The Founding of The Federal Reserve

0:00There was a statement, I think somebody asked Professor Peden earlier, what was this naivete on the part of the people advocating inflation, and he answered basically people tend to seem to be naive in their own self-interest. And this is very relevant to what I'm talking about today, namely the origin of the Federal Reserve system. The orthodox view, so to speak, or the mainstream view of the history of the Federal Reserve System is very similar to the mainstream view of the history of all government regulation, progressive institutions, so to so-called, history of the public school system, all the histories written before about 1960.

0:47Essentially, it's an exercise in hagiography, which is, those of you not familiar with theology, The history is the lives of the saints. Heroic enlightened people in some, you know, some county, in Zilch County, North Dakota, whatever, decide there should be public schools and they agitate for it and backward types and don't want to pay more taxes or against it and finally the enlightened people win out. And it's that sort of approach in progressive regulation, it's things like those who want to, those who think we shouldn't have diseased meat agitate for it and finally they went out over a narrow, selfish businessman who were against the meat control regulation.

1:32So that sort of approach to the history of regulation is naive and biased at best. It turns out, in the last 20 years or so, historians have revised this whole picture of the history of government regulation in the United States. And the same thing goes for the history of the founding of the Federal Reserve system. The thing, one thing we have to realize in the first place is that the Federal Reserve Act was a part of the progressive era, part of the progressive package, so-called progressive legislation, which started around 1900 and continued on through World War I. And if we realize that the nature of the progressive movement and progressivism was not simply we discover enlightenment, we realize the public good requires that untrammeled businessmen be regulated, made to serve the public interest and that sort of stuff.

2:36If we realize that the whole history is totally different, then we're more apt to have a better picture of the founding of the Federal Reserve system. Basically, the insight into the history of the progressive era can be related to something like this. For example, when tariffs go up, when the steel industry, well, let's put it this way, say the government institutes a higher tariff on steel, which it's doing most of the time anyway, since about 1820. When the government institutes a higher tariff on steel or import quotas on steel, Well, nobody really thinks that this is done because of farsighted, enlightened people think we really need it and therefore we come in and they persuade businessmen to go along with it and persuade the government to go along with it.

3:26Nobody really believes that. Everybody realizes that if the steel tariff goes up, it's probably because the steel industry is agitated for it. And then if you check on this hypothesis, you're fine, of course. That's exactly what happened. Not every person in the steel industry, but basically the steel industrialists, realizing that they're inefficient and being out-competed by foreign steel, decide to agitate for a higher tariff. So in things like tariffs, this is common practice, you're not called an economic determinist or a Marxist if you make the statement that tariff went up because industrialists in that particular industry agitated for it. And yet, for anything else, this somehow becomes a no-no, or for Boehm kind of proposition entertain.

4:12For any other kind of regulation, banking regulation or whatever, down to things like foreign aid and war, to make the similar statement, in other words, to go a little bit deeper into just tariffs, where the thing is obvious, the tariffs are agitated for by the particular industry, to expand the analysis a little bit, becomes unrespectable, to say the least, and both among historians and among everybody else. So people engaging in this sort of analysis, or power elite analysis, if you want to call it that, it's not very common, either in the historical profession or in the rest of scholarship or in the public. But in the last 20 years or so, there has been quite a bit of it, and it's helped to revise our whole viewpoint of what happened.

5:01and government regulation in general and the progressive period in particular. Basically what happened was in the progressive period, by the end of the 19th century, business, first of all, was extremely competitive, all during the late 19th century as a broad generalization, and prices were falling throughout. In other words, from the Civil War down to about 1900, late 1890s, prices were generally falling. were falling, and they were falling for good reason, namely that business was so competitive and the economy was so productive that the supply of goods and services was increasing at a rapid rate. In other words, that's when America industrialized. It was the biggest period of economic growth in the history of the world. And the standard of living went up and productivity went up and prices fell, not being that businesses were suffering because costs were also falling as productivity increased and mass production So in this situation, many business groups who tend to be inefficient try to correct this price falling situation by organizing cartels.

6:11In other words, by organizing a cartel of each industry so that they could cut production and raise prices. And this was tried in industry after industry, starting with the railroads, which were the first big business in the United States, First large-scale business and continuing on through manufacturing by the late 1890s. Either trying through cartels, formal cartels, or through mergers. And in the late 1890s, the theory was, we'll just merge into one big, we'll have one big firm for the entire steel industry, the oil industry, etc. And then we'll be able to cut production and raise prices and raise profits at the same time. So they tried this systematically. This was the ideology, so to speak, among businessmen, that the way to benefit for all of us is to have quotas, either formal quotas as in cartels or in mergers where you just agree that you will have certain shares of this corporation and then we'll cut production and raise prices. That was the great goal. All of this was a

7:11total flop-a-roo and case after case, literally hundreds of cases of this kind of merger or of the Cartel, they all flopped. And they flopped for two basic reasons. One is that an economic theory can predict this, and this is confirmed time and time again. Two basic reasons. One is, well, the basic reason is that the industry is free. Government cannot step in and force people to accept the cartel or accept the merger. So what happens is that as soon as the cartel is formed or the merger is completed, and then they cut production and raise prices and profits go up. Other businessmen come in and say, hey, this looks like a great industry here, the zinc, whatever, the zinc industry or the oil industry or whatever, railroads. They're making a lot of profits. Let's nip in there and out-compete them because they're raising prices.

7:59And we're going to come in with a new firm, a new factory, a new railroad, and we'll bust them. And that's exactly what happens. So you have new competition always coming in and out-competing the older firms. And then the older firms are stuck with a new firm, and they have a permanent competitor, which is a big pain in the neck, because they come in with later equipment, with new factories and new equipment, the latest technology, etc. And now they have a permanent new competitor on their hands. So the whole thing became a big pain in the neck for them. And that's one reason. And then internally, what happened was that individual firms would start breaking in the cartel. They'd say, look, we've raised... In other words, the cartel restricts production, raises prices. Prices are very high, and then the individual firm says, look, I'm not supposed to do this because I have a cartel agreement with the rest of my buddies in the industry, but here's what we're going to do.

8:51For you, my old pal and drinking buddy or whatever, other than my buyer, I will sell you the steel or whatever, titanium, et cetera, for 20% off list, provided you don't tell anybody about it. So you have a secret price cutting, and then this firm gains profits, gains sales, and of course the secret leaks out pretty quickly, after about six months or a year, and then the other firms get very mad about this, and they call it your rate buster, which in business terms is equivalent to scab in the union terms, and the whole cartel falls apart with mutual recrimination and hatred, and they're back where they started, except now they've got more hatred than they had before. So in other words, this system didn't work. The cartel policy and the merger policy flopped.

9:37And at that point, some of the, each step of the way, some of the, were farsighted in the sense of realizing this was a flop, among the business groups, decided the only way to preserve a cartel, preserve a merger, is to have the government enforce it. The turn of the political arm to create the cartel for you. And this was the origin of progressive regulation. Progressive system was not a group of farsighted, essentially was not a group of farsighted intellectuals who sat around and said, we have to plan, we have to curb businessmen for the sake of public interest. It was groups of businessmen saying, we have to impose cartels through the government and thereby eliminating our competition, curbing the maverick firm, which doesn't want to engage in a cartel and gaining profits that way.

10:27So, for example, in railroad regulation, the first things they did after the railroad businesses put in the ICC, the Interstate Commerce Commission, the first thing the ICC did was outlaw secret price cutting, because secret price cutting is always the great instrument by which an individual firm can bust the cartel. And how do you do it? You do it in the name of publicity. You say, well, it's a terrible thing to have a secret price cutting. all prices should be, the books should be open. All firms should have, they should release publicity about their prices and costs and so forth, et cetera, so the public will know the right to know and won't have jazz. What it really meant was we want to know what our competitors are charging. We do it by making the government make all of us release, you know, open the books. So anyway, this is, and of course you do this in the name of openness or democracy or whatever, in the name of the public interest because

11:19America was born in an anti-monopoly ideology, a hatred of monopoly, meaning, by the way, monopoly meant for centuries, until modern economics came in and poisoned the well, so to speak, what monopoly meant was very simple. It meant a grant of special privilege on the part of the government to different businesses for exclusive production or sale of a product, period. It didn't mean a large firm, it didn't mean a differentiated product, and all the rest of it. And it's meant very simply, grant by the government of exclusive privilege. It's very much like what we've done during the discussion of Professor Peden before, that when the church fathers attacked the rich, they didn't mean the rich period. They meant the tax collectors and so forth. It's a similar situation, a shift in the language.

12:05So how could they sell this to the American public? How could these business groups sell this, a compulsory cartel system to the American public? They can't say we want compulsory cartels. So what they did was they created the ideology of the public interest. This is the public good. We have to curb evil business groups and sort of stuff. And the businessmen who took this position were then called enlightened by their allies, by the media or whatever, the media of that epoch. These are enlightened businessmen who rise above their own self-interest to look at the larger good. They have the far vision of, unlike Diocletian, They want to curb their selfish profits for the good of the entire industry and the good of the country. Now how was this ideology pushed? The ideology was pushed very simply by intellectuals who were rising up.

12:53Throughout history, the statism has been imposed by two groups, an alliance of two groups. The state itself, the state apparatus, the king, the throne, and the opinion molding groups, the intellectuals, and intellectuals, which in most cases in history have been the churches, the state church. And so this is known as the Alliance of Throne and Altar. You have the church and the state. The church, the function of the church was to tell the people to obey the state. The state is God in many cases. The king is God. The king is divinely sanctioned. And in return for this, and the public believes them because they are the intellectual opinion molders. And in return for that, the church gets part of the bootle, they get part of the state revenue in the form of tax subsidies and so forth.

13:40So this is a very cozy alliance until essentially Western Europe, until the age of Western Europe and the church and state were separated. And essentially in the progressive period, in the early 20th century, you begin to reform the old alliance of intellectuals and government, Big government intellectuals have performed the function of court apologists for the new regime and informing the public, this is the public interest, the common good, the general welfare and all the rest of it. The intellectuals are ready for this alliance because there are a lot of them coming up. There's a multiplication of the number of intellectuals in the world in this country in the late 19th century. The PhD program came in. Suddenly PhDs poured on the market, engineers poured on the market, various guild groups, physicians, all that.

14:30They're looking for jobs and also looking for special privilege. They're looking for ways to keep their competitors out. And so this alliance became a very cozy one because the intellectuals then became state intellectuals. They became planners, apologists for planning and so forth and so on. Okay, so this is a general background of a banking situation. So we have to realize the Federal Reserve System was a progressive measure. 1913, it was part of the Wilson Progressive Package, Woodrow Wilson being the acne of progressivism up to that point. And once again, we have a similar situation. There was no, before the Federal Reserve System, there was no free banking. There was a quasi-centralized system. Free banking, or an approximation of free banking was before the Civil War, approximately from the 1840s after Andrew Jackson destroyed the central bank of his epoch until the Civil War.

15:26During those 20 years or so, it was more or less a free banking system, competitive, there was no centralized system, and it worked pretty well. And to the extent it didn't work is because there was still government interference. But basically a free system. During the Civil War, the Republican Party took the opportunity of a one-party Congress, since the South had seceded, to enact their beloved economic legislation, one of which was high tariffs, another of which was the greenbacks, and it was eliminating the gold standard for many years, and a third was to eliminate the free banking system. The way they did it was by imposing a very prohibitive tax on state bank notes, in other words, the banks, private banks and centralizing them, monopolizing the issue of bank notes or paper money in the hands of a few nationally chartered banks, there were no nationally chartered banks before that, a few, very few large Wall Street banks and then tying this so any other bank had to, in order to get paper money, had to go to the, had to have deposits in the national banks and in order to buy paper money,

16:38for Money, so to speak, because the individual banks couldn't issue it themselves, and tying that to the federal, to the public debt. In other words, national banks could have termed their credit on top of US government bonds. And this was done in order to sell the government bonds during the war, the Civil War. And specifically, to get even more specific than that, Jay Cook Jay Cooke was the main instigator of this. Jay Cooke was, being a friend of Secretary of Treasury Chase and political ally, managed to get the monopoly of all government bond underwriting during the Civil War. Remember, there was hardly any underwriting at all before that. And so this is a tremendous bonanza to Cooke.

17:24And he gets the monopoly of all government bond issue. He then, he was the first one to engage in modern propaganda efforts. and he hired pamphleteers to talk about the glories of government bonds and all the rest of it. And in addition to that, he essentially pushed through the national banking system, the system I've been talking about, founding there... So every national bank has the permanent credit on top of government bonds, which they own, thereby forcing the banks to buy government bonds from him, Jay Cook, since he had the controllable government bonds. And then he himself set up several of these national banks himself as part of this system. So at any rate, we had, this is the beginning, after that, this system continues after the Civil War and the hard money people had to spend at least 15 years trying to get back to gold, period.

18:09They couldn't worry about the banking system. And so their energies were restricted or confined to eliminating greenbacks or getting back to gold. So this system then continues on. continues on. We then have a quasi-centralized system based on Wall Street national, a few Wall Street national banks. But it still was not central. It was a halfway house to the Federal Reserve system. Okay. In this situation, the banks become unhappy, especially the large Wall Street banks become unhappy because they're beginning to be outcompeted by other regional banking structures. Chicago becomes a central reserve city, Kansas City banks become important, and the whole banking credit system becomes more and more decentralized as the economy grows, and the Wall Street banks become more and more unhappy about the situation, the control is slipping away from them, gradually but very rapidly.

19:12Another problem was, and this is a problem inherent in all fractional reserve banking, Reserve Banking in my view is inherently bankrupt. It's always ready to go bust. The reason is fairly simple. Most businesses, all businesses as far as I know, try to adjust the time structure of their assets to follow the time structure of their liabilities. In other words, if you have a $1 million debt coming up in next July 1st, you make sure that the million dollars you have coming in owed to you will come in before July 1st, not after. So you'll have Bankers have the million bucks to pay your own creditor. So most businesses try to have a time structure of their assets shorter than the time structure of their liabilities. Certainly a lot longer. Have the money flowing in before they have to pay the money out.

19:59With banks, however, just the opposite. Banks liabilities are zero time structure, in other words, you have to pay immediately. I'm not talking about certificates of deposit or time deposit, I'm talking about demand deposits and bank notes. These have to be paid on demand immediately. It's a zero-time structure, whereas their assets, of course, flow into the future. So all banks are inherently bankrupt. All of these for the public to find out about it. Essentially, it's a structure based on mythology more than anything else. And so all banks are subject to bank runs. And historically, when confidence is lost, I don't know if you've seen these old movies The bankers were made in the 30s. There were a lot of movies in that period where there was a small town and there was a big line up from five in the morning and lining up at the bank, because the public had heard a rumor that the bankers really didn't have the money they thought they'd have, and they wanted to get their money out fast before the other guy could get the money out. So there was a long line of the bankers, of course, very respectable looking, usually fat. In those days, fatness meant respectability. And the bankers would assure them, no, it's a pack of lies, and I assure you, madam,

21:07The money is there, don't worry about it, you don't have to take it out. And if the people are astute enough or scared enough, they'll say, no, no, we want our money out, we don't listen to this stuff. Of course the banker is a big liar, he says he didn't have the money. And by 8 o'clock or 9 o'clock the bank is bust. So the banks understand the situation, they're inherently in bad shape, plus the fact that if any banks expand their credit, Banks that don't expand will have liabilities upon them and will try to cash them in, not because they have no confidence, it's simply in a daily matter of business, and they might go bust for that reason. Any bank that expands beyond what his fellow bankers are expanding will quickly go under.

21:52So for those reasons, it became evident to the banking community that in order for these fractional reserve banks to survive, you have to have a central bank, a lender of last resort, as it's called, which will have the resources to bail them out in case of trouble and also will be able to centralize reserves so that all banks will more or less expand reserves together, so you don't have a problem with one bank expanding and suddenly being caught up short by the sounder or more conservative banks. All banks will expand through the to a central banking system, central bank buying assets and the reserves flooding into the system and the credits, everything ballooning and wafting upward nicely and harmoniously uniformly. In other words, the banks realize in order to preserve their soundness and structure, they have to have a compulsory cartelized system because voluntary cartels don't work in banking much very well either.

22:49So in other words, the turn toward compulsory cartels and banking is very similar of a piece with the turn toward compulsory cartels and the rest of the business, industry, railroads, manufacturing, meatpacking, insurance and everything else. Okay, and also the Wall Street banks were particularly interested in getting control over the rest of the economy as a second factor here, not just to save themselves but also to got control of the maverick western and regional banks that were proliferating. And in particular, the person, the banking firm of the most vision on this subject, the one which always took the lead in cartelization and regulatory commissions and all the rest of it, was the firm, the interest center around JP Morgan & Company.

23:37Morgan being the largest investment banker after Jay Cooke. By the way, justice doesn't always triumph in the world, but in the case of Jay Cooke, Just this triumph, he went bust in the panic of 1873, after controlling the banking system and inflating and so forth and so on, he finally went under. After that, J.P. Morgan becomes the preeminent investment banker. And first on the railroads and then in manufacturing, Morgan takes the lead in this vision of a new cartelized system, including a new cartelized banking system. Okay, just to give you an idea, here's a quote here on the role of the Fed and what the people at the time thought the role of the Fed was going to be. Oh, just another point, the theory propounded before the public was, and the public again is not going to fall for this very well, so the theory propounded before the public was we need the Fed, one, to catch up with the world, because everybody else, all other major countries have a central bank,

24:39Therefore, we should have it, and secondly, in order to stop wildcat banks from inflating too much, we need a central bank in order to impose stability and make sure to limit any inflationary potential of the private banks. It's very similar to saying the ICC, we need an interstate commerce commission to control the railroads, they won't mook the public by higher freight rates. The real reason was they wanted to raise private freight rates, railroad freight rates through the ICC and not to lower them. Similarly here, the propaganda is that we need the Fed in order to control the individual private banks and make sure they don't expand credit too much. The real reason was they need the Fed to expand credit and maintain the expanded credit so the banks wouldn't go under.

25:25We need a lender of last resort. But to use the phrase in the very common of that period, the money supply needs to be more elastic. That was the big phrase. We need a Fed because we need the money supply to be more elastic. In other words, the money supply is too rigid. We need to expand it more. Especially during recessions and bank panics, we need a Fed to expand money and credit. And so this is what they meant. Eosticity was a sort of euphemism for inflation. At any rate, to quote, which is just one area here to show the criterion of the whole system, Edward N. Hurley, when the Federal Trade Commission was established, about the same time the Federal Reserve was established, the vice chairman, de facto head of the Federal Trade Commission was Edward N. Hurley, who was the president of the Illinois Manufacturers Association when when he was appointed, and whose actions and appointment was hailed and subsequent actions were hailed throughout the business community.

26:24He addressed the Association of National Advertisers in December 1915, a couple of years after the Federal Reserve and the Federal Trade Commission were put through about the same time. He exalted, quote, that through a period of years the government has been gradually extending its machinery of helpfulness to different classes and groups upon whose prosperity depends in a large degree the prosperity of a country. And then he says, the railroads and the shippers had the ICC, they had their ICC, Interstate Commerce Commission, the farmers had the agriculture department, and the bankers now have the Federal Reserve Board. He concluded, quote, that to do for general business that which these other agencies do for the groups to which I have referred was the thought behind the creation of the Federal Trade Commission. Okay, what does the Federal Reserve do for the nation's bankers? That then becomes the question.

27:17Okay, the idea of central banking, before the Federal Reserve comes in, the first thought was the Treasury would do it. Instead of creating a Federal Reserve, maybe the Treasury Department could act as a central bank on its own. And then, for example, in 1900, Secretary of Treasury Lyman Gage called for the establishment of regional central banks, and in 1906, Secretary of Treasury Leslie Shaw suggested in his annual report that he be given total power to regulate the nation's banks. It didn't work. But this was the... and they tried to intervene, they tried to, both of them tried to expand treasury bills and so forth during recessions.

28:06They didn't work. And the question then is, who are these people? Who are Gage and Shaw? Do they do this? Do they either call for central banks or try to impose an act as a central bank on their own hook? Are they isolated bureaucrats where power went to their head? And in order to analyze that, we have to realize that most historians, unfortunately, when they deal with government action, they just deal with the Secretary or Treasury or the Federal Reserve Chairman or whatever, at the time he exists, in other words, it's as if somebody dropped from heaven, becomes Secretary of the Treasury for four years or eight years or something, and then disappears. And his life then is sort of like a self-contained hermetically sealed vacuum, and he does various things, and then he disappears. And if, however, you examine What he did before he was Secretary of Treasury and what he did after he had a very different perspective I don't mean just on these people, I mean all the top bureaucrats.

29:02If you examine what their life was before and after they were in office, the whole viewpoint about them against the shift, they turned out to be isolated bureaucrats but part of a whole financial network of power elite. For example, Gage, the first Secretary of Treasury under McKinley, who tried to do this. Before he was appointed Secretary of Treasury, he was the head of the powerful First National Bank of Chicago, one of the major banks in those days in the Rockefeller orbit. And now we have to say that there were two big financial orbits at this point, the Morgans and the Rockefellers, both of whom were in favor of central banking by this point. He was also president of the American Bankers Association, after he left the Treasury Department, after a couple of years, he becomes president of the U.S. Trust Company, which was Rockefeller controlled, and his handpicked assistant of the Treasury, Frank Vanderlip, one of the major figures in creating the Federal Reserve system, goes on to become a top executive of the Rockefeller flagship bank of that period, the National City Bank of New York. He was appointed at the Treasury, not because his name was plucked out of a hat,

30:10But because Mark Hanna, his close friend and political mastermind and financial backer of President McKinley, chairman of the Ohio Republican Party and then the National Republican Party, co-magnate and iron manufacturer, Hanna, was also a close business associate of an old friend and high school classmate of John D. Rockefeller Sr. So when you begin to realize that, you begin to realize it's not an accident. These things are not something Hanna somehow has a theory. or, you know, the thing just works somehow by a random selection of people.

30:45Okay, Leslie Shaw, who was the next Secretary-Treasurer I mentioned, who was under Theodore Roosevelt, was a small-town Iowa banker who became governor of his state. He continued as president of a bank while he was governor. In those days, there was none of this nonsense about blind trust or or worry about conflict of interest, and he was a friend and ally of the so-called Des Moines Regency, which was running the Iowa Republican Party for many years. And the head of the Iowa Regency, Senator Allison, was in turn tied closely to Charles Perkins, who was the close Morgan ally and president of the Morgan-controlled Chicago Burlington and Quincy Railroad. Okay, after the failure of these two attempts by Gage and Shor to use the treasury as a fulcrum of the central bank, comes the panic of 1907.

31:36It was at that point when the large bankers decided we needed, no more fooling around follows, we need a central bank. But even before the panic of 1907, the drive for a central bank was launched officially by Jacob Schiff, who was head of the powerful investment banking firm of Kuhn-Lohenberg Committee, who urged the New York Chamber of Commerce to advocate fundamental banking reforms. This was January 1906. Okay. And the New York Commerce immediately established a special committee to investigate the problem. The prize of leaders in commercial investment banking, including Israel Strauss of R.H. Mises, who was a close friend of Schiff, and Frank Vanderlip, I've already mentioned, whose name appears, pops up constantly, of the National City Bank, marched the special committee unsurprisingly. The Special Committee reports, yes, yes, we need a central bank, and as they put it, we need a strong central bank, quote, similar to the Bank of Germany, unquote, which was the role model for them.

32:38Well, the New York Chamber was kind of reluctant. This is kind of radical for them. They didn't endorse it. But the big bankers took up the cry. In mid-1906, the American Bankers Association named the Commission of Inquiry of Leading Bankers to study the question. And the report, again, calls for radical changes and more or less of a central bank. By that time, after the panic of 1907, as I say, then they realized, boy, we really need a central bank. Bank, we have to start to get going on this. And one of the things that were passed during this panic of 1907 was the Old Rich Reland Act, which provided for issuance of so-called emergency currency by groups of bankers, clustered in national currency associations. There was a regional cartel scheme for each region, but it was supposed to be a stopgap for the emergency, but the emergency was seven years, which is a hell of a long emergency period.

33:36during which they could issue these notes. However, Old Rich Veeleon really wasn't used, it was only used once. The main thing that came out of the Old Rich Veeleon Act of 1908 was the setting up of a National Monetary Commission by the Old Rich Veeleon Act to study the American and foreign banking systems and emerge with a plan for reform. Form The commission consisted of nine senators and nine representatives, the usual kind of government commission, and the standard bureaucratic procedure. The chairman was Senator Aldrich, who passed the act, and the vice-chairman was Representative Rieland, who was the other co-sponsor. Rieland is unimportant. He was a Buffalo banker, and we need say no more about him.

34:23Aldrich is a person of a different stamp. Extremely powerful senator from Rhode Island, Republican senator, who made millions during his long service in the U.S. Senate. It's not quite known exactly how he did it, he started off as a fairly humble grocer and winds up after 30 years in the Senate as a multi-millionaire, which in those days meant multi-multi-million, I mean million meant a lot then. Old Rich, again it's not an accident, he was one of the prime movers in the creation of the Federal Reserve System, he was also the father-in-law of John D. Rockefeller Jr. and maybe fairly said, I think, to be Rockefeller's person, his man in the U.S. Senate. It was from Nelson Oldridge, our beloved governor of New York. I come from New York. Nelson Oldridge Rockefeller took his first two names.

35:10Okay, from the inception of this National Monetary Commission until the Oldridge Plan was presented to the Congress four years later, that was 1909, 1913, Oldridge and the Commission were a vital key in the drive for a central bank. Particularly influential in the deliberations of the Commission were two men who were not official members. This often happens, of course. Most of the senators and congressmen barely, rarely showed up at the sessions. Oldrich asked J.P. Morgan to recommend a banking expert. Who else? Who better than Morgan to recommend an expert? And he recommended very happily with, happily responded with Henry P. Davison, a Morgan partner, and George Reynolds, who was president of the American Bankers Association. You have to realize the way the Morgans worked in that period, investment banks are partnership, Partnerships are not corporations, I think it's still true, and the Morgan firm assigned several partners to be their political arms, so to speak, they're people in politics, and Henry Davison was one of them, another was George W. Perkins, who winds up as head of the Progressive Party of America, and a bunch of others, Thomas W. Lamont, et cetera, et cetera. So that was one big focus, the old rich Rockefeller connection,

36:24Morgan, coming in with a Morgan partner as a key person here. Another prime foco for the drive for central bank was Paul Moritz Warburg, who was a scion of the great international banking family, a German banking firm, M.M. Warburg and Company of Homburg, who emigrates to the United States in 1902 to become a partner in the influential banking house of Kuhn-Lohabend Company. What you have to realize about Warburg is he spent all of his time, apparently his full not an investment banking but in pushing the idea of a central bank in print and lectures and all that sort of stuff he was being paid I think about six hundred thousand a year which you know meant about I don't know whether it is now six million or something like that more than that just for the purpose of propagandizing for central bank the he was he was sensitive to the to the idea to the view, to the idea that the public didn't like central banks, didn't like central control,

37:26was suspicious of Wall Street and so forth. And you then had a certain amount of jockeying for power influence on the part of, or specifics on the part of the various pro-central bankers. They had to work out a whole bunch of things here. And they had to work out the provisions, they had to work out the general situation. Interestingly enough, Aldrich, the politician, wanted a straight central bank. That's it. and Warburg, the banker, said no, no, the American public won't accept this. We needed phony decentralization. We needed the idea of regional banks or the Federal Reserve Board, which would only supervise it, because the public won't accept the straight outright centralization. We needed the content of centralization with a form of decentralization, which of course is the thing that eventually happens.

38:14In order to finally iron out their differences in November I think 1910 I think it was, the top pro-central banking people met in a famous secret meeting, a clandestine meeting, it's famous now, at Jekyll Island, Georgia, the Jekyll Island club of Jekyll Island, Georgia, which was a duck-shooting retreat, and there was a big secrecy involved because the press was all interested in the activities of all these people and they told the press We're taking a special railroad, chartering a special railroad car, going down to Georgia for duck shooting. We're not going to talk about anything specific, anything economic. And they all travel under assumed names in this railroad car, like the old rich chartered, and somehow they manage to talk the press out of publicizing this.

39:04And they don't investigate this to, I don't know how they did it. Transactions occurred, gentle persuasion occurred, and nothing was mentioned at the time. Okay, so they met for about a week at Jekyll Island. The people who met symbolized the power elite involved in the pushing for the Federal Reserve system. Senator Aldrich was there, of course, he had chartered the car. It's not really known who got them in there because none of these guys were club members of the Jekyll Island club and somebody had to reserve the space for them. It was probably J.P. Morgan who was a member of the Jekyll Island club. These other guys weren't big shoddy enough to be members. So, Senator Aldrich was there, Henry Davison, the Morgan partner, was there, I've already mentioned, Paul Warburg, the Kuhn-Lower partner, was there, Frank Vanderlip, Vice President of Rockefeller's National City Bank, Charles Norton, who was President of Morgan's first national bank in New York, and Apeyit Andrew, who was the economist, he was a Harvard economist.

39:58You have to have some technician to work out the specifics, who was staff assistant to Aldrich. And, again, this symbolizes the unity of business, government, and economics, or economists. Okay, so it's a living embodiment, as I say, of the Rockefeller, Kuhn, Lowell, Morgan interests allied in this great struggle aided by economic technicians. Okay, they draft the bill for the central bank. They draft what was later to become the Federal Reserve Act, almost word for word, except for tiny details. The draft was essentially written by Warburg with a decentralized soupçon added from others. The final writing, the actual writing was contributed by Vander Lipp, and as I say, the main disagreement was that Oldridge wanted a straight central bank at Warburg saying, no, no, we have to have a phony facade of decentralization.

40:46And then Oldridge finally, they make the agreement, Oldridge presents the draft of the National Monetary Commission in January 1911, and slightly revised, it was introduced as a commission report or commission bill, as the Oldridge bill, a year later, which in turn became the Federal Final Reserve Act. Now the interesting thing is the Old Rich and the Monetary Commission, they were ready for the report by January 1911, as I said. They delayed it for a whole year. Why did they delay it? Because by this time, in the elections of 1910, the Democrats won the Congress. And so, at this point, they realized they had to do some more spade work. They had to convert the Democrats, and they also had to convert the rest of the public. So we needed a year of propaganda and agitation before they actually presented the Federal Reserve bill.

41:40So at the beginning of February 1911, this educational campaign starts, 22 top bankers from 12 cities meet in Atlantic City and consider the Aldrich Plan. They warmly endorse it, of course, and James Forgan, who was president of the First National of Bank of Chicago, which was Rockefeller control, as he put it, the real purpose of this conference is to discuss winning the banking community over to government control directed by the bankers for their own ends. I'm going to repeat that. The real purpose of this conference is to discuss winning the banking community over to government control directed by the bankers for their own ends. Educating the bankers, this isn't really, this is not the kind of government intervention It was generally appreciated by the conference that this would increase the power of the big national banks to compete with the rapidly growing state banks, help bring those state banks under control and strengthen the position of the national banks in foreign banking activities.

42:45Okay, by November 1911, Aldrich, combined with the big bankers, wins the support of the American Bankers Association, the big trade association of bankers. And Aldrich addresses the association in a speech and he says, the organization proposed is not a bank but a cooperative union of all the banks of the country for definite purposes. For the lay public, Aldrich and his colleagues created an organization in the spring of 1911 called this National Citizens League for the creation of the sound banking system. The League grew out of a resolution which Paul Warburg had pushed through a meeting of the National Board of Trade in January 1910, setting aside January 18th of 1911 to be Monetary Day devoted to a quote, businessman's monetary conference. At that January 1911 meeting, the conference appointed a committee of seven headed by Warburg to organize the Businessman's Monetary Reform League, a group of leading Chicago businessmen were then organized and the idea was they should establish the Citizens League, not in New York, which is suspect, but in Chicago, the heartland of America.

43:45So it looks like a grassrootsy organization. And James Lawrence Laughlin, the economist, was the operating head of it, admitted that later, you know, later years. Yeah, yeah, this whole thing was a banker's front, which he, of course, was in favor of. So, the stated purpose of the League, for example, was to advance the cause of cooperation with dominant centralization of oil banks by an evolution out of our clearinghouse experience. And then there was various splits in their personality conflicts, et cetera, around the fact that the Democrats, and Laughlin was a Democrat, wanted to get rid of the evil name Aldrich, because Aldrich was a big shot Republican, from the bill. At the annual meeting of the American Bankers Association in August 1913, A. Barton Hepburn of the Chase National Bank exalted about a successful effort to get the bankers to endorse the Glass Bill.

44:54Quote, the measure recognizes and adopts the principles of a central bank. Indeed, if it works out as the sponsors of the law of hope, it will make all incorporated banks together joint owners of a central dominating power. Okay, so the Federal Reserve System was then enacted in December 1913 and opened its doors the following November, 19, November 14, and won at the same time a cartelizing and inflationary Organization. Okay, the bank structure was such that the banks themselves were very powerful in selecting Federal Reserve officials. There's a whole different structure, different regional structure and all that. The chief executive officer of each bank, which in those days was called the governor, now called the president, was selected by the bank directors themselves, in other words in other words, the regional bank directors and mostly bankers, and then we have of course the Federal Reserve Board and the Governor of the Federal Reserve Bank of New York which in those days ran the system until 1929, the next step then is to analyze who these guys

46:02were, and that of course becomes important, another thing that happened by the way is the reserves was centralized in the Federal Reserve system, the Federal Reserve banks banks become the monopolists of all paper money, not just national bank for now, only the Federal Reserve can print paper money, and the reserve requirements were cut in half, thereby running a great inflationary potential for the whole system. Reserve requirements before that were about 20% and now go down about 10%. The bankers all hail the enactment of the Federal Reserve system, this is great stuff, and now they say we have to see who's going to run it, and the next step is who the personnel are. Okay, there were seven members of the Federal Reserve Board in that period, of whom two were ex officio in those days, the Secretary of the Treasury and the Control of the Currency.

46:48So who were they? Well, Secretary of the Treasury and the Control of the Currency, before they assumed their post, again, who were they before they became big shots in the Wilson administration? They were close associates, business and financial associates themselves. Secretary of the Treasury William Gibbs McAdoo had been a failing businessman in New York City. He was a loser. He set up several enterprises in his life and they all collapsed. For some reason, he was befriended. He was taken a personal liking to by J.P. Morgan, which is something you want to have happen to you in that period. And Morgan decided to bail McAdoo out. And he set McAdoo up as president of New York's Hudson and Manhattan Railroad, which ran the tubes under the Hudson in the River, which he was before he became Secretary of Treasury.

47:36He spent his entire life, the rest of his life on the Morgan financial embit. His fellow board members and officers of the Hudson Manhattan Trans, they were all Morgan people. They were president of Morgan companies, they were presidents of Morgan cartel, Morgan merge companies in industry like International Harvester and U.S. Steel, which were originally, by the way, monopolies. The whole thing was a flop-a-roo from that perspective. So all these guys were on his board, and then when he, after he becomes Secretary of the Treasury, Wilson cements, I mean, McAdoo cements his political stature by marrying the daughter of President Wilson, which is the second best thing for you to do if you're a Wilson's president. One is you become a pal of Morgan, and two you become the son-in-law of Wilson.

48:23The ruler of the currency was a longtime associate of McAdoo's. He was a Virginia banker and president of the Richmond Trust Safe Deposit Company, John Skelton Williams, had been a director of McAdoo's Putzen Manhattan Railroad and president of the Morgan-oriented Seaboard Airline Railway. Okay, so that's those two guys. Who were the other five appointees? Who were the other five people whom Wilson appointed to the Federal Reserve Board? There was Charles Hamlin who was another close associate of McAdoo. He was a Boston attorney who had married into the wealthy Prine family of Albany, a family long connected with the New York Central Railroad which had been run by the Morgans for about four decades by this point. The other three, the other four appointees were Paul Warburg we've already talked about. Frederic Delano was the uncle of Franklin D. Roosevelt, president of the Rockefeller Control Wabash Railway, known as Uncle Fred, I think, in the New Deal period.

49:18William P.G. Harding was president of the First National Bank of Birmingham, Alabama, and son-in-law of Joseph Woodward, who was head of the Woodward Iron Company, which had several prominent Morgan and Rockefeller people on the board of directors. And finally, an economist, Professor Adolph C. Miller of the University of Chicago, and for Land Economic Technician Prestige. However, he wasn't just an ordinary economist. He was also, he had married into the wealthy Morgan-connected Sprague family of Chicago. His father-in-law Otto Sprague had been a prominent businessman and served as the director of the Morgan dominated Pullman Company and his wife's uncle, Albert Sprague was director of the Chicago Telephone Company, subsidiary of the American Tele-and-Tele, which essentially was a Morgan controlled monopoly. So then we have, in other words, the Federal Reserve Board The Federal Reserve began its existence with three Morgan men, one Rockefeller type, and a Kuhn-Loeb, an ally of the Rockefellers, a prominent Alabama banker and an economist with vague Morgan family connections.

50:16That's the disinterested public interest at work. Okay, the guy who controlled the Federal Reserve System with an iron hand from the beginning until he died in 1928 was Governor of the Federal Reserve Bank of New York, Benjamin Strong. He ran the system, much to the dislike of the Federal Reserve Board in Washington. And after he died, the law was changed to ensure the Federal Reserve Board was running things and not the Governor of the Federal Reserve Bank of New York. Who was Benjamin Strong? His policies were inflationary throughout and all that. Who was he? Where did he come from? Again, he didn't drop out of the sky by divine edict. He had spent before this virtually his entire business and personal life in the circle of top aides of J.P. Morgan. He was secretary of several trust companies in New York City and he lived in a suburb in New York, Englewood, New Jersey, which in those days was a very wealthy suburb.

51:09It's come down a bit since then. And Engelwood, he became close friends of three top Morgan partners, which is the next best thing if you're not a friend of Morgan, you'd be a friend of three top Morgan partners. Henry P. Davison, we mentioned already, Thomas W. Lamont and Dwight Morrow. Davison became Strong's mentor and offered him the post of secretary of the new Morgan-Created Bankers Trust Company. What was happening was the trust companies were popping up in that period, the banks wanted to get a piece of the action, and so Morgan created Bankers Trust for that purpose. Soon after that, strong against cemented his alliances by marrying the daughter of the wealthy Edmund Converse, president of the Bankers Trust, and he soon succeeded Thomas LeMans as vice president. So you marry the daughter of the president, your pal of three Morgan partners.

51:57And not long after, when Converse was getting old, he becomes the vice president and virtual president. Okay, the Strong had favored central banking at least since 1907, and in August 1911, he participated with Nelson Aldrich in a lengthy meeting on the Aldrich Plan, with Davison, Vanderlip, and a few other big shots on Aldrich's yacht. When the Federal Reserve System was established, Warburg was also a close friend of Strong, offered the post to the governor of the New York Fed to Strong. No, he refuses, he doesn't like the Fed because it's not enough of a central bank. He wants it run from New York, as he said, by board of directors on the ground, Wall Street.

52:47After a week in the country, Davison and Warburg persuaded Strong, don't worry about it, this will be a central bank and you'll be running it. And at that point he accepted the job and became governor of the New York Fed. He proceeded to assume absolute power. Okay, that's essentially the story of the founding of the Fed, as he put it, as Strong put it in the, he put it, for example, that when he was worried that the state banks refused to join the system, you know, state banks have the option of either joining the Fed or not, and he was worried about it, and he said, he said in a letter in October 1916, 2016, frankly our bankers are more or less an unorganized mob until they are educated by experience of the advantages of cooperation through the reserve system, I believe is unsafe for life on reserves contributed by their voluntary action, in other words force them into the system.

53:38And that way every cartelist has always complained about individual businessmen who kick over the traces and don't accept the collective discipline of the cartel. Senator Carter Glass said when he drew up the Glass Bill, the final Federal Reserve Bill, and he said afterward, he looked back on his handiwork and he said that he thought it was great stuff about two years later, and he said, the proponents of the Federal Reserve Act had no idea of impairing the rightful prestige of New York as the financial metropolis of this hemisphere. They rather expected to confirm its distinction and even hoped to assist powerfully in wresting this scepter from London and eventually making New York the financial center of the world. Indeed, momentarily this has come to pass. And we may point out, Carter Glass goes on, to the amazing contrast between New York under the old system in 1907, shaken to its very foundations because of two bank failures, and New York at the present time, under the new system, serenely secure in its domestic

54:35banking operations and confidently financing the great enterprises of European nations at war. Okay? It concludes my talk. Murray, thank you very much. Again, a most informative and detailed and interesting discussion. I think we can piece some things together from what we've seen thus far. Professor Peden was up here telling us about government and inflation and how the government inflates. And one of the major messages I think we found in what Murray said is that when government becomes partner with the banking community, then that inflation becomes even more inevitable and the incentive system becomes one where it's in everybody's incentive who controls money and credit for even more inflation.

55:31I've been saving this question up for a long time and I haven't had a chance to ask it to you and it's related to money but not necessarily the history of the Federal Reserve. Right now, there's a lot of banks or have been over the last few years failing and then the FDIC comes in and bails them out and I haven't figured out what the effect of that is on the economy when money is taken out of the system because of the failure of the bank and then the FDIC comes back and puts some new money back in with T-bills or whatever it does to prop it up. I know it has something to do with the business cycle but I'm confused about exactly, I mean, this is monetary inflation but you're not necessarily saying a whole bunch and a bunch of price inflation and one of the things I think I'm confused about is which causes the business cycle? What causes distortions in the economy?

56:19I guess there's a lot of questions and all rocked up into that, but what is the effect of banks failing today with the existing system where the FDIC comes back in and props it up? What is it going to do to the economy? What can we expect from here on out? Deflation of prices, inflation of prices or what kind of distortions? Well, I think what's happened since, see something, a sea chain happened in 1933, namely the Fed had always been hampered in its inflationary potential and saving out the banks by the fact they had a gold standard to worry about. The Fed couldn't inflate too much, they had to pay in gold also, and so there were literally thousands of bank failures during the early 30s. With the going off the gold standard and with the FDIC, the Fed now has unlimited power to expand on a flight.

57:06And when the FDIC bailed out, for example, the Continental Illinois National Bank, they only had to bail out the people with deposits of $100,000 and under. They decided to bail out everybody. So they've already expanded now the FDIC as universal deposit insurance. The use of insurance, of course, is a euphemism. It means the government prints money and bails out the banks. The key thing is the Federal Reserve has the unlimited power to print money. That's the key. Create, manufacture money. Instead of money being minted in gold or whatever and dug out of mines and painfully minted, making it therefore very scarce, which preserves the soundness of the money unit, instead of that the government, the Federal Reserve, has the unlimited power to print whatever it wants. So what it does is it pends $8 billion, $30 billion, whatever, and bails out banks, buys assets or whatever.

57:56The technical, they do it to the tune of a lot of crises, a lot of jetting back and forth across the world to save the third world nations. But basically what it means is it's very simple. Basically, the Fed prints dollars and hands it out. So this is monetary inflation. It's expanding the supply of dollars. That's the distortion that creates the business cycle. And in order to try to eliminate recessions, which are the cause of, which is the result of inflation, they try to inflate more. So it's a sort of a spiral operation. And I don't, I've been in a constant argument with my hard-money colleagues now for at least 10 years about whether deflation or inflation is on the horizon. And one of the, they sort of, in a sense they have proclaimed victory recently because they redefined deflation.

58:45Deflation now means any inflation of less than 10% a year. Talking about changing linguistics. I take the old-fashioned view that deflation means a substantial fall in the cost of living. Not the fall in zinc prices or something like that, the fall in cost of living. And that, of course, hasn't happened and won't happen. And it won't happen as long as the Federal Reserve has the infinite power to create money, which they have. And so if you have the power to create money, the power to print money, you'll do it. It's one of Rothbard's laws. I have my own laws. One is, if you have the power to print money, you'll do it, okay? Regardless of any ideology or statements that you should limit your counterfeit operations the 3% of the years the Freemenites want to do. Basically, you'll print it. You'll find various reasons for it.

59:31You'll save banks, you'll save people, you'll save the people of Argentina, whatever. There's lots of reasons for creating more money. And that's really the problem. Well, the Federal Reserve has the power to print money, but they don't really print very much money, they print credit. And that's very different from money because it draws interest. And it looked like a good deal going in, but the interest becomes such a weight burden at some point, they can't expand credit. Then what happens? Well, they can expand credit. They print money and they create... Usually the money goes out in the form of buying assets of one sort or another. So, if they buy government bonds, for example, this means the government bond dealer gets whatever, the money for, say, a million, say the Federal buys a, writes out a check for a million dollars of government bonds, the bond dealer gets the million dollar check, which means the Federal says the Federal Reserve system promises to pay to the bearer a million

1:00:26dollars. He can't do it because only banks can have deposit accounts with the Federal Reserve banks. He deposits in his bank, or else he tears it up, which he won't do. If you deposit in Chase or Citibank or whatever, they get a reserve increase of a million dollars, they pyramid credit 10 to 1 on top of it, this is basically what happens. In other words, it's a creation of money through the fact that the Federal Reserve has the power to print. If anybody asks the Fed to redeem your deposits in dollars, they'll print the dollars and redeem it. So the power to actually print the money is the basis for the whole inflationary system. It doesn't mean they actually print the money and spend it, that's what the Treasury used to do in the Civil War. There's a more sophisticated way of doing it. They write out checks out of thin air, buy bonds with it and then the checks or deposits on the Fed then go out into the system, circulate in the system.

1:01:12And say if anybody wants to redeem their deposit in cash, the Fed will print the cash to pay it back, pay it off. So that's the process. It's less honest but equivalent to the old idea that the Treasury prints money and spends it on missiles or whatever. But that can't go on forever, because of the interest burden. Well, the interest burden can be, yeah, the interest burden is increased. The interest burden can always be alleviated, so to speak, by inflation. In other words, the more you inflate, the lower the interest burden becomes. Not if you inflate with credit. They're inflating with credit. They're not inflating with money. The result of credit is money, dollars. I call money dollars. And dollars is what pays for goods and services. Well, the amount of dollars in circulation are very small compared to the amount of credit.

1:02:00Well, I mean, I don't know how you pay for stuff. I pay for stuff by writing out a check, and that's dollars. And this check is accepted by my people I spend money on. I call that money. Most people call it money. Murray's point is that this credit can easily be converted into money. That's the whole idea behind this. I used to scold bankers for being part of this inflation problem. argued that when they made these loans out of, they fabricated them on the books that contributed to inflation because it would expand the money supply. Their argument was, no, that doesn't expand the money supply because the loans will be paid off. They argued back, no, they don't ever pay them off, they just substitute collateral by more and more money, which is what we've done up to a point.

1:02:46But there comes a point where people can't service the debt any longer. And then the banks, they like to get some of that money back that they loaned out. And it looks like there's a limitation on how much credit you can extend in the system. And we're somewhere near that. The credit can continue to expand somewhat. But under the present system, we don't have the capacity to inflate substantially, not like we've done in the past. I mean, we're somewhere near that. I just don't understand your statement. Israel now has a 900% inflation rate per annum. Yeah, but they don't do it with credit. They do it with money. They're printing money. and Money. You can have unlimited inflation as long as you're running currency. I'm sorry, I think the difference comes in. The Bank of Israel buys government bonds, pay the deficit. You do have problems and we see some domestic banks experiencing them now when they've granted large loans or increased their loans outstanding over the years

1:03:37in the anticipation that inflation will keep rising to make the debtors able to service the loan debt.

1:04:14War II. And this is what Murray and Professor Peden were talking about this morning. The inflation so racks the society and the controls put on not to get the root cause of it, but to try and make it politicians palatable for the citizens to live with, ultimately brings down the society as a major factor. That is kind of the limit I think you're referring to as well. I think we all hope and pray that we don't get to that position in the United States with good dialogue like we've had We've had here today in very informative presentations, perhaps we can strengthen the message we need to send so that those events won't occur.