid free-silver or greenback Bryanism.
As soon as McKinley was safely elected, the Morgan-Rockefeller forces began to organize a “reform” movement to cure the “inelasticity” of money in the existing gold standard and to
move slowly toward the establishment of a central bank. To do so, they decided to use the techniques they had successfully employed in establishing a pro–gold standard. The crucial point was to avoid the public suspicion of Wall Street and banker control by acquiring the veneer of a broad-based grassroots movement. To do so, the movement was deliberately focused in the Middle West, the heartland of America, and organizations developed that included not only bankers, but also businessmen, economists, and other academics, who supplied respectability, persuasiveness, and technical expertise to the reform cause. When it was time to have a convention, they chose Indianapolis.
The Indianapolis Monetary Convention released a preliminary report what was to complete the promise of the McKinley victory by codifying and enacting what was already in place, a de facto: single gold standard, with silver reduced to the status of subsidiary token currency. Indianapolis Monetary Commission resolved to urge President McKinley to (1) continue the gold standard, and (2) create a new system of “elastic” bank credit. To that end, the convention urged the president to appoint a new monetary commission to prepare legislation for a new revised monetary system.
A bill for a national monetary commission passed the House of Representatives but died in the Senate. The executive committee developed new methods of molding public opinion using a
questionnaire replies as an organizing tool. In November, Hugh Hanna hired as his Washington assistant financial journalist Charles A. Conant, whose task was to propagandize and organize
public opinion for the recommendations of the commission.
The campaign to beat the drums for the forthcoming commission report was launched when Conant published an article in the December 1 issue of Sound Currency magazine, taking an advanced line on the report, and bolstering the conclusions not only with his own knowledge of monetary and banking history, but also with frequent statements from the as-yet-unpublished replies to the staff questionnaire.
Bank credit should be increased in recessions and whenever seasonal pressure
for redemption by agricultural country banks forced the large central reserve
banks to contract their loans.
The public having been aroused by the preliminary report, the actual measures called for by the commission were of marginal importance. (More important was that the question of banking reform had been raised at all.) The executive committee decided to organize a second and final meeting of the Indianapolis Monetary Convention, which duly met at Indianapolis on January 25, 1898.
(does any of this sound suspiciously like Obamabcare?)
But any reform legislation had to wait until after the elections of 1898, for the gold forces were not yet in control of Congress. In the autumn, the executive committee of the Indianapolis Monetary
Convention mobilized its forces, calling on no less than 97,000 correspondents throughout the country through whom it had distributed the preliminary report. The executive committee
urged its constituency to elect a gold-standard Congress; when the gold forces routed the silverites in November, the results of the election were hailed by Hanna as eminently satisfactory. The decks were now cleared for the McKinley administration to submit its bill, and the Congress that met in December 1899 quickly passed the measure for the new monetary commission, Congress then passed the conference’s report and a bill that was the Gold Standard Act in March 1900. The currency reformers were on their way.
It is well known that the Gold Standard Act provided for a single gold standard, with no retention of silver money except as tokens. Less well known are the clauses that began the march toward a more “elastic” currency. As Lyman Gage had suggested in 1897, national banks, previously confined to large cities, were now made possible with a small amount of capital in small towns and rural areas. And it was made far easier for national banks to issue notes. The object of these clauses, as one historian put it, was to satisfy an “increased demand for money at crop-moving time, and to meet popular cries for ‘more money’ by encouraging the organization of national banks in comparatively undeveloped regions.”
The reformers exulted over the passage of the Gold Standard Act, but took the line that this was only the first step on the much-needed path to fundamental banking reform.
There was far too much freedom and decentralization in the system. In consequence, our massive deposit credit system “trembles whenever the foundations are disturbed,” that is, whenever the chickens of inflationary credit expansion came home to roost in demands for cash or gold. The result of the inelasticity of money, and of the impossibility of interbank cooperation, we were always in danger of losing gold abroad just at the time when gold was needed to sustain confidence in the nation’s banking system.
The complaints were the existing bank note system was weak in not “responding to the needs of the money market,” that is, not supplying a sufficient amount of money. Since the national banking system was incapable of supplying those needs there was no reason to continue it. The cries came from every corner, the U.S. banking system as the worst in the world, and pointed to the glorious central banking system as existed in Britain and France. But no such centralized banking system yet existed in the United States: In the United States, however, there is no single business institution, and no group of large institutions, in which self-interest, responsibility, and power naturally unite and conspire for the protection of the monetary system against twists and strains.
In his last annual report as secretary of the Treasury in 1901, Lyman Gage let the cat completely out of the bag, calling outright for a government central bank. Without such a central bank, he declared in alarm, “individual banks stand isolated and apart, separated units, with no tie of mutuality between them.” Unless a central bank established such ties, Gage warned, the panic of 1893 would be repeated. When he left office early the next year, Lyman Gage took up his post as president of the Rockefeller-controlled U.S. Trust Company in New York City.
to be continued