2.
The Federal
Reserve System
“Legal
Factual White Supremacy Pure Klan’s Man Claimed”
“Brief Background
I”
The
Federal Reserve System is the third central banking system in United States
history. The First Bank of the United States (1791–1811) and the Second Bank of
the United States (1817–1836) each had a 20-year charter.
Both banks issued currency, made commercial
loans, accepted deposits, purchased securities, maintained multiple branches
and acted as fiscal agents for the U.S. Treasury.
The
U.S. Federal Government was required to purchase 20% of the bank capital stock
shares and to appoint 20% of the board members (directors) of each of those
first two banks "of the United States."
Therefore,
each bank's majority control was placed squarely in the hands of wealthy
investors who purchased the remaining 80% of the stock.
These
banks were opposed by state-chartered banks, who saw them as very large
competitors, and by many who insisted that they were in reality banking cartels
compelling the common man to maintain and support them. President Andrew
Jackson vetoed legislation to renew the Second Bank of the United States,
starting a period of free banking.
Jackson staked the legislative success of his
second presidential term on the issue of central banking.
"Every
monopoly and all exclusive privileges are granted at the expense of the public,
which ought to receive a fair equivalent.
The
many millions which this act proposes to bestow on the stockholders of the
existing bank must come directly or indirectly out of the earnings of the
American people," Jackson said in 1832.
Jackson's
second term in office ended in March 1837 without the Second Bank of the United
States's charter being renewed.
In
1863, as a means to help finance the Civil War, a system of national banks was
instituted by the National Currency Act. The banks each had the power to issue
standardized national bank notes based on United States bonds held by the bank.
The
Act was totally revised in 1864 and later named as the National-Bank Act, or
National Banking Act, as it is popularly known. The administration of the new
national banking system was vested in the newly created Office of the
Comptroller of the Currency and its chief administrator, the Comptroller of the
Currency.
The Office, which still exists today, examines
and supervises all banks chartered nationally and is a part of the U.S.
Treasury Department.
The
Federal Reserve Act
National
bank currency was considered inelastic because it was based on the fluctuating
value of U.S. Treasury bonds rather than the growing desire for easy credit.
If Treasury bond prices declined, a national
bank had to reduce the amount of currency it had in circulation by either
refusing to make new loans or by calling in loans it had made already.
The
related liquidity problem was largely caused by an immobile, pyramidal reserve
system, in which nationally chartered rural/agriculture-based banks were
required to set aside their reserves in federal reserve city banks, which in
turn were required to have reserves in central city banks.
During the planting seasons, rural banks would
exploit their reserves to finance full plantings, and during the harvest
seasons they would use profits from loan interest payments to restore and grow
their reserves.
A
national bank whose reserves were being drained would replace its reserves by
selling stocks and bonds, by borrowing from a clearing house or by calling in
loans.
As
there was little in the way of deposit insurance, if a bank was rumored to be
having liquidity problems then this might cause many people to remove their
funds from the bank.
Because
of the crescendo effect of banks which lent more than their assets could cover,
during the last quarter of the 19th century and the beginning of the 20th
century, the United States economy went through a series of financial panics.
The
National Monetary Commission
Prior
to a particularly severe panic in 1907, there was a motivation for renewed demands
for banking and currency reform.[4] The following year, Congress enacted the
Aldrich-Vreeland Act which provided for an emergency currency and established
the National Monetary Commission to study banking and currency reform.
Fed
Reserve.JPG
The
chief of the bipartisan National Monetary Commission was financial expert and
Senate Republican leader Nelson Aldrich. Aldrich set up two commissions – one
to study the American monetary system in depth and the other, headed by
Aldrich, to study the European central-banking systems and report on them.
Aldrich
went to Europe opposed to centralized banking but, after viewing Germany's
banking system, he came away believing that a centralized bank was better than
the government-issued bond system that he had previously supported. Centralized
banking was met with much opposition from politicians, who were suspicious of a
central bank and who charged that Aldrich was biased due to his close ties to
wealthy bankers such as
“
J.P. Morgan and his daughter's marriage to John D. Rockefeller, Jr.”
In
1910, Aldrich and executives representing the banks of J.P. Morgan,
Rockefeller, and Kuhn, Loeb & Co., secluded themselves for ten days at
Jekyll Island, Georgia.
The
executives included Frank A. Vanderlip, president of the National City Bank of
New York, associated with the Rockefellers; Henry Davison, senior partner of
J.P. Morgan Company; Charles D. Norton, president of the First National Bank of
New York; and Col. Edward House, who would later become President Woodrow
Wilson's closest adviser and founder of the Council on Foreign Relations.
There,
Paul Warburg of Kuhn, Loeb, & Co. directed the proceedings and wrote the
primary features of what would be called the Aldrich Plan. Warburg would later
write that
"The matter of a uniform discount rate
(interest rate) was discussed and settled at Jekyll Island.
"
Vanderlip wrote in his 1935 autobiography From Farmboy to Financier:
Despite
my views about the value to society of greater publicity for the affairs of
corporations, there was an occasion, near the close of 1910, when I was as
secretive, indeed, as furtive as any conspirator. None of us who participated
felt that we were conspirators; on the contrary we felt we were engaged in a
patriotic work.
We
were trying to plan a mechanism that would correct the weaknesses of our
banking system as revealed under the strains and pressures of the panic of
1907.
I do not feel it is any exaggeration to speak
of our secret expedition to Jekyl Island as the occasion of the actual
conception of what eventually became the Federal Reserve System. … Discovery,
we knew, simply must not happen, or else all our time and effort would be
wasted. If it were to be exposed publicly that our particular group had gotten
together and written a banking bill, that bill would have no chance whatever of
passage by Congress.
Yet,
who was there in Congress who might have drafted a sound piece of legislation
dealing with the purely banking problem with which we were concerned?
Despite
meeting in secret, from both the public and the government, the importance of
the Jekyll Island meeting was revealed three years after the Federal Reserve
Act was passed, when journalist Bertie Charles Forbes in 1916 wrote an article
about the "hunting trip".
The
1911–12 Republican plan was proposed by Aldrich to solve the banking dilemma, a
goal which was supported by the American Bankers’ Association. The plan
provided for one great central bank, the National Reserve Association, with a
capital of at least $100 million and with 15 branches in various sections.
The branches were to be controlled by the
member banks on a basis of their capitalization.
The
National Reserve Association would issue currency, based on gold and commercial
paper, that would be the liability of the bank and not of the government.
The Association would also carry a portion of
member banks’ reserves, determine discount reserves, buy and sell on the open
market, and hold the deposits of the federal government. The branches and
businessmen of each of the 15 districts would elect thirty out of the 39
members of the board of directors of the National Reserve Association
Aldrich
fought for a private monopoly with little government influence, but conceded
that the government should be represented on the board of directors.
Aldrich then presented what was commonly
called the "Aldrich Plan" – which called for establishment of a
"National Reserve Association" – to the National Monetary Commission.
Most Republicans and Wall Street bankers
favored the Aldrich Plan, but it lacked enough support in the bipartisan
Congress to pass.
Because
the bill was introduced by Aldrich, who was considered [by whom?] the epitome
of the "Eastern establishment", the bill received little support. It
was derided by southerners and westerners who believed that wealthy families
and large corporations ran the country and would thus run the proposed National
Reserve Association.
The National Board of Trade appointed Warburg
as head of a committee to persuade Americans to support the plan.
The
committee set up offices in the then-45 states and distributed printed
materials about the proposed central bank.
The
Nebraskan populist and frequent Democratic presidential candidate William
Jennings Bryan said of the plan: "Big financiers are back of the Aldrich
currency scheme.
"
He asserted that if it passed, big bankers would "then be in complete control
of everything through the control of our national finances."
There
was also Republican opposition to the Aldrich Plan. Republican Sen. Robert M.
LaFollette and Rep. Charles Lindbergh Sr. both spoke out against the favoritism
that they contended the bill granted to Wall Street.
"The
Aldrich Plan is the Wall Street Plan…I have alleged that there is a 'Money
Trust'", said Lindbergh. "The Aldrich plan is a scheme plainly in the
interest of the Trust"
In response, Rep. Arsène Pujo, a Democrat from
Louisiana, obtained congressional authorization to form and chair a
subcommittee (the Pujo Committee) within the House Committee Banking Committee,
to conduct investigative hearings on the alleged
"Money Trust".
The
hearings continued for a full year and were led by the subcommittee's counsel,
Democratic lawyer Samuel Untermyer, who later also assisted in drafting the
Federal Reserve Act. The "Pujo hearings" convinced much of the
populace that America's money largely rested in the hands of a select few on
Wall Street.
The Subcommittee issued a report saying:
"If
by a 'money trust' is meant an established and well-defined identity and
community of interest between a few leaders of finance…which has resulted in a
vast and growing concentration of control of money and credit in the hands of a
comparatively few men…the condition thus described exists in this country
today...
To us
the peril is manifest...When we find...the same man a director in a half dozen
or more banks and trust companies all located in the same section of the same
city, doing the same class of business and with a like set of associates
similarly situated all belonging to the same group and representing the same
class of interests, all further pretense of competition is useless.... "
Seen
as a "Money Trust" plan, the Aldrich Plan was opposed by the
Democratic Party as was stated in its 1912 campaign platform, but the platform
also supported a revision of banking laws intended to protect the public from
financial panics and
"the domination of what is known as the "Money
Trust." During the 1912 election, the Democratic Party took control of the
presidency and both chambers of Congress.
The
newly elected president, Woodrow Wilson, was committed to banking and currency
reform, but it took a great deal of his political influence to get an
acceptable plan passed as the Federal Reserve Act in 1913.
Wilson thought the Aldrich plan was perhaps
"60–70% correct".
When Virginia Rep. Carter Glass, chairman of
the House Committee on Banking and Currency, presented his bill to
President-elect Wilson, Wilson said that the plan must be amended to contain a
Federal Reserve Board appointed by the executive branch to maintain control
over the bankers.
After
Wilson presented the bill to Congress, a group of Democratic congressmen
revolted. The group, led by Representative Robert Henry of Texas, demanded that
the "Money Trust" be destroyed before it could undertake major
currency reforms.
The
opponents particularly objected to the idea of regional banks having to operate
without the implicit government protections that large, so-called money-center
banks would enjoy.
The group almost succeeded in killing the
bill, but were mollified by Wilson's promises to propose antitrust legislation
after the bill had passed, and by Bryan's support of the bill.
Enactment
of the Federal Reserve Act (1913)
After
months of hearings, amendments, and debates the Federal Reserve Act passed
Congress in December, 1913.
The
bill passed the House by an overwhelming majority of 298 to 60 on December 22,
1913 and passed the Senate the next day by a vote of 43 to 25.
An earlier version of the bill had passed the
Senate 54 to 34, but almost 30 senators had left for Christmas vacation by the
time the final bill came to a vote. Most every Democrat was in support of and
most Republicans were against it
As
noted in a paper by the American Institute of Economic Research:
In
its final form, the Federal Reserve Act represented a compromise among three political
groups. Most Republicans (and the Wall Street bankers) favored the Aldrich Plan
that came out of Jekyll Island.
Progressive
Democrats demanded a reserve system and currency supply owned and controlled by
the Government in order to counter the "money trust" and destroy the
existing concentration of credit resources in Wall Street.
Conservative
Democrats proposed a decentralized reserve system, owned and controlled
privately but free of Wall Street domination. No group got exactly what it
wanted.
But
the Aldrich plan more nearly represented the compromise position between the
two Democrat extremes, and it was closest to the final legislation passed.
Frank
Vanderlip, one of the Jekyll Island attendees and the president of National
City Bank, wrote in his autobiography:
Although
the Aldrich Federal Reserve Plan was defeated when it bore the name Aldrich,
nevertheless its essential points were all contained in the plan that was
finally adopted.
Ironically,
in October 1913, two months before the enactment of the Federal Reserve Act,
Frank Vanderlip proposed before the Senate Banking Committee his own competing
plan to the Federal Reserve System, one with a single central bank controlled
by the Federal government, which almost derailed the legislation then being
considered and already passed by the U.S. House of Representatives.
Even
Aldrich stated strong opposition to the currency plan passed by the House.
However,
the former point was also made by Republican Representative Charles Lindbergh
Sr. of Minnesota, one of the most vocal opponents of the bill, who on the day
the House agreed to the Federal Reserve Act told his colleagues:
"But
the Federal reserve board have no power whatever to regulate the rates of
interest that bankers may charge borrowers of money.
This
is the Aldrich bill in disguise, the difference being that by this bill the
Government issues the money, whereas by the Aldrich bill the issue was
controlled by the banks...Wall Street will control the money as easily through
this bill as they have heretofore."(Congressional Record, v. 51, page
1447, Dec. 22, 1913)
Republican
Congressman Victor Murdock of Kansas, who voted for the bill, told Congress on
that same day:
"I
do not blind myself to the fact that this measure will not be effectual as a
remedy for a great national evil – the concentrated control of credit...The
Money Trust has not passed [died]...
You
rejected the specific remedies of the Pujo committee, chief among them, the
prohibition of interlocking directorates. He [your enemy] will not cease
fighting...at some half-baked enactment...You struck a weak half-blow, and time
will show that you have lost. You could have struck a full blow and you would
have won."
In
order to get the Federal Reserve Act passed, Wilson needed the support of
populist William Jennings Bryan, who was credited with ensuring Wilson's
nomination by dramatically throwing his support Wilson's way at the 1912
Democratic convention.
Wilson appointed Bryan as his Secretary of
State. Bryan served as leader of the agrarian wing of the party and had argued
for unlimited coinage of silver in his "Cross of Gold Speech" at the
1896 Democratic convention.
Bryan
and the agrarians wanted a government-owned central bank which could print
paper money whenever Congress wanted, and thought the plan gave bankers too
much power to print the government's currency. Wilson sought the advice of prominent
lawyer Louis Brandeis to make the plan more amenable to the agrarian wing of
the party; Brandeis agreed with Bryan.
Wilson
convinced them that because Federal Reserve notes were obligations of the
government and because the president would appoint the members of the Federal
Reserve Board, the plan fit their demands.
However,
Bryan soon became disillusioned with the system. In the November 1923 issue of
"Hearst's Magazine" Bryan wrote that "The Federal Reserve Bank
that should have been the farmer's greatest protection has become his greatest
foe."
Southerners
and westerners learned from Wilson that the system was decentralized into 12
districts and surely would weaken New York and strengthen the hinterlands. Sen.
Robert L. Owen of Oklahoma eventually relented to speak in favor of the bill,
Arguing that the nation's currency was already
under too much control by New York elites, whom he alleged had singlehandedly
conspired to cause the 1907 Panic.
Large
bankers thought the legislation gave the government too much control over
markets and private business dealings. The New York Times called the Act the
"Oklahoma idea, the Nebraska idea" – referring to Owen and Bryan's
involvement.
However,
several Congressmen, including Owen, Lindbergh, LaFollette, and Murdock claimed
that the New York bankers feigned their disapproval of the bill in hopes of
inducing Congress to pass it. The day before the bill was passed, Murdock told
Congress:
"You
allowed the special interests by pretended dissatisfaction with the measure to
bring about a sham battle, and the sham battle was for the purpose of diverting
you people from the real remedy, and they diverted you. The Wall Street bluff
has worked."
When
Wilson signed the Federal Reserve Act on December 23, 1913, he said he felt
grateful for having had a part "in completing a work ... of lasting
benefit for the country," knowing that it took a great deal of compromise
and expenditure of his own political capital to get it enacted.
This was in
keeping with the general plan of action he made in his First Inaugural Address
on March 4, 1913, in which he stated:
We
shall deal with our economic system as it is and as it may be modified, not as
it might be if we had a clean sheet of paper to write upon; and step-by-step we
shall make it what it should be,
in the spirit of those who question their own
wisdom and seek counsel and knowledge, not shallow self-satisfaction or the
excitement of excursions we cannot tell.
While
a system of 12 regional banks was designed so as not to give eastern bankers
too much influence over the new bank, in practice, the Federal Reserve Bank of
New York became
"first
among equals". The New York Fed, for example, is solely responsible for
conducting open market operations, at the direction of the Federal Open Market
Committee.
Democratic
Congressman Carter Glass sponsored and wrote the eventual legislation,
And his home state capital of Richmond,
Virginia, was made a district headquarters. Democratic Senator James A. Reed of
Missouri obtained two districts for his state.
However, the 1914 report of the Federal
Reserve Organization Committee, which clearly laid out the rationale for their
decisions on establishing Reserve Bank districts in 1914, showed that it was based
almost entirely upon current correspondent banking relationships.
To quell Elihu Root's objections to possible
inflation, the passed bill included provisions that the bank must hold at least
40% of its outstanding loans in gold. (In later years, to stimulate short-term
economic activity, Congress would amend the act to allow more discretion in the
amount of gold that must be redeemed by the Bank.)
Critics of the time (later joined by economist
Milton Friedman) suggested that Glass's legislation was almost entirely based
on the Aldrich Plan that had been derided as giving too much power to elite
bankers.
Glass
denied copying Aldrich's plan. In 1922, he told Congress, "No greater
misconception was ever projected in this Senate Chamber."
Wilson
named Warburg and other prominent experts to direct the new system, which began
operations in 1915 and played a major role in financing the Allied and American
war efforts.
Warburg at first refused the appointment,
citing America's opposition to a "Wall Street man", but when World
War I broke out he accepted. He was the only appointee asked to appear before
the Senate,
Whose
members questioned him about his interests in the central bank and his ties to
Kuhn, Loeb, & Co.'s "money trusts".
Accord
of 1951 between the Federal Reserve and the Treasury Department
Main
article: 1951 Accord
Post
Bretton-Woods era
In
July 1979, Paul Volcker was nominated, by President Carter, as Chairman of the
Federal Reserve Board amid roaring inflation. He tightened the money supply,
and by 1986 inflation had fallen sharply.
In
October 1979 the Federal Reserve announced a policy of "targeting"
money aggregates and bank reserves in its struggle with double-digit inflation.
In
January 1987, with retail inflation at only 1%, the Federal Reserve announced
it was no longer going to use money-supply aggregates, such as M2, as guidelines
for controlling inflation, even though this method had been in use from 1979,
apparently with great success.
Before 1980, interest rates were used as
guidelines; inflation was severe. The Fed complained that the aggregates were
confusing. Volcker was chairman until August 1987, whereupon Alan Greenspan
assumed the mantle, seven months after monetary aggregate policy had changed
2001
recession to present
From
early 2001 to mid-2003 the Federal Reserve lowered its interest rates 13 times,
from 6.25 to 1.00%, to fight recession. In November 2002, rates were cut to
1.75, and many interest rates went below the inflation rate.
On
June 25, 2003, the federal funds rate was lowered to 1.00%, its lowest nominal
rate since July, 1958, when the overnight rate averaged 0.68%. Starting at the
end of June 2004, the Federal Reserve System raised the target interest rate
and then continued to do so 17 straight times.
In
February 2006, Ben Bernanke was appointed by President George W. Bush as the
chairman of the Federal Reserve.
In
March 2006, the Federal Reserve ceased to make public M3, because the costs of
collecting this data outweighed the benefits.[32] M3 includes all of M2 (which
includes M1) plus large-denomination ($100,000 +) time deposits, balances in
institutional money funds, repurchase liabilities issued by depository
institutions,
And Eurodollars held by U.S. residents at
foreign branches of U.S. banks as well as at all banks in the United Kingdom
and Canada.
2008
subprime mortgage crisis
Main
article: Federal Reserve responses to the subprime crisis
Due
to a credit crunch caused by the sub-prime mortgage crisis in September 2007,
the Federal Reserve began cutting the federal funds rate. The Fed cut rates by
0.25% after its December 11, 2007 meeting
And
disappointed many individual investors who expected a higher rate cut: the Dow
Jones Industrial Average dropped by nearly 300 points at its close that day.
The
Fed slashed the rate 0.75% in an emergency action on January 22, 2008 to assist
in reversing a significant market slide influenced by weakening international
markets.
The Dow Jones Industrial Average initially
fell nearly 4% (465 points) at the start of trading and then rebounded to a
more tolerable 1.06% (128 point) loss. On January 30, 2008, eight days after
the 75 points decrease, the Fed lowered its rate again, this time by 50 points.
On
August 25, 2009, President Barack Obama announced he would nominate Bernanke to
a second term as chairman of the Federal Reserve.
In
October 2013, Janet Yellen was nominated to succeed Ben Bernanke as the chairperson
of the Federal Reserve.
In
December 2013, the Fed raised its benchmark interest rates by a quarter of a
percentage point to between 0.25 and 0.50 percent, after 9 years of an
unchanged and stable very low interest rate.
