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The Fed­eral Reserve:

Big Government’s Silent Partner

by George F. Smith

“Cen­tral­iza­tion of credit in the banks of the state, by means of
a national bank with state cap­i­tal and an exclu­sive monop­oly.”

— Fifth plank of the Com­mu­nist Man­i­festo, 1848

Sta­tists have long prized and fueled cri­sis as the means for
enlarg­ing gov­ern­ment. They con­vince enough peo­ple that the fed­eral gov­ern­ment
never does wrong, yet the evil that lurks in the world will on occa­sion strike
us. Some­times the evil is exter­nal, as in 9–11, other times it is inter­nal, as
in the case of cer­tain eco­nomic upheavals. When the cri­sis is mostly eco­nomic,
the cul­prit is always the pri­vate sec­tor, and the guilty par­ties are usu­ally big
shots who got swept away with avarice. With a lap­dog media clam­or­ing for
“reform,” politi­cians pass more laws and flood the air­waves with rhetoric about
how their new leg­is­la­tion will crush the forces of greed.

It was cri­sis that helped launch one of the great­est destroy­ers
of our world, the Fed­eral Reserve Sys­tem.

In the era fol­low­ing the War of Seces­sion, the fed­eral
gov­ern­ment aggres­sively pro­moted devel­op­ment of the West through huge sub­si­dies
and other favors to busi­ness cronies. Cor­rup­tion flour­ished, and overex­tended
banks occa­sion­ally failed, caus­ing pan­ics in 1873, 1884, 1893, and 1907.
Through­out this era there was grow­ing oppo­si­tion to sound money, elo­quently
expressed by rail­road spec­u­la­tor Jay Cooke in 1869: “Why,” he asked, “should
this Grand and Glo­ri­ous coun­try be stunted and dwarfed—its activ­i­ties chilled
and its very life blood cur­dled by these mis­er­able ‘hard coin’ theories—the
musty the­o­ries of a bygone age.” [1]

The Panic of 1907 is espe­cially sig­nif­i­cant because it led to
government-directed bank­ing “reform.” The panic got under­way when United
Copper’s stock price col­lapsed. Knicker­bocker Trust of New York had invested
heav­ily in United Cop­per, and depos­i­tors made a run on the bank to get their
money out. When Knicker­bocker failed, depos­i­tors at other banks got ner­vous and
demanded their money, ignit­ing the panic. [2]

J. P. Mor­gan got together with other bank­ing lead­ers and met
vir­tu­ally non­stop for three weeks to solve the cri­sis. They secured credit from
for­eign investors, redi­rected funds from strong banks to weak ones, and bought
stock in founder­ing but still promis­ing com­pa­nies. [3] The panic died a few
weeks later.

For the New York bankers, there remained a much more seri­ous
prob­lem. The growth of state banks over the pre­vi­ous 20 years had slowly eroded
their power. By 1896, state and other non-national banks con­sti­tuted 61% of the
total, and by 1913, 71%. More sig­nif­i­cantly, non-nationals com­manded 57% of
bank­ing resources by 1913. [4]

With such a trou­bling trend, what did the New York bankers do?
They turned to their pals in Wash­ing­ton. As we’ve seen, from the time of
Lincoln’s admin­is­tra­tion gov­ern­ment sought to part­ner with busi­ness, deliv­er­ing
spe­cial favors in return for polit­i­cal sup­port — this is mer­can­til­ism, the
sys­tem Amer­ica rejected in 1776. By the early 20th cen­tury, Amer­ica was
neck-deep in Pro­gres­sive pro­pa­ganda, so there was no viable group oppos­ing
gov­ern­ment takeover of their lives. The once laissez-faire, sound-money
Demo­c­ra­tic Party died with the nom­i­na­tion of William Jen­nings Bryant for
pres­i­dent in 1896. From that point on, Repub­li­cans and Democ­rats alike were
pro­mot­ing more sta­tism as the mir­a­cle cure for ills it had bred.

Both Con­gress and the Amer­i­can Bank­ing Asso­ci­a­tion had been
push­ing for cen­tral bank­ing since the 1890s. The Panic of 1907 gave them another
excuse to make it a real­ity. Amid all the maneu­ver­ing and pro­pos­als for
fun­da­men­tal change, Mor­gan banker Henry Davi­son orga­nized a duck hunt­ing trip at
Jekyll Island, Geor­gia in Decem­ber, 1910. The ducks they took aim at were not
the web-footed kind, but the unsus­pect­ing Amer­i­can cit­i­zen who had always
thought of money as gold.

The hunters were major play­ers in Amer­i­can mer­can­til­ism:
Sen­a­tor Nel­son Aldrich (R., R.I.), who had headed up the National Mon­e­tary
Com­mis­sion, a con­gres­sional com­mit­tee ded­i­cated to devel­op­ing ideas for cen­tral
bank­ing; Frank Van­der­lip of Rockefeller’s National City Bank; Paul War­burg of
the invest­ment firm of Kuhn, Loeb, & Co., who was there to pro­mote the
Ger­man cen­tral bank of Bis­marck; Charles Nor­ton of First National Bank of New
York, a Mor­gan com­pany; and Davi­son, a part­ner of J.P. Morgan’s. [5]

They devised a plan whereby a board of com­mer­cial bankers would
super­vise regional reserve banks. When Aldrich later intro­duced it to Con­gress,
Democ­rats blocked it. In 1913, Carter Glass, a Demo­c­ra­tic con­gress­man from
Vir­ginia, used the Jekyll Island scheme as the basis for the Fed­eral Reserve
Act. [6]

The Act cre­ated 12 regional reserve banks ruled by a board of
Wash­ing­ton bureau­crats, includ­ing pres­i­den­tial appointees. Though the reserve
banks are offi­cially “pri­vate” insti­tu­tions, they’re lit­tle dif­fer­ent from
gov­ern­ment agen­cies, as Mur­ray Roth­bard noted.

In this man­ner gov­ern­ment seized what Roth­bard called “a
cru­cial com­mand post” of the econ­omy, and there­fore of the Amer­i­can soci­ety. [7]
It used cri­sis — repeated pan­ics cre­ated by gov­ern­ment med­dling — and the
eco­nomic illit­er­acy and trust of the pub­lic to achieve its pur­pose.

And what has it sown from its com­mand post? A sub­tle means of
wealth trans­fer. A method of tax­ing us with­out leg­is­la­tion. A way of
coun­ter­feit­ing money legally. “Through the pur­chase of [usu­ally gov­ern­ment] debt
by a bank, fiat money is injected into the econ­omy,” Gary North writes. [8]
“Wealth then moves to those mar­ket par­tic­i­pants who gain early access to this
newly cre­ated fiat money,” who are usu­ally polit­i­cally con­nected. The ones on
fixed incomes or with­out close gov­ern­ment con­nec­tions are the losers, as the
injec­tion of money even­tu­ally jacks up prices.

The Fed greatly reduced reserve require­ments dur­ing the 1920s,
expand­ing credit reck­lessly and gen­er­at­ing a false pros­per­ity that ended in the
crash of 1929. Peo­ple knew what the Fed was up to — man­u­fac­tur­ing dol­lars out of
thin air — and started a run on banks to pull their money out in the form of
gold specie and cer­tifi­cates. When Roo­sevelt took office, he slammed the bank
door in their faces, then later ordered them to return their gold. In 1933 he
made the dol­lar a fiat cur­rency domes­ti­cally, but backed by gold

Roo­sevelt also cre­ated the Fed­eral Deposit Insur­ance
Cor­po­ra­tion (FDIC) in 1933, pro­vid­ing fed­eral guar­an­tee of bank deposits. Bank
runs and the threat thereof have van­ished, and most peo­ple believe this is good.
As Lew Rock­well observes, the threat of bank runs used to “to keep wan­ton
invest­ing at bay,” but the government-banking car­tel views such restric­tions “as
against the national inter­est. As a result, the [bank­ing] indus­try is
per­pet­u­ally shaky, and the largest banks are a men­ace to pub­lic life itself.”

Prior to 1929 the gov­ern­ment had never inter­vened to help
recov­ery from a reces­sion. Pre­vi­ous admin­is­tra­tions had let reces­sions run their
course, and recov­ery, at the hands of the mar­ket, usu­ally occurred in a year or
less. Hoover, and then Roo­sevelt to a much greater degree, took the sta­tist
course and drove the econ­omy into a pro­longed depres­sion. For his part,
Roo­sevelt has been dei­fied.

The Fed, as the engine of infla­tion, bankrolls gov­ern­ment
wrong-doing. Its cre­ation marked the first step in the destruc­tion of sound
money — a gold stan­dard. As Lud­wig von Mises wrote long ago, “Ide­o­log­i­cally,
[sound money] belongs in the same class with polit­i­cal con­sti­tu­tions and bills
of rights.”[10] In the name of civil lib­erty and civ­i­liza­tion itself, the Fed
should be abol­ished and a market-directed gold stan­dard restored.


1. The Mys­tery of Bank­ing, Mur­ray Roth­bard, New York: Richard­son and
Sny­der, 1983. p. 135. (PDF version)

2. Sep­a­rat­ing Money and the State, Part I: Eighty Years of Destruc­tion,
Dou­glas E. French, http://www.fff.org/freedom/1094e.asp

3. The Panic of 1907 and the Birth of the Fed­eral Reserve, Jim Klann, http://www.lp.org/lpnews/0108/klann.html

4. Roth­bard, p. 136

5. Roth­bard, p. 137

6. French

7. Tak­ing Money Back, Mur­ray Roth­bard, http://www.lewrockwell.com/rothbard/tmb.html

8. Gary North, in For­ward to Rothbard’s Mys­tery of Bank­ing

9. Banks on the Dole, Llewellyn H. Rock­well, http://www.mises.org/freemarket_detail.asp?control=216&sortorder=articledate

10. The The­ory of Money and Credit, Lud­wig von Mises, Yale Uni­ver­sity
Press, 1953, p. 414

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