A Brighter Future through Central Banking?
Gregory D. L. Morris, a member of the editorial board of the Museum of American Finance, recently came out with a piece in Bloomberg entitled “How a Populist Outage Gave Birth to the Federal Reserve: Echoes” which goes over the history of central banking in the U.S. and how the Federal Reserve Act was a reaction to the Panic of 1907. Morris claims that the Fed’s creation was a product of populist rage that ironically mimics much of the public criticism directed toward the central bank today. He writes:
On Nov. 2, 1907, John Pierpont Morgan assembled the presidents of several prominent trust companies in the library of his Fifth Avenue mansion. The illiquidity of their firms had caused what is known today as the Panic of 1907. Morgan forced those rich and powerful men to wait and worry, and by the next morning he had strong-armed them into an agreement that ended the crisis.
It wasn’t the first time that Morgan, a private citizen, had come to the rescue of the financial community. And the reaction among the public, and at all levels of government, was a mixture of shame and anger. In response, Congress created a central bank six years later, on Dec. 23, 1913.
This simple explanation, to speak frankly, is lacking in substance and historical fact. As anyone who has actually studied the origins of the legalized cartel known as the Federal Reserve System knows, it was not a product of angelic Congressman rushing in to save the ignorant public but a blatant power grab by the financial elite. As libertarian economist Murray Rothbard noted:
During the 1890s, in the new field of large-scale industrial corporations, big-business interests tried to establish high prices and reduced production via mergers, and again, in every case, the merger collapsed from the winds of new competition. In both sets of cartel attempts, J. P. Morgan and Company had taken the lead, and in both sets of cases, the market, hampered though it was by high protective, tariff walls, managed to nullify these attempts at voluntary cartelization.
It then became clear to these big-business interests that the only way to establish a cartelized economy, an economy that would ensure their continued economic dominance and high profits, would be to use the powers of government to establish and maintain cartels by coercion, in other words, to transform the economy from roughly laissez-faire to centralized, coordinated statism. But how could the American people, steeped in a long tradition of fierce opposition to government-imposed monopoly, go along with this program? How could the public’s consent to the New Order be engineered?
Like most central banking apologists, Morris acknowledges financial panics and busts but never questions why the arose in the first place. He attributes the Panic of 1907 to the illiquidity of the big banks and trust firms but makes no peep about the U.S. Treasury, under the direction of Secretary and Central Bank-wannabe Leslie Shaw, and its blatant policy of inflation from 1905-1907. Such a policy, like all fiat generated booms, eclipsed into a deflationary bust as people increased their cash balances. Government allowed major banks to suspend specie payments, as occurs in most major financial panics, essentially taking a skewer to basic property rights.
“Socialism has never and nowhere been at first a working-class movement,” proclaimed Nobel laureate and economist Fredriech Hayek and indeed that was the case with the creation of the Federal Reserve. Rothbard again exposes this procedure:
The first step in such mobilization was to win the support of the nation’s academics and experts. The task was made easier by the growing alliance and symbiosis between academia and the power elite. Two organizations that proved particularly useful for this mobilization were the American Academy of Political and Social Science (AAPSS) of Philadelphia, and the Academy of Political Science (APS) of Columbia University, both of which included in their ranks leading corporate-liberal businessmen, financiers, attorneys, and academics.
Like any movement pushing for centralized power, leaders from academia, big business, and the government began a propaganda campaign to drive for legislation creating a central banking system. It all began in January of 1906 with Jacob H. Schiff, head of the Wall Street firm Kuhn, Loeb and Co., giving a speech to the New York Chamber of Commerce calling for a national central bank. In the winter of 1907-1908, the AAPSS, APS, and ColumbiaUniversitythrew a few symposiums calling for the adoption of central banking.  Former Assistant of the Treasury and top executive at the prominent National City Bank of New York, which represented the interests of the Rockefeller family, Frank Vanderlip candidly explained the real reason behind such a push for centralization was that the dog-eat-dog competition that dominated the banking industry was too much for the elite financial bearers to deal with. The horrible thing was, as Vanderlip put it, “each institution stands alone, concerned first with its own safety, and using every endeavor to pile up reserves without regard.”
Yes, being that rigorous competition leads to lower prices and increased efficiency in every other industry, it certainly can’t be allowed in banking. How else would the banker class be able to dominate if such productive competition were to take place?
Morris makes the same fallacious claim that prior to the advent of the Fed, banking panics were a common outcome of nonregulation. There are a number of issues with such a statement; mainly that government intervention prevented banks from diversifying risk and forced the acceptance of issued notes by competing financial institutions. As economic historian Tom Woods explains:
Moreover, the post–Civil War panics in theUnited Stateswere due in large part to the unit-banking regulations in many states that forbade branch banking of any sort. Confined to a single office, each bank was necessarily fragile and undiversified.
In a truly free market environment, banks provide a competitive check on the soundness of each other’s fiduciary note issuances by their refusal or acceptance as deposits. The cartelization of large, national banks put a stop to this mechanism, per Rothbard:
A second, and more lasting, intervention was the National Banking Acts of 1863, 1864, and 1865, which destroyed the issue of bank notes by state-chartered (or “state”) banks by a prohibitory tax, and then monopolized the issue of bank notes in the hands of a few large, federally chartered “national banks,” mainly centered on Wall Street. In a typical cartelization, national banks were compelled by law to accept each other’s notes and demand deposits at par, negating the process by which the free market had previously been discounting the notes and deposits of shaky and inflationary banks.
A number of commissions were financed to study the creation of central banking following the Panic of 1907 which culminated into the infamous retreat to J.P. Morgan’s vacation spot known as the Jekyll Island Club. There, members of the financial elite, with the help of Senator Nelson Aldrich of Maryland, put the nail in the coffin of American democracy in monetary affairs by crafting the Federal Reserve bill. A century, and devaluation in the value of the dollar by 95%, later, the U.S. has waged a campaign of unsustainable welfare programs and endless warfare financed by money printing.
The Federal Reserve bill was not a product of populism but of a coordinated effort between members of the Rockefeller, Morgan, and Kuhn, Loeb interests along with the backing of academia and government proponents. Though the inflationary populism that destroyed the Democratic Party of old during the 1896 presidential election raised the veil of public endorsement for central banking, it was ultimately a back room deal between the Morgan and Rockefeller family to endorse candidate and supposed gold standard-backer William McKinley. Once McKinley secured the White House, the faux-grassroots campaign began to reform the inelasticity of the gold standard to one controlled by the Morgan-Rockefeller alliance. Success came as the Federal Reserve, a government sanctioned cartel which garners the benefit of coordinated inflation while offsetting the disastrous consequences to the lower and middle class, was established and has since reigned supreme with the guns of Washington always at its backing.
Tags: Bloomberg, Federal Reserve, Gregory D. L. Morris, Jacob H. Schiff, Jekyll Island Club, Morgan, Murray Rothbard, Nelson Aldrich, Rockefeller, rothbard, Tom Woods
The Federal reserve a populist movement it is great because a banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender.
Another reason to vote for Ron Paul.
Interesting spotlight on central banking and the FED….