The Case Against the Fed

Email Print

Money and Politics

1. The Genesis of Money
2. What is the Optimum Quantity of Money?
3. Monetary Inflation and Counterfeiting
4. Legalized Counterfeiting
5. Loan Banking
6. Deposit Banking
7. Problems for the Fractional–Reserve Banker:
The Criminal Law

8. Problems for the Fractional–Reserve Banker:

9. Booms and Busts
10. Types of Warehouse Receipts
11. Enter the Central Bank
12. Easing the Limits on Bank Credit Expansion
13. The Central Bank Buys Assets
14. Origins of the Federal Reserve:
The Advent of the National Banking System

15. Origins of the Federal Reserve: Wall
Street Discontent

16. Putting Cartelization Across: The Progressive

17. Putting a Central Bank Across: Manipulating
a Movement, 1897–1902

18. The Central Bank Movement Revives, 1906–1910
19. Culmination at Jekyll Island
20. The Fed at Last: Morgan–Controlled Inflation
21. The New Deal and the Displacement of
the Morgans

22. Deposit “Insurance”
23. How the Fed Rules and Inflates
24. What Can Be Done?

and Politics

By far
the most secret and least accountable operation of the federal
government is not, as one might expect, the CIA, DIA, or some
other super-secret intelligence agency. The CIA and other
intelligence operations are under control of the Congress.
They are accountable: a Congressional committee supervises
these operations, controls their budgets, and is informed
of their covert activities. It is true that the committee
hearings and activities are closed to the public; but at least
the people’s representatives in Congress insure some accountability
for these secret agencies.

It is
little known, however, that there is a federal agency that
tops the others in secrecy by a country mile. The Federal
Reserve System is accountable to no one; it has no budget;
it is subject to no audit; and no Congressional committee
knows of, or can truly supervise, its operations. The Federal
Reserve, virtually in total control of the nation’s vital
monetary system, is accountable to nobody — and this strange
situation, if acknowledged at all, is invariably trumpeted
as a virtue.

when the first Democratic president in over a decade was inaugurated
in 1993, the maverick and venerable Democratic Chairman of
the House Banking Committee, Texan Henry B. Gonzalez, optimistically
introduced some of his favorite projects for opening up the
Fed to public scrutiny. His proposals seemed mild; he did
not call for full-fledged Congressional control of the Fed’s
budget. The Gonzalez bill required full independent audits
of the Fed’s operations; videotaping the meetings of the Fed’s
policy-making committee; and releasing detailed minutes of
the policy meetings within a week, rather than the Fed being
allowed, as it is now, to issue vague summaries of its decisions
six weeks later. In addition, the presidents of the twelve
regional Federal Reserve Banks would be chosen by the president
of the United States rather than, as they are now, by the
commercial banks of the respective regions.

It was
to be expected that Fed Chairman Alan Greenspan would strongly
resist any such proposals. After all, it is in the nature
of bureaucrats to resist any encroachment on their unbridled
power. Seemingly more surprising was the rejection of the
Gonzalez plan by President Clinton, whose power, after all,
would be enhanced by the measure. The Gonzalez reforms, the
President declared, “run the risk of undermining market confidence
in the Fed.”

On the
face of it, this presidential reaction, though traditional
among chief executives, is rather puzzling. After all, doesn’t
a democracy depend upon the right of the people to know what
is going on in the government for which they must vote? Wouldn’t
knowledge and full disclosure strengthen the faith of the
American public in their monetary authorities? Why should
public knowledge “undermine market confidence”? Why does “market
confidence” depend on assuring far less public scrutiny than
is accorded keepers of military secrets that might benefit
foreign enemies? What is going on here?

The standard
reply of the Fed and its partisans is that any such measures,
however marginal, would encroach on the Fed’s “independence
from politics,” which is invoked as a kind of self-evident
absolute. The monetary system is highly important, it is claimed,
and therefore the Fed must enjoy absolute independence.

of politics” has a nice, neat ring to it, and has been a staple
of proposals for bureaucratic intervention and power ever
since the Progressive Era. Sweeping the streets; control of
seaports; regulation of industry; providing social security;
these and many other functions of government are held to be
“too important” to be subject to the vagaries of political
whims. But it is one thing to say that private, or market,
activities should be free of government control, and “independent
of politics” in that sense. But these are government
agencies and operations we are talking about, and to say that
government should be “independent of politics” conveys
very different implications. For government, unlike private
industry on the market, is not accountable either to stockholders
or consumers. Government can only be accountable to the public
and to its representatives in the legislature; and if government
becomes “independent of politics” it can only mean that that
sphere of government becomes an absolute self-perpetuating
oligarchy, accountable to no one and never subject to the
public’s ability to change its personnel or to “throw the
rascals out.” If no person or group, whether stockholders
or voters, can displace a ruling elite, then such an elite
becomes more suitable for a dictatorship than for an allegedly
democratic country. And yet it is curious how many self-proclaimed
champions of “democracy,” whether domestic or global, rush
to defend the alleged ideal of the total independence of the
Federal Reserve.

Barney Frank (D., Mass.), a co-sponsor of the Gonzalez bill,
points out that “if you take the principles that people are
talking about nowadays,” such as “reforming government and
opening up government — the Fed violates it more than any
other branch of government.” On what basis, then, should the
vaunted “principle” of an independent Fed be maintained?

It is
instructive to examine who the defenders of this alleged principle
may be, and the tactics they are using. Presumably one political
agency the Fed particularly wants to be independent from is
the U.S. Treasury. And yet Frank Newman, President Clinton’s
Under Secretary of the Treasury for Domestic Finance, in rejecting
the Gonzalez reform, states: “The Fed is independent and that’s
one of the underlying concepts.” In addition, a revealing
little point is made by the New York Times, in noting
the Fed’s reaction to the Gonzalez bill: “The Fed is already
working behind the scenes to organize battalions of bankers
to howl about efforts to politicize the central bank” (New
York Times, October 12, 1993). True enough. But why should
these “battalions of bankers” be so eager and willing to mobilize
in behalf of the Fed’s absolute control of the monetary and
banking system? Why should bankers be so ready to defend a
federal agency which controls and regulates them, and virtually
determines the operations of the banking system? Shouldn’t
private banks want to have some sort of check, some curb,
upon their lord and master? Why should a regulated and controlled
industry be so much in love with the unchecked power of their
own federal controller?

Let us
consider any other private industry. Wouldn’t it be just a
tad suspicious if, say, the insurance industry demanded unchecked
power for their state regulators, or the trucking industry
total power for the ICC, or the drug companies were clamoring
for total and secret power to the Food and Drug Administration?
So shouldn’t we be very suspicious of the oddly cozy relationship
between the banks and the Federal Reserve? What’s going on
here? Our task in this volume is to open up the Fed to the
scrutiny it is unfortunately not getting in the public arena.

power and lack of accountability by the Fed are generally
defended on one ground alone: that any change would weaken
the Federal Reserve’s allegedly inflexible commitment to wage
a seemingly permanent “fight against inflation.” This is the
Johnny-one-note of the Fed’s defense of its unbridled power.
The Gonzalez reforms, Fed officials warn, might be seen by
financial markets “as weakening the Fed’s ability to fight
inflation” (New York Times, October 8, 1993). In
subsequent Congressional testimony, Chairman Alan Greenspan
elaborated this point. Politicians, and presumably the public,
are eternally tempted to expand the money supply and thereby
aggravate (price) inflation. Thus to Greenspan:

temptation is to step on the monetary accelerator or at
least to avoid the monetary brake until after the next election
Giving in to such temptations is likely to impart an inflationary
bias to the economy and could lead to instability, recession,
and economic stagnation.

The Fed’s
lack of accountability, Greenspan added, is a small price
to pay to avoid “putting the conduct of monetary policy under
the close influence of politicians subject to short-term election
cycle pressure” (New York Times, October 14, 1993).

So there
we have it. The public, in the mythology of the Fed and its
supporters, is a great beast, continually subject to a lust
for inflating the money supply and therefore for subjecting
the economy to inflation and its dire consequences. Those
dreaded all-too-frequent inconveniences called “elections”
subject politicians to these temptations, especially in political
institutions such as the House of Representatives who come
before the public every two years and are therefore particularly
responsive to the public will. The Federal Reserve, on the
other hand, guided by monetary experts independent of the
public’s lust for inflation, stands ready at all times to
promote the long-run public interest by manning the battlements
in an eternal fight against the Gorgon of inflation. The public,
in short, is in desperate need of absolute control of money
by the Federal Reserve to save it from itself and its short-term
lusts and temptations. One monetary economist, who spent much
of the 1920s and 1930s setting up Central Banks throughout
the Third World, was commonly referred to as “the money doctor.”
In our current therapeutic age, perhaps Greenspan and his
confreres would like to be considered as monetary “therapists,”
kindly but stern taskmasters whom we invest with total power
to save us from ourselves.

But in
this administering of therapy, where do the private bankers
fit in? Very neatly, according to Federal Reserve officials.
The Gonzalez proposal to have the president instead of regional
bankers appoint regional Fed presidents would, in the eyes
of those officials, “make it harder for the Fed to clamp down
on inflation.” Why? Because, the “sure way” to “minimize inflation”
is “to have private bankers appoint the regional bank presidents.”
And why is this private banker role such a “sure way”? Because,
according to the Fed officials, private bankers “are among
the world’s fiercest inflation hawks” (New York Times,
October 12, 1993).

The worldview
of the Federal Reserve and its advocates is now complete.
Not only are the public and politicians responsive to it eternally
subject to the temptation to inflate; but it is important
for the Fed to have a cozy partnership with private bankers.
Private bankers, as “the world’s fiercest inflation hawks,”
can only bolster the Fed’s eternal devotion to battling against

we have the ideology of the Fed as reflected in its own propaganda,
as well as respected Establishment transmission belts such
as the New York Times, and in pronouncements and
textbooks by countless economists. Even those economists who
would like to see more inflation accept and repeat the Fed’s
image of its own role. And yet every aspect of this mythology
is the very reverse of the truth. We cannot think straight
about money, banking, or the Federal Reserve until this fraudulent
legend has been exposed and demolished.

is, however, one and only one aspect of the common legend
that is indeed correct: that the overwhelmingly dominant cause
of the virus of chronic price inflation is inflation, or expansion,
of the supply of money. Just as an increase in the production
or supply of cotton will cause that crop to be cheaper on
the market; so will the creation of more money make its unit
of money, each franc or dollar, cheaper and worth less in
purchasing power of goods on the market.

But let
us consider this agreed-upon fact in the light of the above
myth about the Federal Reserve. We supposedly have the public
clamoring for inflation while the Federal Reserve, flanked
by its allies the nation’s bankers, resolutely sets its face
against this short-sighted public clamor. But how is the public
supposed to go about achieving this inflation? How can the
public create, i.e., “print,” more money? It would be difficult
to do so, since only one institution in the society is legally
allowed to print money. Anyone who tries to print money is
engaged in the high crime of “counterfeiting,” which the federal
government takes very seriously indeed. Whereas the government
may take a benign view of all other torts and crimes, including
mugging, robbery, and murder, and it may worry about the “deprived
youth” of the criminal and treat him tenderly, there is one
group of criminals whom no government ever coddles: the counterfeiters.
The counterfeiter is hunted down seriously and efficiently,
and he is salted away for a very long time; for he is committing
a crime that the government takes very seriously: he is interfering
with the government’s revenue: specifically, the monopoly
power to print money enjoyed by the Federal Reserve.

in our economy, is pieces of paper issued by the Federal Reserve,
on which are engraved the following: “This Note is Legal Tender
for all Debts, Private, and Public.” This “Federal Reserve
Note,” and nothing else, is money, and all vendors and creditors
must accept these notes, like it or not.

So: if
the chronic inflation undergone by Americans, and in almost
every other country, is caused by the continuing creation
of new money, and if in each country its governmental
“Central Bank” (in the United States, the Federal Reserve)
is the sole monopoly source and creator of all money, who
then is responsible for the blight of inflation? Who
except the very institution that is solely empowered to create
money, that is, the Fed (and the Bank of England, and the
Bank of Italy, and other central banks) itself?

In short:
even before examining the problem in detail, we should already
get a glimmer of the truth: that the drumfire of propaganda
that the Fed is manning the ramparts against the menace of
inflation brought about by others is nothing less than a deceptive
shell game. The culprit solely responsible for inflation,
the Federal Reserve, is continually engaged in raising a hue-and-cry
about “inflation,” for which virtually everyone else
in society seems to be responsible. What we are seeing is
the old ploy by the robber who starts shouting “Stop, thief!”
and runs down the street pointing ahead at others. We begin
to see why it has always been important for the Fed, and for
other Central Banks, to invest themselves with an aura of
solemnity and mystery For, as we shall see more fully, if
the public knew what was going on, if it was able to rip open
the curtain covering the inscrutable Wizard of Oz, it would
soon discover that the Fed, far from being the indispensable
solution to the problem of inflation, is itself the heart
and cause of the problem. What we need is not a totally independent,
all-powerful Fed; what we need is no Fed at all.

The Genesis of Money

It is
impossible to understand money and how it functions, and therefore
how the Fed functions, without looking at the logic of how
money, banking, and Central Banking developed. The reason
is that money is unique in possessing a vital historical component.
You can explain the needs and the demand for everything else:
for bread, computers, concerts, airplanes, medical care, etc.,
solely by how these goods and services are valued now by consumers.
For all of these goods are valued and purchased for their
own sake. But “money,” dollars, francs, lira, etc., is purchased
and accepted in exchange not for any value the paper tickets
have per se but because everyone expects that everyone
else will accept these tickets in exchange. And these expectations
are pervasive because these tickets have indeed been accepted
in the immediate and more remote past. An analysis of the
history of money, then, is indispensable for insight into
how the monetary system works today.

did not and never could begin by some arbitrary social contract,
or by some government agency decreeing that everyone has to
accept the tickets it issues. Even coercion could not force
people and institutions to accept meaningless tickets that
they had not heard of or that bore no relation to any other
pre-existing money. Money arises on the free market, as individuals
on the market try to facilitate the vital process of exchange.
The market is a network, a lattice-work of two people or institutions
exchanging two different commodities. Individuals specialize
in producing different goods or services, and then exchanging
these goods on terms they agree upon. Jones produces a barrel
of fish and exchanges it for Smith’s bushel of wheat. Both
parties make the exchange because they expect to benefit;
and so the free market consists of a network of exchanges
that are mutually beneficial at every step of the way.

But this
system of “direct exchange” of useful goods, or “barter,”
has severe limitations which exchangers soon run up against.
Suppose that Smith dislikes fish, but Jones, a fisherman,
would like to buy his wheat. Jones then tries to find a product,
say butter, not for his own use but in order to resell to
Smith. Jones is here engaging in “indirect exchange,” where
he purchases butter, not for its own sake, but for use as
a “medium,” or middle-term, in the exchange. In other cases,
goods are “indivisible” and cannot be chopped up into small
parts to be used in direct exchange. Suppose, for example,
that Robbins would like to sell a tractor, and then purchase
a myriad of different goods: horses, wheat, rope, barrels,
etc. Clearly, he can’t chop the tractor into seven or eight
parts, and exchange each part for a good he desires. What
he will have to do is to engage in “indirect exchange,” that
is, to sell the tractor for a more divisible commodity, say
100 pounds of butter, and then slice the butter into divisible
parts and exchange each part for the good he desires. Robbins,
again, would then be using butter as a medium of exchange.

any particular commodity starts to be used as a medium, this
very process has a spiralling, or snowballing, effect. If,
for example, several people in a society begin to use butter
as a medium, people will realize that in that particular region
butter is becoming especially marketable, or acceptable in
exchange, and so they will demand more butter in exchange
for use as a medium. And so, as its use as a medium becomes
more widely known, this use feeds upon itself, until rapidly
the commodity comes into general employment in the society
as a medium of exchange. A commodity that is in general use
as a medium is defined as a money.

a good comes into use as a money, the market expands rapidly,
and the economy becomes remarkably more productive and prosperous.
The reason is that the price system becomes enormously simplified.
A “price” is simply the terms of exchange, the ratio of the
quantities of the two goods being traded. In every exchange,
x amount of one commodity is exchanged for y amount of another.
Take the Smith-Jones trade noted above. Suppose that Jones
exchanges 2 barrels of fish for Smith’s 1 bushel of wheat.
In that case, the “price” of wheat in terms of fish is 2 barrels
of fish per bushel. Conversely, the “price” of fish in terms
of wheat is one-half a bushel per barrel. In a system of barter,
knowing the relative price of anything would quickly become
impossibly complicated: thus, the price of a hat might be
10 candy bars, or 6 loaves of bread, or 1 /10 of a TV set,
and on and on. But once a money is established on the market,
then every single exchange includes the money-commodity as
one of its two commodities. Jones will sell fish for the money
commodity, and will then “sell” the money in exchange for
wheat, shoes, tractors, entertainment, or whatever. And Smith
will sell his wheat in the same manner. As a result, every
price will be reckoned simply in terms of its “money-price,”
its price in terms of the common money-commodity.

suppose that butter has become the society’s money by this
market process. In that case, all prices of goods or services
are reckoned in their respective money-prices; thus, a hat
might exchange for 15 ounces of butter, a candy bar may be
priced at 1.5 ounces of butter, a TV set at 150 ounces of
butter, etc. If you want to know how the market price of a
hat compares to other goods, you don’t have to figure each
relative price directly; all you have to know is that the
money-price of a hat is 15 ounces of butter, or 1 ounce of
gold, or whatever the money-commodity is, and then it will
be easy to reckon the various goods in terms of their respective





grave problem with a world of barter is that it is impossible
for any business firm to calculate how it’s doing, whether
it is making profits or incurring losses, beyond a very primitive
estimate. Suppose that you are a business firm, and you are
trying to calculate your income, and your expenses, for the
previous month. And you list your income: “let’s see, last
month we took in 20 yards of string, 3 codfish, 4 cords of
lumber, 3 bushels of wheat … etc.,” and “we paid out:
5 empty barrels, 8 pounds of cotton, 30 bricks, 5 pounds of
beef.” How in the world could you figure out how well you
are doing? Once a money is established in an economy, however,
business calculation becomes easy: “Last month, we took in
500 ounces of gold, and paid out 450 ounces of gold. Net profit,
50 gold ounces.” The development of a general medium of exchange,
then, is a crucial requisite to the development of any sort
of flourishing market economy.

In the
history of mankind, every society, including primitive tribes,
rapidly developed money in the above manner, on the market.
Many commodities have been used as money: iron hoes in Africa,
salt in West Africa, sugar in the Caribbean, beaver skins
in Canada, codfish in colonial New England, tobacco in colonial
Maryland and Virginia. In German prisoner-of-war camps of
British soldiers during World War II, the continuing trading
of CARE packages soon resulted in a “money” in which all other
goods were priced and reckoned. Cigarettes became the money
in these camps, not because of any imposition by German or
British officers or from any sudden agreement: it emerged
“organically” from barter trading in spontaneously developed
markets within the camps.

all these eras and societies, however, two commodities, if
the society had access to them, were easily able to outcompete
the rest, and to establish themselves on the market as the
only moneys. These were gold and silver.

Why gold
and silver? (And to a lesser extent, copper, when the other
two were unavailable.) Because gold and silver are superior
in various “moneyish” qualities — qualities that a good needs
to have to be selected by the market as money. Gold and silver
were highly valuable in themselves, for their beauty; their
supply was limited enough to have a roughly stable value,
but not so scarce that they could not readily be parcelled
out for use (platinum would fit into the latter category);
they were in wide demand, and were easily portable; they were
highly divisible, as they could be sliced into small pieces
and keep a pro rata share of their value; they could
be easily made homogeneous, so that one ounce would look like
another; and they were highly durable, thus preserving a store
of value into the indefinite future. (Mixed with a small amount
of alloy, gold coins have literally been able to last for
thousands of years.) Outside the hermetic prisoner-of-war
camp environment, cigarettes would have done badly as money
because they are too easily manufactured; in the outside world,
the supply of cigarettes would have multiplied rapidly and
its value diminished nearly to zero. (Another problem of cigarettes
as money is their lack of durability.)

good on the market exchanges in terms of relevant quantitative
units: we trade in “bushels” of wheat; “packs” of 20 cigarettes;
“a pair” of shoelaces; one TV set; etc. These units boil down
to number, weight, or volume. Metals invariably trade and
therefore are priced in terms of weight: tons, pounds,
ounces, etc. And so moneys have generally been traded in units
of weight, in whatever language used in that society. Accordingly,
every modern currency unit originated as a unit of weight
of gold or silver. Why is the British currency unit called
“the pound sterling?” Because originally, in the Middle Ages,
that’s precisely what it was: a pound weight of silver. The
“dollar” began in sixteenth-century Bohemia, as a well-liked
and widely circulated one-ounce silver coin minted by the
Count of Schlick, who lived in Joachimsthal. They became known
as Joachimsthalers, or Schlichtenthalers, and human nature
being what it is, they were soon popularly abbreviated as
“thalers,” later to become “dollars” in Spain. When the United
States was founded, we shifted from the British pound currency
to the dollar, defining the dollar as approximately 1/20 of
a gold ounce, or 0.8 silver ounces.

What Is the Optimum Quantity of Money?

The total
stock, or “supply,” or quantity of money in any area or society
at any given time is simply the sum total of all the ounces
of gold, or units of money, in that particular society or
region. Economists have often been concerned with the question:
what is the “optimal” quantity of money, what should the total
money stock be, at the present time? How fast should that
total “grow”?

If we
consider this common question carefully, however, it should
strike us as rather peculiar. How come, after all, that no
one addresses the question: what is the “optimal supply” of
canned peaches today or in the future? Or Nintendo games?
Or ladies’ shoes? In fact, the very question is absurd. A
crucial fact in any economy is that all resources are scarce
in relation to human wants; if a good were not scarce, it
would be superabundant, and therefore be priced, like air,
at zero on the market. Therefore, other things being equal,
the more goods available to us the better. If someone finds
a new copper field, or discovers a better way of producing
wheat or steel, these increases in supply of goods confer
a social benefit. The more goods the better, unless we returned
to the Garden of Eden; for this would mean that more natural
scarcity has been alleviated, and living standards in society
have increased. It is because people sense the absurdity of
such a question that it is virtually never raised.

But why,
then, does an optimal supply of money even arise as a problem?
Because while money, as we have seen, is indispensable to
the functioning of any economy beyond the most primitive level,
and while the existence of money confers enormous social benefits,
this by no means implies, as in the case of all other goods,
that, other things being equal, the more the better. For when
the supplies of other goods increase, we either have more
consumer goods that can be used, or more resources or capital
that can be used up in producing a greater supply of consumer
goods. But of what direct benefit is an increase in the supply
of money?

after all, can neither be eaten nor used up in production.
The money-commodity, functioning as money, can only be used
in exchange, in facilitating the transfer of goods and services,
and in making economic calculation possible. But once a money
has been established in the market, no increases in its supply
are needed, and they perform no genuine social function. As
we know from general economic theory, the invariable result
of an increase in the supply of a good is to lower its price.
For all products except money, such an increase is socially
beneficial, since it means that production and living standards
have increased in response to consumer demand. If steel or
bread or houses are more plentiful and cheaper than before,
everyone’s standard of living benefits. But an increase in
the supply of money cannot relieve the natural scarcity of
consumer or capital goods; all it does is to make the dollar
or the franc cheaper, that is, lower its purchasing power
in terms of all other goods and services. Once a good has
been established as money on the market, then, it exerts its
full power as a mechanism of exchange or an instrument of
calculation. All that an increase in the quantity of dollars
can do is to dilute the effectiveness, the purchasing-power,
of each dollar. Hence, the great truth of monetary theory
emerges: once a commodity is in sufficient supply to be adopted
as a money, no further increase in the supply of money is
needed. Any quantity of money in society is “optimal.”
Once a money is established, an increase in its supply confers
no social benefit.

that mean that, once gold became money, all mining and production
of gold was a waste? No, because a greater supply of gold
allowed an increase in gold’s non-monetary use: more abundant
and lower-priced jewelry, ornaments, fillings for teeth, etc.
But more gold as money was not needed in the economy.
Money, then, is unique among goods and services since increases
in its supply are neither beneficial nor needed; indeed, such
increases only dilute money’s unique value: to be a worthy
object of exchange.

Monetary Inflation and Counterfeiting

that a precious metal such as gold becomes a society’s money,
and a certain weight of gold becomes the currency unit in
which all prices and assets are reckoned. Then, so long as
the society remains on this pure gold or silver “standard,”
there will probably be only gradual annual increases in the
supply of money, from the output of gold mines. The supply
of gold is severely limited, and it is costly to mine further
gold; and the great durability of gold means that any annual
output will constitute a small portion of the total gold stock
accumulated over the centuries. The currency will remain of
roughly stable value; in a progressing economy, the increased
annual production of goods will more than offset the gradual
increase in the money stock. The result will be a gradual
fall in the price level, an increase in the purchasing power
of the currency unit or gold ounce, year after year. The gently
falling price level will mean a steady annual rise in the
purchasing power of the dollar or franc, encouraging the saving
of money and investment in future production. A rising output
and falling price level signifies a steady increase in the
standard of living for each person in society. Typically,
the cost of living falls steadily, while money wage rates
remain the same, meaning that “real” wage rates, or the living
standards of every worker, increase steadily year by year.
We are now so conditioned by permanent price inflation that
the idea of prices falling every year is difficult
to grasp. And yet, prices generally fell every year from the
beginning of the Industrial Revolution in the latter part
of the eighteenth century until 1940, with the exception of
periods of major war, when the governments inflated the money
supply radically and drove up prices, after which they would
gradually fall once more. We have to realize that falling
prices did not mean depression, since costs were falling due
to increased productivity, so that profits were not sinking.
If we look at the spectacular drop in prices (in real
even more than in money terms) in recent years in such particularly
booming fields as computers, calculators, and TV sets, we
can see that falling prices by no means have to connote depression.

But let
us suppose that in this idyll of prosperity, sound money,
and successful monetary calculation, a serpent appears in
Eden: the temptation to counterfeit, to fashion a
near-valueless object so that it would fool people into thinking
it was the money-commodity. It is instructive to trace the
result. Counterfeiting creates a problem to the extent that
it is “successful,” i.e., to the extent that the counterfeit
is so well crafted that it is not found out.

that Joe Doakes and his merry men have invented a perfect
counterfeit: under a gold standard, a brass or plastic object
that would look exactly like a gold coin, or, in the present
paper money standard, a $10 bill that exactly simulates a
$10 Federal Reserve Note. What would happen?

In the
first place, the aggregate money supply of the country would
increase by the amount counterfeited; equally important, the
new money will appear first in the hands of the counterfeiters
themselves. Counterfeiting, in short, involves a twofold process:
(1) increasing the total supply of money, thereby driving
up the prices of goods and services and driving down the purchasing
power of the money-unit; and (2) changing the distribution
of income and wealth, by putting disproportionately more money
into the hands of the counterfeiters.

The first
part of the process, increasing the total money supply in
the country, was the focus of the “quantity theory” of the
British classical economists from David Hume to Ricardo, and
continues to be the focus of Milton Friedman and the monetarist
“Chicago school.” David Hume, in order to demonstrate the
inflationary and non-productive effect of paper money, in
effect postulated what I like to call the “Angel Gabriel”
model, in which the Angel, after hearing pleas for more money,
magically doubled each person’s stock of money overnight.
(In this case, the Angel Gabriel would be the “counterfeiter,”
albeit for benevolent motives.) It is clear that while everyone
would be euphoric from their seeming doubling of monetary
wealth, society would in no way be better off: for there would
be no increase in capital or productivity or supply of goods.
As people rushed out and spent the new money, the only impact
would be an approximate doubling of all prices, and the purchasing
power of the dollar or franc would be cut in half, with no
social benefit being conferred. An increase of money can only
dilute the effectiveness of each unit of money. Milton Friedman’s
more modern though equally magical version is that of his
“helicopter effect,” in which he postulates that the annual
increase of money created by the Federal Reserve is showered
on each person proportionately to his current money stock
by magical governmental helicopters.

Hume’s analysis is perceptive and correct so far as it goes,
it leaves out the vital redistributive effect. Fried-man’s
“helicopter effect” seriously distorts the analysis by being
so constructed that redistributive effects are ruled out from
the very beginning. The point is that while we can assume
benign motives for the Angel Gabriel, we cannot make the same
assumption for the counterfeiting government or the Federal
Reserve. Indeed, for any earthly counterfeiter, it would be
difficult to see the point of counterfeiting if each person
is to receive the new money proportionately.

In real
life, then, the very point of counterfeiting is to constitute
a process, a process of transmitting new money from
one pocket to another, and not the result of a magical and
equi-proportionate expansion of money in everyone’s pocket
simultaneously. Whether counterfeiting is in the form of making
brass or plastic coins that simulate gold, or of printing
paper money to look like that of the government, counterfeiting
is always a process in which the counterfeiter gets the new
money first. This process was encapsulated in an
old New Yorker cartoon, in which a group of counterfeiters
are watching the first $10 bill emerge from their home printing
press. One remarks: “Boy, is retail spending in the neighborhood
in for a shot in the arm!”

And indeed
it was. The first people who get the new money are the counterfeiters,
which they then use to buy various goods and services. The
second receivers of the new money are the retailers who sell
those goods to the counterfeiters. And on and on the new money
ripples out through the system, going from one pocket or till
to another. As it does so, there is an immediate redistribution
effect. For first the counterfeiters, then the retailers,
etc., have new money and monetary income which they use to
bid up goods and services, increasing their demand and raising
the prices of the goods that they purchase. But as prices
of goods begin to rise in response to the higher quantity
of money, those who haven’t yet received the new money find
the prices of the goods they buy have gone up, while their
own selling prices or incomes have not risen. In short, the
early receivers of the new money in this market chain of events
gain at the expense of those who receive the money toward
the end of the chain, and still worse losers are the people
(e.g., those on fixed incomes such as annuities, interest,
or pensions) who never receive the new money at all. Monetary
inflation, then, acts as a hidden “tax” by which the early
receivers expropriate (i.e., gain at the expense of) the late
receivers. And of course since the very earliest receiver
of the new money is the counterfeiter, the counterfeiter’s
gain is the greatest. This tax is particularly insidious because
it is hidden, because few people understand the processes
of money and banking, and because it is all too easy to blame
the rising prices, or “price inflation,” caused by the monetary
inflation on greedy capitalists, speculators, wild-spending
consumers, or whatever social group is the easiest to denigrate.
Obviously, too, it is to the interest of the counterfeiters
to distract attention from their own crucial role by denouncing
any and all other groups and institutions as responsible for
the price inflation.

The inflation
process is particularly insidious and destructive because
everyone enjoys the feeling of having more money, while they
generally complain about the consequences of more money, namely
higher prices. But since there is an inevitable time lag between
the stock of money increasing and its consequence in rising
prices, and since the public has little knowledge of monetary
economics, it is all too easy to fool it into placing the
blame on shoulders far more visible than those of the counterfeiters.

The big
error of all quantity theorists, from the British classicists
to Milton Freidman, is to assume that money is only a “veil,”
and that increases in the quantity of money only have influence
on the price level, or on the purchasing power of the money
unit. On the contrary, it is one of the notable contributions
of “Austrian School” economists and their predecessors, such
as the early-eighteenth-century Irish-French economist Richard
Cantillon, that, in addition to this quantitative, aggregative
effect, an increase in the money supply also changes the distribution
of income and wealth. The ripple effect also alters the structure
of relative prices, and therefore of the kinds and quantities
of goods that will be produced, since the counterfeiters and
other early receivers will have different preferences and
spending patterns from the late receivers who are “taxed”
by the earlier receivers. Furthermore, these changes of income
distribution, spending, relative prices, and production will
be permanent and will not simply disappear, as the quantity
theorists blithely assume, when the effects of the increase
in the money supply will have worked themselves out.

In sum,
the Austrian insight holds that counterfeiting will have far
more unfortunate consequences for the economy than simple
inflation of the price level. There will be other, and permanent,
distortions of the economy away from the free market pattern
that responds to consumers and property-rights holders in
the free economy. This brings us to an important aspect of
counterfeiting which should not be overlooked. In addition
to its more narrowly economic distortion and unfortunate consequences,
counterfeiting gravely cripples the moral and property rights
foundation that lies at the base of any free-market economy.

consider a free-market society where gold is the money. In
such a society, one can acquire money in only three ways:
(a) by mining more gold; (b) by selling a good or service
in exchange for gold owned by someone else; or (c) by receiving
the gold as a voluntary gift or bequest from some other owner
of gold. Each of these methods operates within a principle
of strict defense of everyone’s right to his private property.
But say a counterfeiter appears on the scene. By creating
fake gold coins he is able to acquire money in a fraudulent
and coercive way, and with which he can enter the market to
bid resources away from legitimate owners of gold. In that
way, he robs current owners of gold just as surely, and even
more massively, than if he burglarized their homes or safes.
For this way, without actually breaking and entering the property
of others, he can insidiously steal the fruits of their productive
labor, and do so at the expense of all holders of money, and
especially the later receivers of the new money.

therefore, is inflationary, redistributive, distorts the economic
system, and amounts to stealthy and insidious robbery and
expropriation of all legitimate property-owners in society.

Legalized Counterfeiting

are generally reviled, and for good reason. One reason that
gold and silver make good moneys is that they are easily recognizable,
and are particularly difficult to simulate by counterfeits.
“Coin-clipping,” the practice of shaving edges off coins,
was effectively stopped when the process of “milling” (putting
vertical ridges onto the edges of coins) was developed. Private
counterfeiting, therefore, has never been an important problem.
But what happens when government sanctions, and in effect
legalizes, counterfeiting, either by itself or by other institutions?
Counterfeiting then becomes a grave economic and social problem
indeed. For then there is no one to guard our guardians against
their depredations of private property.

there have been two major kinds of legalized counterfeiting.
One is government paper money. Under a gold standard,
say that the currency unit in a society has become “one dollar,”
defined as 1/20 of an ounce of gold. At first, coins are minted
with a certified weight of gold. Then, at one point, the first
time in the North American colonies in 1690, a central government,
perhaps because it is short of gold, decides to print paper
tickets denominated in gold weights. At the beginning, the
government prints the money as if it is equivalent to the
weight of gold: a “ten dollar” ticket, or paper note, is so
denominated because it implies equivalence to a “ten-dollar”
gold coin, that is, a coin weighing 1/2 an ounce of gold.
At first, the equivalence is maintained because the government
promises redemption of this paper ticket in the same weight
of gold whenever the ticket is presented to the government’s
Treasury. A “ten-dollar” note is pledged to be redeemable
in 1 /2 an ounce of gold. And at the beginning, if the government
has little or no gold on hand, as was the case in Massachusetts
in 1690, the explicit or implicit pledge is that very soon,
in a year or two, the tickets will be redeemable
in that weight of gold. And if the government is still trusted
by the public, it might be able, at first, to pass these notes
as equivalent to gold.

So long
as the paper notes are treated on the market as equivalent
to gold, the newly issued tickets add to the total money supply,
and also serve to redistribute society’s income and wealth.
Thus, suppose that the government needs money quickly for
whatever reason. It only has a stock of $2 million in gold
on hand; it promptly issues $5 million in paper tickets, and
spends it for whatever expenditure it deems necessary: say,
in grants and loans to relatives of top government officials.
Suppose, for example, the total gold stock outstanding in
the country is $10 million, of which $2 million is in government
hands; then, the issue of another $5 million in paper tickets
increases the total quantity of money stock in the country
by 50 percent. But the new funds are not proportionately distributed;
on the contrary, the new $5 million goes first to the government.
Then next to the relatives of officials, then to whomever
sells goods and services to those relatives, and so on.

If the
government falls prey to the temptation of printing a great
deal of new money, not only will prices go up, but the “quality”
of the money will become suspect in that society, and the
lack of redeemability in gold may lead the market to accelerated
discounting of that money in terms of gold. And if the money
is not at all redeemable in gold, the rate of discount will
accelerate further. In the American Revolution, the Continental
Congress issued a great amount of non-redeemable paper dollars,
which soon discounted radically, and in a few years, fell
to such an enormous discount that they became literally worthless
and disappeared from circulation. The common phrase “Not worth
a Continental” became part of American folklore as a result
of this runaway depreciation and accelerated worthlessness
of the Continental dollars.

Loan Banking

paper, as pernicious as it may be, is a relatively straightforward
form of counterfeiting. The public can understand the concept
of “printing dollars” and spending them, and they can understand
why such a flood of dollars will come to be worth a great
deal less than gold, or than uninflated paper, of the same
denomination, whether “dollar,” “franc,” or “mark.” Far more
difficult to grasp, however, and therefore far more insidious,
are the nature and consequences of “fractional-reserve banking,”
a more subtle and modern form of counterfeiting. It is not
difficult to see the consequences of a society awash in a
flood of new paper money; but it is far more difficult to
envision the results of an expansion of intangible bank credit.

One of
the great problems in analyzing banking is that the word “bank”
comprises several very different and even contradictory functions
and operations. The ambiguity in the concept of “bank” can
cover a multitude of sins. A bank, for example, can be considered
“any institution that makes loans.” The earliest “loan banks”
were merchants who, in the natural course of trade, carried
their customers by means of short-term credit, charging interest
for the loans. The earliest bankers were “merchant-bankers,”
who began as merchants, and who, if they were successful at
productive lending, gradually grew, like the great families
the Riccis and the Medicis in Renaissance Italy, to become
more bankers than merchants. It should be clear that these
loans involved no inflationary creation of money. If the Medicis
sold goods for 10 gold ounces and allowed their customers
to pay in six months, including an interest premium, the total
money supply was in no way increased. The Medici customers,
instead of paying for the goods immediately, wait for several
months, and then pay gold or silver with an additional fee
for delay of payment.

sort of loan banking is non-inflationary regardless of what
the standard money is in the society, whether it be gold or
government paper. Thus, suppose that in present-day America
I set up a Rothbard Loan Bank. I save up $10,000 in cash and
invest it as an asset of this new bank. My balance sheet,
see Figure 1, which has assets on the left-hand side of a
T-account, and the ownership of or claim to those assets on
the right-hand side, the sum of which must be equal, now looks
as follows:

The bank
is now ready for business; the $10,000 of cash assets is owned
by myself.

then, that $9,000 is loaned out to Joe at interest. The balance
sheet will now look as follows in Figure 2.

The increased
assets come from the extra $500 due as interest. The important
point here is that money, whether it be gold or other standard
forms of cash, has in no way increased; cash was saved up
by me, loaned to Joe, who will then spend it, return it to
me plus interest in the future, etc. The crucial point is
that none of this banking has been inflationary, fraudulent,
or counterfeit in any way. It has all been a normal, productive,
entrepreneurial business transaction. If Joe becomes insolvent
and cannot repay, that would be a normal business or entrepreneurial

If the
Rothbard Bank, enjoying success, should expand the number
of partners, or even incorporate to attract more capital,
the business would expand, but the nature of this loan bank
would remain the same; again, there would be nothing inflationary
or fraudulent about its operations.

So far,
we have the loan bank investing its own equity in its operations.
Most people, however, think of “banks” as borrowing money
from one set of people, and relending their money to another
set, charging an interest differential because of its expertise
in lending, in channeling capital to productive businesses.
How would this sort of borrow-and-lend bank operate?

Let us
take the Rothbard Loan Bank, as shown in Figure 3, and assume
that the Bank borrows money from the public in the form of
Certificates of Deposit (CDs), repayable in six months or
a year. Then, abstracting from the interest involved, and
assuming the Rothbard Bank floats $40,000 of CDs, and relends
them, we will get a balance sheet as follows:

the important point is that the bank has grown, has borrowed
and reloaned, and there has been no inflationary creation
of new money, no fraudulent activity, and no counterfeiting.
If the Rothbard Bank makes a bad loan, and becomes insolvent,
then that is a normal entrepreneurial error. So far, loan
banking has been a perfectly legitimate and productive activity.

Deposit Banking

We get
closer to the nub of the problem when we realize that, historically,
there has existed a very different type of “bank” that has
no necessary logical connection, although it often had a practical
connection, with loan banking. Gold coins are often heavy,
difficult to carry around, and subject to risk of loss or
theft. People began to “deposit” coins, as well as gold or
silver bullion, into institutions for safekeeping. This function
may be thought of as a “money-warehouse.” As in the case of
any other warehouse, the warehouse issues the depositor a
receipt, a paper ticket pledging that the article will be
redeemed at any time “on demand,” that is, on presentation
of the receipt. The receipt-holder, on presenting the ticket,
pays a storage fee, and the warehouse returns the item.

The first
thing to be said about this sort of deposit is that it would
be very peculiar to say that the warehouse “owed” the depositor
the chair or watch he had placed in its care, that the warehouse
is the “debtor” and the depositor the “creditor.” Suppose,
for example, that you own a precious chair and that you place
it in a warehouse for safekeeping over the summer. You return
in the fall and the warehouseman says, “Gee, sorry, sir, but
I’ve had business setbacks in the last few months, and I am
not able to pay you the debt (the chair) that I owe you.”
Would you shrug your shoulders, and write the whole thing
off as a “bad debt,” as an unwise entrepreneurial decision
on the part of the warehouseman? Certainly not. You would
be properly indignant, for you do not regard placing the chair
in a warehouse as some sort of “credit” or “loan” to the warehouseman.
You do not lend the chair to him; you continue to own the
chair, and you are placing it in his trust. He doesn’t “owe”
you the chair; the chair is and always continues to be yours;
he is storing it for safekeeping. If the chair is not there
when you arrive, you will call for the gendarmes and properly
cry “theft!” You, and the law, regard the warehouseman who
shrugs his shoulders at the absence of your chair not as someone
who had made an unfortunate entrepreneurial error, but as
a criminal who has absconded with your chair. More precisely,
you and the law would charge the warehouseman with being an
“embezzler,” defined by Webster’s as “one who appropriates
fraudulently to one’s own use what is entrusted to one’s care
and management.”

your goods in a warehouse (or, alternatively, in a safe-deposit
box) is not, in other words, a “debt contract”; it is known
in the law as a “bailment” contract, in which the bailor (the
depositor) leaves property in the care, or in the trust of,
the bailee (the warehouse). Furthermore, if a warehouse builds
a reputation for probity, its receipts will circulate as equivalent
to the actual goods in the warehouse. A warehouse receipt
is of course payable to whomever holds the receipt; and so
the warehouse receipt will be exchanged as if it were the
good itself. If I buy your chair, I may not want to take immediate
delivery of the chair itself. If I am familiar with the Jones
Warehouse, I will accept the receipt for the chair at the
Jones Warehouse as equivalent to receiving the actual chair.
Just as a deed to a piece of land conveys title to the land
itself, so does a warehouse receipt for a good serve as title
to, or surrogate for, the good itself.[1]

you returned from your summer vacation and asked for your
chair, and the warehouseman replied, “Well, sir, I haven’t
got your particular chair, but here’s another one just as
good.” You would be just about as indignant as before, and
you would still call for the gendarmes: “I want my chair,
dammit!” Thus, in the ordinary course of warehousing, the
temptations to embezzle are strictly limited. Everyone wants
his particular piece of property entrusted to your care, and
you never know he they will want to redeem it.

goods, however, are of a special nature. They are homogeneous,
so that no one unit can be distinguished from another. Such
goods are known in law as being “fungible,” where any unit
of the good can replace any other. Grain is a typical example.
If someone deposits 100,000 bushels of No. 1 wheat in a grain
warehouse (known customarily as a “grain elevator”), all he
cares about when redeeming the receipt is getting 100,000
bushels of that grade of wheat. He doesn’t care whether these
are the same particular bushels that he actually
deposited in the elevator.

this lack of caring about the specific items redeemed opens
the door for a considerable amount of embezzlement by the
warehouseowner. The warehouseman may now be tempted to think
as follows: “While eventually the wheat will be redeemed and
shipped to a flour mill, at any given time there is always
a certain amount of unredeemed wheat in my warehouse. I therefore
have a margin within which I can maneuver and profit by using
someone else’s wheat.” Instead of carrying out his trust and
his bailment contract by keeping all the grain in storage,
he will be tempted to commit a certain degree of embezzlement.
He is not very likely to actually drive off with or sell the
wheat he has in storage. A more likely and more sophisticated
form of defrauding would be for the grain elevator owner to
counterfeit fake warehouse-receipts to, say, No.
1 wheat, and then lend out these receipts to speculators in
the Chicago commodities market. The actual wheat in his elevator
remains intact; but now he has printed fraudulent warehouse-receipts,
receipts backed by nothing, ones that look exactly like the
genuine article.

warehousing, that is, one where every receipt is backed by
a deposited good, may be referred to as “100 percent warehousing,”
that is, where every receipt is backed by the good for which
it is supposed to be a receipt. On the other hand, if a warehouseman
issues fake warehouse receipts, and the grain stored in his
warehouse is only a fraction (or something less than 100 percent)
of the receipts or paper tickets outstanding, then he may
be said to be engaging in “fractional-reserve warehousing.”
It should also be clear that “fractional-reserve warehousing”
is only a euphemism for fraud and embezzlement.

in the late nineteenth century, the great English economist
W. Stanley Jevons warned of the dangers of this kind of “general
deposit warrant,” where only a certain category of good is
pledged for redemption of a receipt, in contrast to “specific
deposit warrants,” where the particular chair or watch must
be redeemed by the warehouse. Using general warrants, “it
becomes possible to create a fictitious supply of a commodity,
that is, to make people believe that a supply exists which
does not exist.” On the other hand, with specific deposit
warrants, such as “bills of lading, pawn-tickets, dock-warrants,
or certificates which establish ownership to a definite object,”
it is not possible to issue such tickets “in excess of goods
actually deposited, unless by distinct fraud.”[2]

In the
history of the U. S. grain market, grain elevators several
times fell prey to this temptation, spurred by a lack of clarity
in bailment law. Grain elevators issued fake warehouse receipts
in grain during the 1860s, lent them to speculators in the
Chicago wheat market, and caused dislocations in wheat prices
and bankruptcies in the wheat market. Only a tightening of
bailment law, ensuring that any issue of fake warehouse receipts
is treated as fraudulent and illegal, finally put an end to
this clearly impermissible practice. Unfortunately, however,
this legal development did not occur in the vitally important
field of warehouses for money, or deposit banking.

If “fractional-reserve”
grain warehousing, that is, the issuing of warehouse receipts
for non-existent goods, is clearly fraudulent, then so too
is fractional-reserve warehousing for a good even more fungible
than grain, i.e., money (whether it be gold or government
paper). Any one unit of money is as good as any other, and
indeed it is precisely for its homogeneity, divisibility,
and recognizability that the market chooses gold as money
in the first place. And in contrast to wheat, which after
all, is eventually used to make flour and must therefore eventually
be removed from the elevator, money, since it is used for
exchange purposes only, does not have to be removed
from the warehouse at all. Gold or silver may be removed for
a non-monetary use such as jewelry, but paper money of course
has only a monetary function, and therefore there is no compelling
reason for warehouses ever to have to redeem their receipts.
First, of course, the money-warehouse (also called a “deposit
bank”) must develop a market reputation for honesty and probity
and for promptly redeeming their receipts whenever asked.
But once trust has been built up, the temptation for the money-warehouse
to embezzle, to commit fraud, can become overwhelming.

For at
this point, the deposit banker may think to himself: “For
decades, this bank has built up a brand name for honesty and
for redeeming its receipts. By this time, only a small portion
of my receipts are redeemed at all. People make money payments
to each other in the market, but they exchange these warehouse
receipts to money as if they were money (be it gold or government
paper) itself. They hardly bother to redeem the receipts.
Since my customers are such suckers, I can now engage in profitable
hanky-panky and none will be the wiser.”

The banker
can engage in two kinds of fraud and embezzlement. He may,
for example, simply take the gold or cash out of the vault
and live it up, spending money on mansions or yachts. However,
this may be a dangerous procedure; if he should ever be caught
out, and people demand their money, the embezzling nature
of his act might strike everyone as crystal-clear. Instead,
a far more sophisticated and less blatant course will be for
him to issue warehouse receipts to money, warehouse receipts
backed by nothing but looking identical to the genuine receipts,
and to lend them out to borrowers. In short, the banker counterfeits
warehouse receipts to money, and lends them out. In that way,
insofar as the counterfeiter is neither detected nor challenged
to redeem in actual cash, the new fake receipts will, like
the old genuine ones, circulate on the market as if they were
money. Functioning as money, or money-surrogates, they will
thereby add to the stock ofmoney in the society, inflate prices,
and bring about a redistribution of wealth and income from
the late to the early receivers of the new “money.”

If a
banker has more room for fraud than a grain warehouseman,
it should be clear that the consequences of his counterfeiting
are far more destructive. Not just the grain market but all
of society and the entire economy will be disrupted and harmed.
As in the case of the coin counterfeiter, all property-owners,
all owners of money, are expropriated and victimized by the
counterfeiter, who is able to extract resources from the genuine
producers by means of his fraud. And in the case of bank money,
as we shall see further, the effect of the banker’s depredations
will not only be price inflation and redistribution of money
and income, but also ruinous cycles of boom and bust generated
by expansions and contractions of the counterfeit bank credit.

Problems for the Fractional-Reserve Banker: The Criminal Law

A deposit
banker could not launch a career of “fractional-reserve” fraud
and inflation from the start. If I have never opened a Rothbard
Bank, I could not simply launch one and start issuing fraudulent
warehouse-receipts. For who would take them? First, I would
have to build up over the years a brand name for honest, 100-percent
reserve banking; my career of fraud would have to be built
parasitically upon my previous and properly built-up reputation
for integrity and rectitude.

our banker begins his career of crime, there are several things
he has to worry about. In the first place, he must worry that
if he is caught out, he might go to jail and endure heavy
fines as an embezzler. It becomes important for him to hire
legal counsel, economists, and financial writers to convince
the courts and the public that his fractional-reserve actions
are certainly not fraud and embezzlement, that they are merely
legitimate entrepreneurial actions and voluntary contracts.
And that therefore if someone should present a receipt promising
redemption in gold or cash on demand, and if the banker cannot
pay, that this is merely an unfortunate entrepreneurial failure
rather than the uncovering of a criminal act. To get away
with this line of argument, he has to convince the authorities
that his deposit liabilities are not a bailment, like a warehouse,
but merely a good-faith debt. If the banker can convince people
of this trickery, then he has greatly widened the temptation
and the opportunity he enjoys, for practicing fractional-reserve
embezzlement. It should be clear that, if the deposit banker,
or money-warehouseman, is treated as a regular warehouseman,
or bailee, the money deposited for his safe-keeping can never
constitute part of the “asset” column on his balance sheet.
In no sense can the money form part of his assets, and therefore
in no sense are they a “debt” owed to the depositor to comprise
part of the banker’s liability column; as something stored
for safekeeping, they are not loans or debts and therefore
do not properly form part of his balance sheet at all.

since bailment law was undeveloped in the nineteenth century,
the bankers’ counsel were able to swing the judicial decisions
their way. The landmark decisions came in Britain in the first
half of the nineteenth century, and these decisions were then
taken over by the American courts. In the first important
case, Carr v. Carr, in 1811, the British
judge, Sir William Grant, ruled that since the money paid
into a bank deposit had been paid generally, and not earmarked
in a sealed bag (i.e., as a “specific deposit”) that the transaction
had become a loan rather than a bailment. Five years later,
in the key follow-up case of Devaynes v. Noble,
one of the counsel argued correctly that “a banker is rather
a bailee of his customer’s fund than his debtor, … because
the money in … [his] hands is rather a deposit than
a debt, and may therefore be instantly demanded and taken
up.” But the same Judge Grant again insisted that “money paid
into a banker’s becomes immediately a part of his general
assets; and he is merely a debtor for the amount.” In the
final culminating case, Foley v. Hill and Others,
decided by the House of Lords in 1848, Lord Cottenham, repeating
the reasoning of the previous cases, put it lucidly if astonishingly:

money placed in the custody of a banker is, to all intents
and purposes, the money of the banker, to do with as he
pleases; he is guilty of no breach of trust in employing
it; he i s not answerable to the principal if he puts
it into jeopardy, i f he engages in a hazardous speculation;
he is not bound to keep it or deal with it as the property
of his principal; but he is, of course, answerable for
the amount, because he has contracted.[3]

The argument
of Lord Cottenham and of all other apologists for fractional-reserve
banking, that the banker only contracts for the amount of
money, but not to keep the money on hand, ignores the fact
that if all the depositors knew what was going on and exercised
their claims at once, the banker could not possibly
honor his commitments. In other words, honoring the contracts,
and maintaining the entire system of fractional-reserve banking,
requires a structure of smoke-and-mirrors, of duping the depositors
into thinking that “their” money is safe, and would be honored
should they wish to redeem their claims. The entire system
of fractional-reserve banking, therefore, is built on deceit,
a deceit connived at by the legal system.

A crucial
question to be asked is this: why did grain warehouse law,
where the conditions — of depositing fungible goods — are
exactly the same, and grain is a general deposit and not an
earmarked bundle — develop in precisely the opposite direction?
Why did the courts finally recognize that deposits of even
a fungible good, in the case of grain, are emphatically a
bailment, not a debt? Could it be that the bankers conducted
a more effective lobbying operation than did the grain men?

the American courts, while adhering to the debt-not-bailment
doctrine, have introduced puzzling anomalies which indicate
their confusion and hedging on this critical point. Thus,
the authoritative law reporter Michie states that, in American
law, a “bank deposit is more than an ordinary debt, and the
depositor’s relation to the bank is not identical to that
of an ordinary creditor.” Michie cites a Pennsylvania case,
People’s Bank v. Legrand, which affirmed
that “a bank deposit is different from an ordinary debt in
this, that from its very nature it is constantly subject to
the check of the depositor, and is always payable on demand.”
Also, despite the law’s insistence, following Lord Cottenham,
that a bank “becomes the absolute owner of money deposited
with it,” yet a bank still “cannot speculate with its depositors’
[?] money.”[4]

Why aren’t
banks treated like grain elevators? That the answer is the
result of politics rather than considerations of justice or
property rights is suggested by the distinguished legal historian
Arthur Nussbaum, when he asserts that adopting the “contrary
view” (that a bank deposit is a bailment not a debt) would
“lay an unbearable burden upon banking business.” No doubt
bank profits from the issue of fraudulent warehouse receipts
would indeed come to an end as do any fraudulent profits when
fraud is cracked down on. But grain elevators and other warehouses,
after all, are able to remain in business successfully; why
not genuine safe places for money?[5]

To highlight
the essential nature of fractional-reserve banking, let us
move for a moment away from banks that issue counterfeit warehouse
receipts to cash. Let us assume, rather, that these deposit
banks instead actually print dollar bills made up
to look like the genuine article, replete with forged signatures
by the Treasurer of the United States. The banks, let us say,
print these bills and lend them out at interest. If they are
denounced for what everyone would agree is forgery and counterfeiting,
why couldn’t these banks reply as follows: “Well, look, we
do have genuine, non-counterfeit cash reserves of, say, 10
percent in our vaults. As long as people are willing to trust
us, and accept these bills as equivalent to genuine cash,
what’s wrong with that? We are only engaged in a market transaction,
no more nor less so than any other type of fractional-reserve
banking.” And what indeed is wrong about this statement
that cannot be applied to any case of fractional-reserve banking?[6]

Problems for the Fractional-Reserve Banker: Insolvency

unfortunate turn of the legal system means that the fractional-reserve
banker, even if he violates his contract, cannot be treated
as an embezzler and a criminal; but the banker must still
face the lesser, but still unwelcome fact of insolvency. There
are two major ways in which he can become insolvent.

The first
and most devastating route, because it could happen at any
time, is if the bank’s customers, those who hold the warehouse
receipts or receive it in payment, lose confidence in the
chances of the bank’s repayment of the receipts and decide,
en masse, to cash them in. This loss of confidence,
if it spreads from a few to a large number of bank depositors,
is devastating because it is always fatal. It is fatal because,
by the very nature of fractional-reserve banking, the bank
cannot honor all of its contracts. Hence the overwhelming
nature of the dread process known as a “bank run,” a process
by which a large number of bank customers get the wind up,
sniff trouble, and demand their money. The “bank run,” which
shivers the timbers of every banker, is essentially a “populist”
uprising by which the duped public, the depositors, demand
the right to their own money. This process can and will break
any bank subject to its power. Thus, suppose that an effective
and convincing orator should go on television tomorrow, and
urge the American public: “People of America, the banking
system of this country is insolvent. ‘Your money’
is not in the bank vaults. They have less than 10 percent
of your money on hand. People of America, get your money out
of the banks now before it is too late!” If the people
should now heed this advice en masse, the American
banking system would be destroyed tomorrow.[7]

A bank’s
“customers” are comprised of several groups. They are those
people who make the initial deposit of cash (whether gold
or government paper money) in a bank. They are, in the second
place, those who borrow the bank’s counterfeit issue of warehouse
receipts. But they are also a great number of other
people, specifically those who accept the bank’s
receipts in exchange, who thereby become a bank’s customers
in that sense.

Let us
see how the fractional-reserve process works. Because of the
laxity of the law, a deposit of cash in a bank is treated
as a credit rather than a bailment, and the loans go on the
bank’s balance sheet. Let us assume, first, that I set up
a Rothbard Deposit Bank, and that at first this bank adheres
strictly to a 100-percent reserve policy. Suppose that $20,000
is deposited in the bank. Then, abstracting from my capital
and other assets of the bank, its balance sheet will look
as in Figure 4:

So long
as Rothbard Bank receipts are treated by the market as if
they are equivalent to cash, and they function as such, the
receipts will function instead of, as surrogates for,
the actual cash. Thus, suppose that Jones had deposited $3,000
at the Rothbard Bank. He buys a painting from an art gallery
and pays for it with his deposit receipt of $3,000. (The receipt,
as we shall see, can either be a written ticket or an open
book account.) If the art gallery wishes, it need not bother
redeeming the receipt for cash; it can treat the receipt as
if it were cash, and itself hold on to the receipt. The art
gallery then becomes a “customer” of the Rothbard Bank.

It should
be clear that, in our example, either the cash itself or
the receipt to cash circulates as money: never both at once.
So long as deposit banks adhere strictly to 100-percent reserve
banking, there is no increase in the money supply; only the
form in which the money circulates changes. Thus,
if there are $2 million of cash existing in a society, and
people deposit $1.2 million in deposit banks, then the total
of $2 million of money remains the same; the only difference
is that $800,000 will continue to be cash, whereas the remaining
$1.2 million will circulate as warehouse receipts to the cash.

now that banks yield to the temptation to create fake warehouse
receipts to cash, and lend these fake receipts out. What happens
now is that the previously strictly separate functions of
loan and deposit banking become muddled; the deposit trust
is violated, and the deposit contract cannot be fulfilled
if all the “creditors” try to redeem their claims. The phony
warehouse receipts are loaned out by the bank. Fractional-reserve
banking has reared its ugly head.

suppose that the Rothbard Deposit Bank in the previous table
decides to create $15,000 in fake warehouse receipts, unbacked
by cash, but redeemable on demand in cash, and lends them
out in various loans or purchases of securities. For how the
Rothbard Bank’s balance sheet now looks see Figure 5:

In this
case, something very different has happened in a bank’s lending
operation. There is again an increase in warehouse receipts
circulating as money, and a relative decline in the use of
cash, but in this case there has also been a total increase
in the supply of money. The money supply has increased because
warehouse receipts have been issued that are redeemable in
cash but not fully backed by cash. As in the case of any counterfeiting,
the result, so long as the warehouse receipts function as
surrogates for cash, will be to increase the money supply
in the society, to raise prices of goods in terms of dollars,
and to redistribute money and wealth to the early receivers
of the new bank money (in the first instance, the bank itself,
and then its debtors, and those whom the latter spend the
money on) at the expense of those who receive the new bank
money later or not at all. Thus, if the society starts with
$800,000 circulating as cash and $1.2 million circulating
as warehouse receipts, as in the previous example, and the
banks issue another $1.7 million in phony warehouse receipts,
the total money supply will increase from $2 million to $3.7
million, of which $800,000 will still be in cash, with $2.9
million now in warehouse receipts, of which $1.2 million are
backed by actual cash in the banks.

Are there
any limits on this process? Why, for example, does the Rothbard
Bank stop at a paltry $15,000, or do the banks as a whole
stop at $1.7 million? Why doesn’t the Rothbard Bank seize
a good thing and issue $500,000 or more, or umpteen millions,
and the banks as a whole do likewise? What is to stop them?

The answer
is the fear of insolvency; and the most devastating route
to insolvency, as we have noted, is the bank run. Suppose,
for example, that the banks go hog wild: the Rothbard Bank
issues many millions of fake warehouse receipts; the banking
system as a whole issues hundreds of millions. The more the
banks issue beyond the cash in their vaults, the more outrageous
the discrepancy, and the greater the possibility of a sudden
loss of confidence in the banks, a loss that may start in
one group or area and then, as bank runs proliferate, spread
like wildfire throughout the country. And the greater the
possibility for someone to go on TV and warn the public of
this growing danger. And once a bank run gets started, there
is nothing in the market economy that can stop that run short
of demolishing the entire jerry-built fractional-reserve banking
system in its wake.

from and short of a bank run, there is another powerful check
on bank credit expansion under fractional reserves, a limitation
that applies to expansion by any one particular bank.
Let us assume, for example, an especially huge expansion of
pseudo-warehouse receipts by one bank. Suppose that the Rothbard
Deposit Bank, previously hewing to 100-percent reserves, decides
to make a quick killing and go all-out: upon a cash reserve
of $20,000, previously backing receipts of $20,000, it decides
to print unbacked warehouse receipts of $1,000,000, lending
them out at interest to various borrowers. Now the Rothbard
Bank’s balance sheet will be as in Figure 6:

may be fine and profitable for the Rothbard Bank for a brief
while, but there is now one enormous fly embedded in its ointment.
Suppose that the Rothbard Bank creates and lends out fake
receipts of $1,000,000 to one firm, say the Ace Construction
Company. The Ace Construction Company, of course, is not going
to borrow money and pay interest on it but not use it; quickly,
it will pay out these receipts in exchange for various goods
and services. If the persons or firms who receive the receipts
from Ace are all customers of the Rothbard Bank, then all
is fine; the receipts are simply passed back and forth from
one of the Rothbard Bank’s customers to another. But suppose,
instead, that the receipts go to people who are not
customers of the Rothbard Bank, or not bank customers at all.

for example, that the Ace Construction Company pays $1 million
to the Curtis Cement Company. And the Curtis Cement Company,
for some reason, doesn’t use banks; it presents the receipt
for $1 million to the Rothbard Bank and demands redemption.
What happens? The Rothbard Bank, of course, has peanuts, or
more precisely, $20,000. It is immediately insolvent and out
of business.

plausibly, let us suppose that the Curtis Cement Company uses
a bank, all right, but not the Rothbard Bank. In that case,
say, the Curtis Cement Company presents the $1 million receipt
to its own bank, the World Bank, and the World Bank presents
the receipt for $1 million to the Roth-bard Bank and demands
cash. The Rothbard Bank, of course, doesn’t have the money,
and again is out of business.

that for an individual expansionist bank to inflate warehouse
receipts excessively and go out of business does not
require a bank run; it doesn’t even require that the person
who eventually receives the receipts is not a customer of
banks. This person need only present the receipt to another
bank to create trouble for the Rothbard Bank that cannot be

For any
one bank, the more it creates fake receipts, the more danger
it will be in. But more relevant will be the number of its
banking competitors and the extent of its own clientele in
relation to other competing banks. Thus, if the Rothbard Bank
is the only bank in the country, then there are no limits
imposed on its expansion of receipts by competition;
the only limits become either a bank run or a general unwillingness
to use bank money at all.

On the
other hand, let us ponder the opposite if unrealistic extreme:
that every bank has only one customer, and that therefore
there are millions of banks in a country. In that case, any
expansion of unbacked warehouse receipts will be impossible,
regardless how small. For then, even a small expansion by
the Rothbard Bank beyond its cash in the vaults will lead
very quickly to a demand for redemption by another bank which
cannot be honored, and therefore insolvency.

One force,
of course, could overcome this limit of calls for redemption
by competing banks: a cartel agreement among all banks to
accept each other’s receipts and not call on their fellow
banks for redemption. While there are many reasons for banks
to engage in such cartels, there are also difficulties, difficulties
which multiply as the number of banks becomes larger. Thus,
if there are only three or four banks in a country, such an
agreement would be relatively simple. One problem in expanding
banks is making sure that all banks expand relatively proportionately.
If there are a number of banks in a country, and Banks A and
B expand wildly while the other banks only expand their receipts
a little, claims on Banks A and B will pile up rapidly in
the vaults of the other banks, and the temptation will be
to bust these two banks and not let them get away with relatively
greater profits. The fewer the number of competing banks in
existence, the easier it will be to coordinate rates of expansion.
If there are many thousands of banks, on the other hand, coordination
will become very difficult and a cartel agreement is apt to
break down.[8]

Booms and Busts

We have
so far emphasized that bank credit expansion under fractional-reserve
banking (or “creation of counterfeit warehouse receipts”)
creates price inflation, loss of purchasing power of the currency
unit, and redistribution of wealth and income. Euphoria caused
by a pouring of new money into the economy is followed by
grumbling as price inflation sets in, and some people benefit
while others lose. But inflationary booms are not the only
consequence of fractional-reserve counterfeiting. For at some
point in the process, a reaction sets in. An actual bank run
might set in, sweeping across the banking system; or banks,
in fear of such a run, might suddenly contract their credit,
call in and not renew their loans, and sell securities they
own, in order to stay solvent. This sudden contraction will
also swiftly contract the amount of warehouse receipts, or
money, in circulation. In short, as the fractional-reserve
system is either found out or in danger of being found out,
swift credit contraction leads to a financial and business
crisis and recession. There is no space here to go into a
full analysis of business cycles, but it is clear that the
credit-creation process by the banks habitually generates
destructive boom-bust cycles.[9]

Types of Warehouse Receipts

Two kinds
of warehouse receipts for deposit banks have developed over
the centuries. One is the regular form of receipt, familiar
to anyone who has ever used any sort of warehouse: a paper
ticket in which the warehouse guarantees to hand over, on
demand, the particular product mentioned on the receipt, e.g.,
“The Rothbard Bank will pay to the bearer of this ticket on
demand,” 10 dollars in gold coin, or Treasury paper money,
or whatever. For deposit banks, this is called a “note” or
“bank note.” Historically, the bank note is the overwhelmingly
dominant form of warehouse receipt.

form of deposit receipt, however, emerged in the banks of
Renaissance Italy. When a merchant was large-scale and very
well-known, he and the bank found it more convenient for the
warehouse receipt to be invisible, that is, to remain as an
“open book account” on the books of the bank. Then, if he
paid large sums to another merchant, he did not have to bother
transferring actual bank notes; he would just write out a
transfer order to his bank to shift some of his open book
account to that of the other merchant. Thus, Signor Medici
might write out a transfer order to the Ricci Bank to transfer
100,000 lira of his open book account at the Bank to Signor
Bardi. This transfer order has come to be known as a “check,”
and the open book deposit account at the bank as a “demand
deposit,” or “checking account.” Note the form of the contemporary
transfer order known as a check: “I, Murray N. Rothbard, direct
the Bank of America to pay to the account of Service Merchandise
100 dollars.”

It should
be noted that the bank note and the open book demand deposit
are economically and legally equivalent. Each is an alternative
form of warehouse receipt, and each takes its place in the
total money supply as a surrogate, or substitute, for cash.
However, the check itself is not the equivalent of the bank
note, even though both are paper tickets. The bank note itself
is the warehouse receipt, and therefore the surrogate, or
substitute for cash and a constituent of the supply of money
in the society. The check is not the warehouse receipt itself,
but an order to transfer the receipt, which is an intangible
open book account on the books of the bank.

I f the
receipt-holder chooses to keep his receipts in the form of
a note or a demand deposit, or shifts from one to another,
it should make no difference to the bank or to the total supply
of money, whether the bank is practicing 100-percent or fractional-reserve

But even
though the bank note and the demand deposit are economically
equivalent, the two forms will not be equally marketable or
acceptable on the market. The reason is that while a merchant
or another bank must always trust the bank in question in
order to accept its note, for a check to be accepted the receiver
must trust not only the bank but also the person who signs
the check. In general, it is far easier for a bank to develop
a reputation and trust in the market economy, than for an
individual depositor to develop an equivalent brand name.
Hence, wherever banking has been free and relatively unregulated
by government, checking accounts have been largely confined
to wealthy merchants and businessmen who have themselves developed
a widespread reputation. In the days of uncontrolled banking,
checking deposits were held by the Medicis or the Rockefellers
or their equivalent, not by the average person in the economy.
If banking were to return to relative freedom, it is doubtful
if checking accounts would continue to dominate the economy.

For wealthy
businessmen, however, checking accounts may yield many advantages.
Checks will not have to be accumulated in fixed denominations,
but can be made out for a precise and a large single amount;
and unlike a loss of bank notes in an accident or theft, a
loss of check forms will not entail an actual decline in one’s

Enter the Central Bank

Banking began in England, when the Bank of England was chartered
in 1694. Other large nations copied this institution over
the next two centuries, the role of the Central Bank reaching
its now familiar form with the English Peel Act of 1844. The
United States was the last major nation to enjoy the dubious
blessings of Central Banking, adopting the’ Federal Reserve
System in 1913.

The Central
Bank was privately owned, at least until it was generally
nationalized after the mid-twentieth century. But it has always
been in close cahoots with the central government. The Central
Bank has always had two major roles: (1) to help finance the
government’s deficit; and (2) to cartelize the private commercial
banks in the country, so as to help remove the two great market
limits on their expansion of credit, on their propensity to
counterfeit: a possible loss of confidence leading to bank
runs; and the loss of reserves should any one bank expand
its own credit. For cartels on the market, even if they are
to each firm’s advantage, are very difficult to sustain unless
government enforces the cartel. In the area of fractional-reserve
banking, the Central Bank can assist cartelization by removing
or alleviating these two basic free-market limits on banks’
inflationary expansion credit.

It is
significant that the Bank of England was launched to help
the English government finance a large deficit. Governments
everywhere and at all times are short of money, and much more
desperately so than individuals or business firms. The reason
is simple: unlike private persons or firms, who obtain money
by selling needed goods and services to others, governments
produce nothing of value and therefore have nothing to sell.[10]
Governments can only obtain money by grabbing it from others,
and therefore they are always on the lookout to find new and
ingenious ways of doing the grabbing. Taxation is the standard
method; but, at least until the twentieth century, the people
were very edgy about taxes, and any increase in a tax or imposition
of a new tax was likely to land the government in revolutionary
hot water.

the discovery of printing, it was only a matter of time until
governments began to “counterfeit” or to issue paper money
as a substitute for gold or silver. Originally the paper was
redeemable or supposedly redeemable in those metals, but eventually
it was cut off from gold so that the currency unit, the dollar,
pound, mark, etc. became names for independent tickets or
notes issued by government rather than units of weight of
gold or silver. In the Western world, the first government
paper money was issued by the British colony of Massachusetts
in 1690.[11]

The 1690s
were a particularly difficult time for the English government.
The country had just gone through four decades of revolution
and civil war, in large part in opposition to high taxes,
and the new government scarcely felt secure enough to impose
a further bout of higher taxation. And yet, the government
had many lands it wished to conquer, especially the mighty
French Empire, a feat that would entail a vast increase in
expenditures. The path of deficit spending seemed blocked
for the English since the government had only recently destroyed
its own credit by defaulting on over half of its debt, thereby
bankrupting a large number of capitalists in the realm, who
had entrusted their savings to the government. Who then would
lend anymore money to the English State?

At this
difficult juncture, Parliament was approached by a syndicate
headed by William Paterson, a Scottish promoter. The syndicate
would establish a Bank of England, which would print enough
bank notes, supposedly payable in gold or silver, to finance
the government deficit. No need to rely on voluntary savings
when the money tap could be turned on! In return, the government
would keep all of its deposits at the new bank. Opening in
July 1694, the Bank of England quickly issued the enormous
sum of £760,000, most of which was used to purchase government
debt. In less than two years time, the bank’s outstanding
notes of £765,000 were only backed by £36,000 in
cash. A run demanding specie smashed the bank, which was now
out of business. But the English government, in the first
of many such bailouts, rushed in to allow the Bank of England
to “suspend specie payments,” that is, to cease its obligations
to pay in specie, while yet being able to force its
debtors to pay the bank in full. Specie payments resumed two
years later, but from then on, the government allowed the
Bank of England to suspend specie payment, while continuing
in operation, every time it got into financial difficulties.

The year
following the first suspension, in 1697, the Bank of England
induced Parliament to prohibit any new corporate bank from
being established in England. In other words, no other incorporated
bank could enter into competition with the Bank. In addition,
counterfeiting Bank of England notes was now made punishable
by death. A decade later, the government moved to grant the
Bank of England a virtual monopoly on the issue of bank notes.
In particular, after 1708, it was unlawful for any corporation
other than the Bank of England to issue paper money, and any
note issue by bank partnerships of more than six persons was
also prohibited.

The modern
form of Central Banking was established by the Peel Act of
1844. The Bank of England was granted an absolute monopoly
on the issue of all bank notes in England. These notes, in
turn, were redeemable in gold. Private commercial banks were
only allowed to issue demand deposits. This meant that, in
order to acquire cash demanded by the public, the banks had
to keep checking accounts at the Bank of England. In effect,
bank demand deposits were redeemable in Bank of England notes,
which in turn were redeemable in gold. There was a double-inverted
pyramid in the banking system. At the bottom pyramid, the
Bank of England, engaging in fractional-reserve banking, multiplied
fake warehouse receipts to gold — its notes and deposits —
on top of its gold reserves. In their turn, in a second inverted
pyramid on top of the Bank of England, the private commercial
banks pyramided their demand deposits on top of their
reserves, or their deposit accounts, at the Bank of England.
It is clear that, once Britain went off the gold standard,
first during World War I and finally in 1931, the Bank of
England notes could serve as the standard fiat money, and
the private banks could still pyramid demand deposits on top
of their Bank of England reserves. The big difference is that
now the gold standard no longer served as any kind of check
upon the Central Bank’s expansion of its credit, i.e., its
counterfeiting of notes and deposits.

too, that with the prohibition of private bank issue of notes,
in contrast to demand deposits, for the first time the form
of warehouse receipt, whether notes or deposits, made a big
difference. If bank customers wish to hold cash, or paper
notes, instead of intangible deposits, their banks have to
go to the Central Bank and draw down their reserves. As we
shall see later in analyzing the Federal Reserve, the result
is that a change from demand deposit to note has a contractionary
effect on the money supply, whereas a change from note to
intangible deposit will have an inflationary effect.

Easing the Limits on Bank Credit Expansion

The institution
of Central Banking eased the free-market restrictions on fractional-reserve
banking in several ways. In the first place, by the mid-nineteenth
century a “tradition” was craftily created that the Central
Bank must always act as a “lender of last resort” to bail
out the banks should the bulk of them get into trouble. The
Central Bank had the might, the law, and the prestige of the
State behind it; it was the depository of the State’s accounts;
and it had the implicit promise that the State regards the
Central Bank as “too big to fail.” Even under the gold standard,
the Central Bank note tended to be used, at least implicitly,
as legal tender, and actual redemption in gold, at least by
domestic citizens, was increasingly discouraged though not
actually prohibited. Backed by the Central Bank and beyond
it by the State itself, then, public confidence in the banking
system was artificially bolstered, and runs on the banking
system became far less likely.

under the gold standard, then, domestic demands for gold became
increasingly rare, and there was generally little for the
banks to worry about. The major problem for the bankers was
international demands for gold, for while the citizens
of, say, France, could be conned into not demanding gold for
notes or deposits, it was difficult to dissuade British or
German citizens holding bank deposits in francs from cashing
them in for gold.

The Peel
Act system insured that the Central Bank could act as a cartelizing
device, and in particular to make sure that the severe free-market
limits on the expansion of any one bank could be
circumvented. In a free market, as we remember, if a Rothbard
Bank expanded notes or deposits by itself, these warehouse
receipts would quickly fall into the hands of clients of
other banks, and these people or their banks would demand
redemption of Rothbard warehouse receipts in gold. And since
the whole point of fractional-reserve banking is not
to have sufficient money to redeem the receipts, the Rothbard
Bank would quickly go under. But if a Central Bank enjoys
the monopoly of bank notes, and the commercial banks all pyramid
expansion of their demand deposits on top of their “reserves,”
or checking accounts at the Central Bank, then all the Bank
need do to assure successful cartelization is to expand proportionately
throughout the country, so that all competing banks increase
their reserves, and can expand together at the same rate.
Then, if the Rothbard Bank, for example, prints warehouse
receipts far beyond, say triple, its reserves in deposits
at the Central Bank, it will not, on net, lose reserves if
all the competing banks are expanding their credit
at the same rate. In this way, the Central Bank acts as an
effective cartelizing agent.

But while
the Central Bank can mobilize all the banks within a country
and make sure they all expand the money-substitutes they create
at the same rate, they once again have a problem with the
banks of other countries. While the Central Bank
of Ruritania can see to it that all the Ruritanian banks are
mobilized and expand their credit and the money-supply together,
it has no power over the banks or the currencies of other
countries. Its cartelizing potential extends only to the borders
of its own country.

The Central Bank Buys Assets

analyzing operations of the Federal Reserve in more detail,
we should understand that the most important way that a Central
Bank can cartelize its banking system is by increasing the
reserves of the banks, and the most important way to do that
is simply by buying assets.

In a
gold standard, the “reserve” of a commercial bank, the asset
that allegedly stands behind its notes or deposits, is gold.
When the Central Bank enters the scene, and particularly after
the Peel Act of 1844, the reserves consist of gold, but predominantly
they consist of the bank’s demand deposit account at the Central
Bank, an account which enables the bank to redeem its own
checking account in the notes of the Central Bank, which enjoys
a State-granted monopoly on the issue of tangible notes. As
a result, in practice the banks hold Central Bank deposits
as their reserve and they redeem in Central Bank notes, whereas
the Central Bank is pledged to redeem those notes in gold.

post-Peel Act structure, it is clear, not undesignedly paved
the way for a smooth transition to a fiat paper standard.
Since the average citizen had come to use Central Bank notes
as his cash, and gold was demanded only by foreigners, it
was relatively easy and not troublesome for the government
to go off gold and to refuse to redeem its or its Central
Bank notes in specie. The average citizen continued to use
Bank notes and the commercial banks continued to redeem their
deposits in those notes. The daily economic life of the country
seemed to go on much as before. It should be clear that, if
there had been no Central Bank, and especially no Central
Bank with a Peel Act type monopoly of notes, going off gold
would have created a considerable amount of trouble and a
public outcry.

then, can the Central Bank increase the reserves of the banks
under its jurisdiction? Simply by buying assets. It doesn’t
matter whom it buys assets from, whether from the
banks or from any other individual or firm in the economy.
Suppose a Central Bank buys an asset from a bank. For example,
the Central Bank buys a building, owned by the Jonesville
Bank for $1,000,000. The building, appraised at $1,000,000,
is transferred from the asset column of the Jonesville Bank
to the asset column of the Central Bank. How does the Central
Bank pay for the building? Simple: by writing out a check
on itself for $1,000,000. Where did it get the money to write
out the check? It created the money out of thin air, i.e.,
by creating a fake warehouse receipt for $1,000,000 in cash
which it does not possess. The Jonesville Bank deposits the
check at the Central Bank, and the Jonesville Bank’s deposit
account at the Central Bank goes up by $1,000,000. The Jonesville
Bank’s total reserves have increased by $1,000,000, upon which
it and other banks will be able, in a short period of time,
to multiply their own warehouse receipts to non-existent reserves
manyfold, and thereby to increase the money supply of the
country manyfold.

7 demonstrates this initial process of purchasing assets.
We now have to deal with two sets of T-accounts: the commercial
bank and the Central Bank The process is shown as in figure

let us analyze the similar, though less obvious, process that
occurs when the Central Bank buys an asset from anyone, any
individual or firm, in the economy. Suppose that the Central
Bank buys a house worth $1,000,000 from Jack Levitt, homebuilder.
The Central Bank’s asset column increases by $1,000,000 for
the house; again, it pays for the house by writing a $1,000,000
check on itself, a warehouse receipt for non-existent cash
it creates out of thin air. It writes out the check to Mr.
Levitt. Levitt, who cannot have an account at the Central
Bank (only banks can do so), can do only one thing with the
check: deposit it at whatever bank he uses. This increases
his checking account by $1,000,000. Now, here there is a variant
on the events of the previous example. Already, in the one
act of depositing this check, the total money supply in the
country has increased by $1,000,000, a $1,000,000 which did
not exist before. So an inflationary increase in the money
supply has already occurred. And redistribution has already
occurred as well, since all of the new money, at least initially,
resides in the possession of Mr. Levitt. But this is only
the initial increase, for the bank used by Levitt, say the
Rockville Bank, takes the check and deposits it at the Central
Bank, thereby gaining $1,000,000 in its deposits, which serve
as its reserves for its own fractional-reserve banking operations.
The Rockville Bank, accompanied by other, competing banks,
will then be able to pyramid an expansion of multiple amounts
of warehouse receipts and credits, which will comprise the
new warehouse receipts being loaned out. There will be a multiple
expansion of the money supply. This process can be seen in
Figures 8 and 9 below.

At this
point, the commercial bank has an increase in its reserves
— its demand deposits at the Central Bank — of $1,000,000.
This bank, accompanied by its fellow commercial banks, can
now expand a multiple of loans and demand deposits on top
of those reserves. Let us assume — a fairly realistic assumption
— that that multiple is 10-to-l. The bank feels that now it
can expand its demand deposits to 10 times its reserves. It
now creates new demand deposits in the process of lending
them out to businesses or consumers, either directly or in
the course of purchasing securities on the market. At the
end of this expansion process taking a few weeks, the bank’s
balance sheet can be seen in Figure 9 below. Note that the
situation in Figure 9 could have resulted, either from the
direct purchase of an asset by the Central Bank from the commercial
bank itself (Figure 7), or by purchasing an asset
in the open market from someone who is a depositor at this
or another commercial bank (Figure 8). The end result will
be the same.

Origins of the Federal Reserve: The Advent of the National
Banking System

It should
now be crystal clear what the attitude of commercial banks
is and almost always will be toward the Central Bank in their
country. The Central Bank is their support, their staff and
shield against the winds of competition and of people trying
to obtain money which they believe to be their own property
waiting in the banks’ vaults. The Central Bank crucially bolsters
the confidence of the gulled public in the banks and deters
runs upon them. The Central Bank is the banks’ lender of last
resort, and the cartelizer that enables all the banks to expand
together so that one set of banks doesn’t lose reserves to
another and is forced to contract sharply or go under. The
Central Bank is almost critically necessary to the prosperity
of the commercial banks, to their professional career as manufacturers
of new money through issuing illusory warehouse receipts to
standard cash.

we can now see the mendacity of the common claim that private
commercial banks are “inflation hawks” or that Central Banks
are eternally guarding the pass against inflation. Instead,
they are all jointly the inflation-creators, and the only
inflation-creators, in the economy.

Now this
does not mean, of course, that banks are never griping about
their Central Bank. In every “marriage” there is friction,
and there is often grousing by the banks against their shepherd
and protector. But the complaint, almost always, is that the
Central Bank is not inflating, is not protecting them, intensely
or consistently enough. The Central Bank, while the
leader and mentor of the commercial banks, must also consider
other pressures, largely political. Even when, as now, their
notes are standard cash, they must worry about public opinion,
or about populist complaints against inflation, or about instinctively
shrewd if often unsophisticated public denunciations of the
“money power.” The attitude of a bank toward the Central Bank
and government is akin to general bellyaching by welfare “clients”
or by industries seeking subsidies, against the government.
The complaints are almost always directed, not against the
existence of the welfare system or the subsidy program, but
against alleged “deficiencies” in the intensity and scope
of the subventions. Ask the complainers if they wish to abolish
welfare or subsidies and you will see the horror of their
response, if indeed they can be induced to treat the question
seriously. In the same way, ask any bankers if they wish to
abolish their Central Bank and the reaction of horror will
be very similar.[12]

For the
first century of the history of the American Republic, money
and banking were crucial policy issues between the political
parties. A Central Bank was a live issue from the beginning
of the American nation. At each step of the way, the champions
of the Central Bank were the enthusiastic Nationalists, the
advocates of a Big Central Government. In fact, in 1781, even
before the Revolutionary War was over, the leading Nationalist,
Philadelphia’s merchant tycoon Robert Morris, who was Congress’s
virtual wartime economic czar, got Congress to charter the
first Central Bank, his own Bank of North America (BNA). Like
the Bank of England, Congress bestowed on Morris’s private
BNA the monopoly privilege of issuing paper notes throughout
the country. Most of these notes were issued in the purchase
of newly-issued federal debt, and the BNA was made the depository
of all congressional funds. Over half the capital of the BNA
was officially subscribed by Congress.[13]
The BNA notes were supposedly redeemable in specie, but of
course the fractional-reserve expansion indulged in by the
BNA led to the depreciation of its notes outside its home
base in Philadelphia. After the end of the Revolutionary War,
Morris lost his national political power, and he was forced
to privatize the BNA swiftly and to shift it to the status
of a regular private bank shorn of government privilege.

the first century of the Republic, the party favoring a Central
Bank, first the Hamiltonian High Federalists, then the Whigs
and then the Republicans, was the party of Big Central Government,
of a large public debt, of high protective tariffs, of large-scale
public works, and of subsidies to large businesses in that
early version of “partnership between government and industry,”
Protective tariffs were to subsidize domestic manufactures,
while paper money, fractional reserve banking, and Central
Banking were all advocated by the nationalists as part of
a comprehensive policy of inflation and cheap credit in order
to benefit favored businesses. These favorites were firms
and industries that were part of the financial elite, centered
from the beginning through the Civil War in Philadelphia and
New York, with New York assuming first place after the end
of that war.

against this powerful group of nationalists was an equally
powerful movement dedicated to laissez-faire, free markets,
free trade, ultra-minimal and decentralized government, and,
in the monetary sphere, a hard-money system based squarely
on gold and silver, with banks shorn of all special privileges
and hopefully confined to 100-percent specie banking. These
hard-money libertarians made up the heart and soul of the
Jeffersonian Democratic-Republican and then the Jacksonian
Democratic party, and their potential constituents permeated
every occupation except those of banker and the banker’s favored
elite clientele.

the First Bank of the United States was established by Hamilton,
followed by a Second Bank put in by pro-bank Democrat-Republicans
after the War of 1812, President Andrew Jackson managed to
eliminate the Central Bank after a titanic struggle waged
during the 1830s. While the Jacksonian Democrats were not
able to enact their entire hardmoney program during the 1840s
and 1850s because of the growing Democratic split over slavery,
the regime of those decades, in addition to establishing free
trade for the last time in the United States, also managed
to eliminate not only the Central Bank but all traces of centralized

the new Republican Party of the 1850s contained many former
Jacksonian Democrats, the economic agenda of the Republicans
was firmly fixed by the former Whigs in the party. The victorious
Republicans took advantage of the near one-party Congress
after the secession of the South to drive through their cherished
agenda of economic nationalism and statism. This nationalist
program included: a huge increase in central government power
fueled by the first income tax and by heavy taxes on liquor
and tobacco, vast land grants as well as monetary subsidies
to new transcontinental railroads; and the reestablishment
of a protective tariff.

Not the
least of the Republican statist revolution was effected on
the monetary and financial front. To finance the war effort
against the South, the federal government went off the gold
standard and issued irredeemable fiat paper money, called
“Greenbacks” (technically, U.S. Notes). When the irredeemable
paper, after two years, sank to 50 cents on the dollar on
the market in terms of gold, the federal government turned
increasingly to issuing public debt to finance the war.

the Republican-Whig program managed to dump the traditional
Jefferson-Jackson Democratic devotion to hard money and gold,
as well as their hatred of the public debt. (Both Jefferson,
and later Jackson, in their administrations, managed, for
the last time in American history, to pay off the
federal public debt!) In addition, while the Republicans did
not yet feel strong enough to bring back a Central Bank, they
effectively put an end to the relatively free and non-inflationary
banking system of the post-Jacksonian era, and created a new
National Banking System that centralized the nation’s banks,
and established what amounted to a halfway house toward Central

The state
banks had been happy, from the beginning of the war, to pyramid
an expansion of fractional-reserve notes and demand deposits
on top of the increase of federal green-backs, thus expanding
the total supply of money. Later in the Civil War, the federal
government created the National Banking System, in the Bank
Acts of 1863, 1864, and 1865. Whereas the Peel Act had granted
to one Bank of England the monopoly of all bank notes, the
National Banking Acts granted such a monopoly to a new category
of federally chartered “national banks”; the existing state
banks were prohibited from any issue of notes, and had to
be confined to issuing bank deposits.[14]
In other words, to obtain cash, or paper notes, the state
banks had to keep their own deposit accounts at the national
banks, so as to draw down their accounts and obtain cash to
redeem their customers’ deposits if necessary. For their part,
the national banks were established in a centralized tripartite
hierarchy. At the top of the hierarchy were leading “central
reserve city” banks, a category originally confined to large
banks in New York City; beneath that were “reserve city” banks,
in cities of over 500,000 population; and beneath those were
the rest, or “country banks.” The new legislation featured
a device pioneered by Whig state governments, especially New
York and Michigan, in the 1840s: legal minimum fractional-reserve
requirements of bank reserves to their notes and deposits.
The reserve requirements fashioned an instrument of control
by the upper strata of the banking hierarchy over the lower.
The crucial point was to induce the lower tiers of banks to
keep much of their reserves, not in legal cash (gold, silver,
or greenbacks) but in demand deposit accounts in the higher
tier banks.

the country banks had to keep a minimum ratio of 15 percent
of reserves to their notes and demand deposits outstanding.
Of that 15 percent, only 40 percent had to be in cash; the
rest could be in the form of demand deposits at either reserve
city or central reserve city banks. For their part, the reserve
city banks, with a minimum reserve ratio of 25 percent, could
keep no more than half of these reserves in cash; the other
half could be kept as demand deposits in central reserve city
banks, which also had to keep a minimum reserve ratio of 25
percent. These various national banks were to be chartered
by a federal comptroller of the currency, an official of the
Treasury Department. To obtain a charter, a bank had to obey
high minimum capital requirements, requirements rising through
the hierarchical categories of banks. Thus, the country banks
needed to put up at least $50,000 in capital, and the reserve
city banks faced a capital requirement of $200,000.

the Civil War, each state bank could only pyramid notes and
deposits upon its own stock of gold and silver, and any undue
expansion could easily bring it down from the redemption demands
of other banks or the public. Each bank had to subsist on
its own bottom. Moreover, any bank suspected of not being
able to redeem its warehouse receipts, found its notes depreciating
on the market compared either to gold or to the notes of other,
sounder banks.

the installation of the National Banking System, however,
each bank was conspicuously not forced to stand on
its own and be responsible for its own debts. The U. S. Government
had now fashioned a hierarchical structure of four inverse
pyramids, each inverse pyramid resting on top of a smaller,
narrower one. At the bottom of this multi-tiered inverse pyramid
were a handful of very large, central reserve city, Wall Street
banks. On top of their reserves of gold, silver, and greenbacks,
the Wall Street Banks could pyramid an expansion of notes
and deposits by 4:1. On their deposits at the Central Reserve
City banks, the reserve city banks could pyramid by 4:1, and
then the country banks could pyramid their warehouse receipts
by 6.67:1 on top of their deposits at the reserve banks. Finally,
the state banks, forced to keep deposits at national banks,
could pyramid their expansion of money and credit
on top of their deposit accounts at the country or reserve
city banks.

To eliminate
the restriction on bank credit expansion of the depreciation
of notes on the market, the Congress required all the national
banks to accept each other’s notes at par. The federal government
conferred quasi-legal tender status on each national bank
note by agreeing to accept them at par in taxes, and branch
banking continued to be illegal as before the Civil War, so
that a bank was only required to redeem notes in specie at
the counter at its home office. In addition, the federal government
made redemption in specie difficult by imposing a $3 million
per month maximum limit on the contraction (i.e., net redemption)
of national bank notes.

the country was saddled with a new, centralized, and far more
unsound and inflationary banking system that could and did
inflate on top of expansion by Wall Street banks. By being
at the bottom of that pyramid, Wall Street banks could control
as well as generate a multiple expansion of the nation’s money
and credit. Under cover of a “wartime emergency,” the Republican
Party had permanently transformed the nation’s banking system
from a fairly sound and decentralized one into an inflationary
system under central Wall Street control.

The Democrats
in Congress, devoted to hard money, had opposed the National
Banking System almost to a man. It took the Democrats about
a decade to recover politically from the Civil War, and their
monetary energies were devoted during this period to end greenback
inflationism and return to the gold standard, a victory which
came in 1879 and which the Republicans resisted strongly.
Particularly active in pushing for continued greenback inflation
were the industrial and financial power elite among the Radical
Republicans: the iron and steel industrialists and the big
railroads. It was really the collapse of nationalist bankers,
tycoons, and subsidized and over-expanded railroads in the
mighty Panic of 1873 that humbled their political and economic
power and permitted the victory of gold. The Panic was the
consequence of the wartime and post-war inflationary boom
generated by the new Banking System. And such dominant financial
powers as Jay Cooke, the monopoly underwriter of government
bonds from the Civil War on, and the main architect of the
National Banking System, was, in a fit of poetic justice,
driven into bankruptcy by the Panic. But even after 1879,
gold was still challenged by inflationist attempts to bring
back or add silver to the monetary standard, and it took until
1900 before the silver threat was finally beaten back and
gold established as the single monetary standard. Unfortunately,
by that time, the Democrats had lost their status as a hard-money
party, and were becoming more inflationist than the Republicans.
In the midst of these struggles over the basic monetary standard,
the dwindling stock of hard-money Democrats had neither the
ability nor the inclination to try to restore the free and
decentralized banking structure as it had existed before the
Civil War.

Origins of the Federal Reserve: Wall Street Discontent

By the
1890s, the leading Wall Street bankers were becoming increasingly
disgruntled with their own creation, the National Banking
System. In the first place, while the banking system was partially
centralized under their leadership, it was not centralized
enough. Above all, there was no revered Central Bank
to bail out the commercial banks when they got into trouble,
to serve as a “lender of last resort,” The big bankers couched
their complaint in terms of “inelasticity,” The money supply,
they grumbled, wasn’t “elastic” enough. In plain English,
it couldn’t be increased fast enough to suit the

the Wall Street banks found the money supply sufficiently
“elastic” when they generated inflationary booms by means
of credit expansion. The central reserve city banks could
pyramid notes and deposits on top of gold, and thereby generate
multiple inverse pyramids of monetary expansion on top of
their own expansion of credit. That was fine. The problem
came when, late in the inflationary booms, the banking system
ran into trouble, and people started calling on the banks
to redeem their notes and deposits in specie. At that point,
since all of the banks were inherently insolvent, they, led
by the Wall Street banks, were forced to contract their loans
rapidly in order to stay in business, thereby causing a financial
crisis and a system-wide contraction of the supply of money
and credit. The banks were not interested in the contention
that this sudden bust was a payback for, a wiping out of the
excesses of, the inflationary boom that they had generated.
They wanted to be able to keep expanding credit during recession
as well as booms. Hence their call for a remedy to monetary
“inelasticity” during recessions. And that remedy, of course,
was the grand old nostrum that nationalists and bankers had
been pushing for since the beginning of the Republic: a Central

was scarcely the only reason for the discontent of the Wall
Street bankers with the status quo. Wall Street was
also increasingly losing its dominance over the banking system.
Originally, the Wall Street bankers thought that the state
banks would be eliminated completely because of the prohibition
on their issue of notes; instead, the state banks recouped
by shifting to the issue of demand deposits and pyramiding
on top of national bank issues. But far worse: the state banks
and other private banks began to outcompete the national banks
for financial business. Thus, while national banks were totally
dominant immediately after the Civil War, by 1896 state banks,
savings banks, and private banks comprised a full 54 percent
of all bank resources. The relative growth of the state banks
at the expense of the nationals was the result of National
Bank Act regulations: for example, the high capital requirements
for national banks, and the fact that national banks were
prohibited from having a savings department, or from extending
mortgage credit on real estate. Moreover, by the turn of the
twentieth century, state banks had become dominant in the
growing trust business.

Not only
that: even within the national banking structure, New York
was losing its predominance vis-à-vis banks in other
cities. At the outset, New York City was the only central
reserve city in the nation. In 1887, however, Congress amended
the National Banking Act to allow cities with a population
over 200,000 to become central reserve cities, and Chicago
and St. Louis immediately qualified. These cities were indeed
growing much faster than New York. As a result, Chicago and
St. Louis, which had 16 percent of total Chicago, St. Louis,
and New York bank deposits in 1880 were able to double their
proportion of the three cities’ deposits to 33 percent by

In short,
it was time for the Wall Street bankers to revive the idea
of a Central Bank, and to impose full centralization with
themselves in control: a lender of last resort that would
place the prestige and resources of the federal government
on the line in behalf of fractional-reserve banking. It was
time to bring to America the post-Peel Act Central Bank.

The first
task, however, was to beat down the Populist insurrection,
which, with the charismatic pietist William Jennings Bryan
at its head, was considered a grave danger by the Wall Street
bankers. For two reasons: one, the Populists were much more
frankly inflationist than the bankers; and two and more importantly,
they distrusted Wall Street and wanted an inflation which
would sidestep the banks and be outside banker control. Their
particular proposal was an inflation brought about by monetizing
silver, stressing the more abundant silver rather than the
scarcer metal gold as the key means of inflating the money

and his populists had taken control of the Democratic Party,
previously a hard-money party, at its 1896 national convention,
and thereby transformed American politics. Led by the most
powerful investment banker, Wall Street’s J. P. Morgan &
Company, all the nation’s financial groups worked together
to defeat the Bryanite menace, aiding McKinley to defeat Bryan
in 1896, and then cemented the victory in McKinley’s reelection
in 1900. In that way, they were able to secure the Gold Standard
Act of 1900, ending the silver threat once and for all. It
was then time to move on to the next task: a Central Bank
for the United States.

Putting Cartelization Across: The Progressive Line

The origin
of the Federal Reserve has been deliberately shrouded in myth
spread by pro-Fed apologists. The official legend holds that
the idea of a Central Bank in America originated after the
Panic of 1907, when the banks, stung by the financial panic,
concluded that drastic reform, highlighted by the establishment
of a lender of last resort, was desperately necessary.

All this
is rubbish. The Panic of 1907 provided a convenient handle
to stir up the public and spread pro-Central Bank propaganda.
In actuality, the banker agitation for a Central Bank began
as soon as the 1896 McKinley victory over Bryan was secured.

The second
crucial part of the official legend claims that a Central
Bank is necessary to curb the commercial banks’ unfortunate
tendency to over-expand, such booms giving rise to subsequent
busts. An “impartial” Central Bank, on the other hand, driven
as it is by the public interest, could and would restrain
the banks from their natural narrow and selfish tendency to
make profits at the expense of the public weal. The stark
fact that it was bankers themselves who were making this argument
was supposed to attest to their nobility and altruism.

In fact,
as we have seen, the banks desperately desired a Central Bank,
not to place fetters on their own natural tendency to inflate,
but, on the contrary, to enable them to inflate and expand
together without incurring the penalties of market competition.
As a lender of last resort, the Central Bank could permit
and encourage them to inflate when they would ordinarily have
to contract their loans in order to save themselves. In short,
the real reason for the adoption of the Federal Reserve, and
its promotion by the large banks, was the exact opposite of
their loudly trumpeted motivations. Rather than create an
institution to curb their own profits on behalf of the public
interest, the banks sought a Central Bank to enhance their
profits by permitting them to inflate far beyond the bounds
set by free-market competition.

The bankers,
however, faced a big public relations problem. What they wanted
was the federal government creating and enforcing a banking
cartel by means of a Central Bank. Yet they faced a political
climate that was hostile to monopoly and centralization, and
favored free competition. They also faced a public opinion
hostile to Wall Street and to what they perceptively but inchoately
saw as the “money power.” The bankers also confronted a nation
with a long tradition of opposing Central Banking. How then,
could they put a Central Bank across?

It is
important to realize that the problem faced by the big bankers
was only one facet of a larger problem. Finance capital, led
once again and not coincidentally by the Morgan Bank, had
been trying without success to cartelize the economy on the
free market. First, in the 1860s and 1870s, the Morgans, as
the major financiers and underwriters of America’s first big
business, the railroads, tried desperately and repeatedly
to cartelize railroads: to arrange railroad “pools” to restrict
shipments, allocate shipments among themselves, and raise
freight rates, in order to increase profits in the railroad
industry. Despite the Morgan clout and a ready willingness
by most of the railroad magnates, the attempts kept floundering,
shattered on the rock of market competition, as individual
railroads cheated on the agreement in order to pick up quick
profits, and new venture capital built competing railroads
to take advantage of the high cartel prices. Finally, the
Morgan-led railroads turned to the federal government to regulate
railroads and thereby to enforce the cartel that they could
not achieve on the free market. Hence the Interstate Commerce
Commission, established in 1887.[16]

In general,
manufacturing firms did not become large enough to incorporate
until the 1890s, and at that point the investment bankers
financing the corporations, again led by the Morgans, organized
a large series of giant mergers, covering literally hundreds
of industries. Mergers would avoid the problem of cheating
by separate individual firms, and monopoly firms could then
proceed peacefully to restrict production, raise prices, and
increase profits for all the merged firms and stockholders.
The mighty merger movement peaked from 1898–1902. Unfortunately,
once again, virtually all of these mergers flopped badly,
failing to establish monopolies or monopoly prices, and in
some cases steadily losing market shares from then on and
even plunging into bankruptcy. Again the problem was new venture
capital entering the industry and, armed with up-to-date equipment,
outcompeting the cartel at the artificially high price. And
once again, the Morgan financial interests, joined by other
financial and big business groups, decided that they needed
the government, in particular the federal government, to be
their surrogate in establishing and, better yet, enforcing
the cartel.[17]

The famed
Progressive Era, an era of a Great Leap Forward in massive
regulation of business by state and federal government, stretched
approximately from 1900 or the late 1890s through World War
I. The Progressive Era was essentially put through by the
Morgans and their allies in order to cartelize American business
and industry, to take up more effectively where the cartel
and merger movements had left off. It should be clear that
the Federal Reserve System, established in 1913, was part
and parcel of that Progressive movement: just as the large
meat packers managed to put through costly federal inspection
of meat in 1906, in order to place cripplingly high costs
on competing small meat packers, so the big bankers cartelized
banking through the Federal Reserve System seven years later.[18]

as the big bankers, in trying to set up a Central Bank, had
to face a public opinion suspicious of Wall Street and hostile
to Central Banking, so the financiers and industrialists faced
a public steeped in a tradition and ideology of free competition
and hostility to monopoly. How could they get the public and
legislators to go along with the fundamental transformation
of the American economy toward cartels and monopoly?

The answer
was the same in both cases: the big businessmen and financiers
had to form an alliance with the opinion-molding classes in
society, in order to engineer the consent of the public by
means of crafty and persuasive propaganda. The opinion-molding
classes, in previous centuries the Church, but now consisting
of media people, journalists, intellectuals, economists and
other academics, professionals, educators as well as ministers,
had to be enlisted in this cause. For their part the intellectuals
and opinion-molders were all too ready for such an alliance.
In the first place, most of the academics, economists, historians,
social scientists, had gone to Germany in the late nineteenth
century to earn their Ph.D.s, which were not yet being granted
widely in the U.S. There they had become imbued with the ideals
of Bismarckian statism, organicism, collectivism, and State
molding and governing of society, with bureaucrats and other
planners benignly ruling over a cartelized economy in partnership
with organized big business.

was also a more direct economic reason for the intellectuals’
eagerness for this new statist coalition. The late nineteenth
century had seen an enormous expansion and professionalization
of the various segments of intellectuals and technocrats.
Suddenly, tool-and-die men had become graduate engineers;
gentlemen with bachelor’s degrees had proliferated into specialized
doctorates; physicians, social workers, psychiatrists, all
these groups had formed themselves into guilding and professional
associations. What they wanted from the State was plush and
prestigious jobs and grants (a) to help run and plan the new
statist system; and (b) to apologize for the new order. These
guilds were also anxious to have the State license or otherwise
restrict entry into their professions and occupations, in
order to raise the incomes of each guildsman.

the new alliance of State and Opinion-Molder, an old-fashioned
union of Throne and Altar recycled and updated into a partnership
of government, business leader, intellectual, and expert.
During the Progressive Era, by far the most important forum
established by Big Business and Finance which drew together
all the leaders of these groups, hammered out a common ideology
and policy program, and actually drafted and lobbied for the
leading new Progressive measures of state and federal intervention,
was the National Civic Federation; other similar and more
specialized groups followed.[19]

It was
not enough, however, for the new statist alliance of Big Business
and Big Intellectuals to be formed; they had to agree, propound,
and push for a common ideological line, a line that would
persuade the majority of the public to adopt the new program
and even greet it with enthusiasm. The new line was brilliantly
successful if deceptive: that the new Progressive measures
and regulations were necessary to save the public interest
from sinister and exploitative Big Business monopoly, which
business was achieving on the free market. Government policy,
led by intellectuals, academics and disinterested experts
in behalf of the public weal, was to “save” capitalism, and
correct the faults and failures of the free market by establishing
government control and planning in the public interest. In
other words, policies, such as the Interstate Commerce Act,
drafted and operated to try to enforce railroad cartels, were
to be advocated in terms of bringing the Big Bad Railroads
to heel by means of democratic government action.

this successful “corporate liberal” imposture, beginning in
the Progressive Era and continuing ever since, one glaring
public relations problem has confronted this big business-intellectual
coalition. If these policies are designed to tame and curb
rapacious Big Business, how is it that so many Big Businessmen,
so many Morgan partners and Rockefellers and Harrimans, have
been so conspicuous in promoting these programs? The answer,
though seemingly naive, has managed to persuade the public
with little difficulty: that these men are Enlightened, educated,
public-spirited businessmen, filled with the aristocratic
spirit of noblesse oblige, whose seemingly quasi-suicidal
activities and programs are performed in the noble spirit
of sacrifice for the good of humanity. Educated in the spirit
of service, they have been able to rise above the mere narrow
and selfish grasp for profit that had marked their own forefathers.

And then,
should any maverick skeptic arise, who refuses to fall for
this hokum and tries to dig more deeply into the economic
motivations at work, he will be quickly and brusquely dismissed
as an “extremist” (whether of Left or Right), a malcontent,
and, most damning of all, a “believer in the conspiracy theory
of history.” The question here, however, is not some sort
of “theory of history,” but a willingness to use one’s common
sense. All that the analyst or historian need do is to assume,
as an hypothesis, that people in government or lobbying for
government policies may be at least as self-interested
and profit-motivated as people in business or everyday life,
and then to investigate the significant and revealing patterns
that he will see before his eyes.

Banking, in short, was designed to “do for” the banks what
the ICC had “done for” the railroads, the Meat Inspection
Act had done for the big meatpackers, etc. In the case of
Central Banking, the Line that had to be pushed was a variant
of the “anti-Big Business” shell game being perpetrated on
behalf of Big Business throughout the Progressive Era. In
banking, the line was that a Central Bank was necessary to
curb the inflationary excesses of unregulated banks on the
free market. And if Big Bankers were rather conspicuous and
early in advocating such a measure, why this only showed that
they were more educated, more Enlightened, and more nobly
public-spirited than the rest of their banking brethren.

Putting a Central Bank Across: Manipulating a Movement, 1897–1902

1900, two mighty financial-industrial groups, each consisting
of investment banks, commercial banks, and industrial resources,
confronted each other, usually with hostility, in the financial,
and more importantly, the political arena. These coalitions
were (1) the interests grouped around the Morgan bank; and
(2) an alliance of Rockefeller–Harriman and Kuhn, Loeb interests.
It became far easier for these financial elites to influence
and control politicians and political affairs after 1900 than
before. For the “Third Party System,” which had existed in
America from 1856 to 1896, was comprised of political parties,
each of which was highly ideological and in intense conflict
with the opposing party. While each political party, in this
case the Democratic, the Republican, and various minor parties,
consisted of a coalition of interests and forces, each was
dominated by a firm ideology to which it was strongly committed.
As a result, citizens often felt lifelong party loyalties,
were socialized into a party when growing up, were educated
in party principles, and then rode herd on any party candidates
who waffled or betrayed the cause. For various reasons, the
Democratic and Republican parties after 1900, in the Fourth
and later Party Systems, were largely non-ideological, differed
very little from each other, and as a result commanded little
party loyalty. In particular, the Democratic Party no longer
existed, after the Bryan takeover of 1896, as a committed
laissez-faire, hard-money party. From then on, both parties
rapidly became Progressive and moderately statist.[20]

the importance of political parties dwindled after 1900, and
ideological laissez-faire restraints on government intervention
were gravely weakened, the power of financiers in government
increased markedly. Furthermore, Congress — the arena of political
parties — became less important. A power vacuum developed
for the intellectuals and technocratic experts to fill the
executive bureaucracy, and to run and plan national economic
life relatively unchecked.

The House
of Morgan had begun, in the 1860s and 70s, as an investment
bank financing and controlling railroads, and then, in later
decades, moved into manufacturing and commercial banking.
In the opposing coalition, the Rockefellers had begun in oil
and moved into commercial banking; Harriman had earned his
spurs as a brilliant railroad investor and entrepreneur in
competition with the Morgans; and Kuhn, Loeb began in investment
banking financing manufacturing. From the 1890s until World
War II, much of American political history, of programs and
conflicts, can be interpreted not so much as “Democrat” versus
“Republican,” but as the interaction or conflict between the
Morgans and their allies on the one hand, and the Rockefeller–Harriman-Kuhn,
Loeb alliance on the other.

Grover Cleveland spent his working life allied with the Morgans,
and his cabinet and policies were heavily Morgan-oriented;
William McKinley, on the other hand, a Republican from Rockefeller’s
home state of Ohio, was completely in the Rockefeller camp.
In contrast, McKinley’s vice-president, who suddenly assumed
the presidency when McKinley was assassinated, was Theodore
Roosevelt, whose entire life was spent in the Morgan ambit.
When Roosevelt suddenly trotted out the Sherman Antitrust
Act, previously a dead letter, to try to destroy Rockefeller’s
Standard Oil as well as Harriman’s control of the Northern
Pacific Railroad, this led to a titanic struggle between the
two mighty financial groups. President Taft, an Ohio Republican
who was close to the Rockefellers, struck back by trying to
destroy the two main Morgan trusts, United States Steel and
International Harvester. Infuriated, the Morgans created the
new Progressive Party in 1912, headed by Morgan partner George
W. Perkins, and induced the popular ex-President Roosevelt
to run for a third term on the Progressive ticket. The aim,
and the result, was to destroy Taft’s chances for re-election,
and to elect the first Democratic president in twenty years,
Woodrow Wilson.[21]

But while
the two financial groups clashed on many issues and personalities,
on some matters they agreed and were able to work in concert.
Thus, both groups favored the new trend toward cartelization
in the name of Progressivism and curbing alleged Big Business
monopoly, and both groups, led by the Morgans, were happy
to collaborate in the National Civic Federation.

On banking
and on the alleged necessity for a central bank, both groups,
again, were in happy agreement. And while later on in the
history of the Federal Reserve there would be a mighty struggle
for control between the factions, to found the Fed they were
able to work in undisturbed harmony, and even tacitly agreed
that the Morgan Bank would take the lead and play the role
of first among equals.[22]

The bank
reform movement, sponsored by the Morgan and Rockefeller forces,
began as soon as the election of McKinley as President in
1896 was secured, and the populist Bryan menace beaten back.
The reformers decided not to shock people by calling for a
central bank right away, but to move toward it slowly, first
raising the general point that the money supply must be cured
of its “inelasticity,” The bankers decided to employ the techniques
they had used successfully in generating a mass pro-gold standard
movement in 1895 and 1896. The crucial point was to avoid
the damaging appearance of Wall Street prominence and control
in the new movement, by creating a spurious “grass roots”
movement of non-banker businessmen, centered in the noble
American heartland of the Middle West, far from the sinful
environs of Wall Street. It was important for bankers, a
fortiori Wall Street bankers, to take a discreet back
seat in the reform movement, which was to consist seemingly
of heartland businessmen, academics, and other supposedly
disinterested experts.

The reform
movement was officially launched just after the 1896 election
by Hugh Henry Hanna, president of the Atlas Engine Works of
Indianapolis, who had been active in the gold standard movement
earlier in the year; Hanna sent a memorandum to the Indianapolis
Board of Trade urging a heartland state like Indiana to take
the lead in currency reform.[23]
The reformers responded with remarkable speed. Answering the
call of the Indianapolis Board of Trade, delegates of Boards
of Trade from twelve midwestern cities met in Indianapolis
at the beginning of December, and they called for a large
monetary convention of businessmen from 26 states, which met
quickly in Indianapolis on January 12. This Indianapolis Monetary
Convention (IMC) resolved: (a) to urge President McKinley
to continue the gold standard; and (b) to urge the president
to create a new system of “elastic” bank credit, by appointing
a Monetary Commission to prepare legislation for a revised
monetary system. The IMC named Hugh Hanna as chairman of a
permanent executive committee that he would appoint to carry
out these policies.

The influential
Yale Review hailed the IMC for deflecting opposition
by putting itself forward as a gathering of businessmen rather
than bankers. But to those in the know, it was clear that
the leading members of the executive committee were important
financiers in the Morgan ambit. Two particularly powerful
executive members were Alexander E. Orr, Morgan-oriented New
York City banker, grain merchandiser, railroad director, and
director of the J. P. Morgan-owned publishing house of Harper
Brothers; and Milwaukee tycoon Henry C. Payne, a Republican
leader, head of the Morgan-dominated Wisconsin Telephone Company,
and long-time director of the North American Company, a giant
public utility holding company. So close was North American
to the Morgan interests that its board included two top Morgan
financiers; Edmund C. Converse, president of the Morgan-run
Liberty National Bank of New York, and soon to be founding
president of Morgan’s Bankers Trust Company; and Robert Bacon,
a partner in J. P. Morgan & Company, and one of Theodore
Roosevelt’s closest friends.[24]

A third
member of the IMC executive committee was an even more powerful
secretary of the committee and was even closer to the Morgan
empire. He was George Hoster Peabody. The entire Peabody family
of Boston Brahmins had long been personally and financially
closely associated with the Morgans. A George Peabody had
established an international banking firm of which J. P. Morgan’s
father, Junius, had been a senior partner. A member of the
Peabody clan had served as best man at J. P. Morgan’s wedding
in 1865. George Foster Peabody was an eminent, politically
left-liberal, New York investment banker, who was to help
the Morgans reorganize one of their prime industrial firms,
General Electric, and who was later offered the job of Secretary
of Treasury in the Wilson Administration. Although he turned
down the official post, Peabody functioned throughout the
Wilson regime as a close adviser and “statesman without portfolio.”

McKinley was highly favorable to the IMC, and in his First
Inaugural Address, he endorsed the idea of “some revision”
of the banking system. He followed this up in late July, 1897
with a special message to Congress, proposing the establishment
of a special monetary commission. A bill for a commission
passed the House, but failed in the Senate.

but imperturbable, the executive committee of the IMC decided
in August to select their own Indian-apolis Monetary Commission.
The leading role in appointing the new Commission was played
by George Foster Peabody. The Commission consisted of various
industrial notables, almost all either connected with Morgan
railroads or, inonecase, with the Morgan-controlled General
Electric Company.[25]
The working head of the Monetary Commission was economist
J. Laurence Laughlin, head Professor of Political Economy
at the University of Chicago, and editor of the university’s
prestigious Journal of Political Economy. Laughlin
supervised the operations of the Commission staff and the
writings of its reports; the staff consisted of two of Laughlin’s
graduate students at Chicago.

The then
impressive sum of $50,000 was raised throughout the nation’s
banking and corporate community to finance the work of the
Indianapolis Monetary Commission. New York City’s large quota
was raised by Morgan bankers Peabody and Orr, and a large
contribution came from none other than J. P. Morgan himself.

up shop in Washington in mid-September, the Commission staff
pioneered in persuasive public relations techniques to spread
the reports of the Commission far and wide. In the first place,
they sent a detailed monetary questionnaire to several hundred
selected “impartial” experts, who they were sure would answer
the questions in the desired manner. These questionnaire answers
were then trumpeted as the received opinions of the nation’s
business community. Chairman of the IMC Hugh Hanna made the
inspired choice of hiring as Washington assistant of the Commission
the financial journalist Charles A. Conant, who had recently
written A History of Modern Banks of Issue. The Monetary
Commission was due to issue its preliminary report in mid-December;
by early December, Conant was beating the drums for the Commission’s
recommendations, leading an advance line of the report in
an issue of Sound Currency magazine, and bolstering
the Commission’s proposals with frequent reports of unpublished
replies to the Commission’s questionnaire. Conant and his
colleagues induced newspapers throughout the country to print
abstracts of these questionnaire answers, and in that way,
as the Commission’s secretary reported, by “careful manipulation”
were able to get part or all of the preliminary Commission
report printed in nearly 7,500 newspapers, large and small,
across the nation. Thus, long before the days of computerized
direct mail, Conant and the others on the staff developed
a distribution or transmission system of nearly 100,000 correspondents
“dedicated to the enactment of the commission’s plan for banking
and currency reform.”[26]

The prime
emphasis of the Commission’s preliminary report was to complete
the McKinley victory by codifying the existing de facto
single gold standard. More important in the long run was a
call for fundamental banking reform to allow greater “elasticity,”
so that bank credit could be increased during recessions.
As yet, there were little specifics for such a long-run transformation.

The executive
committee now decided to organize the second and final meeting
of the Indianapolis Monetary Convention, which met at that
city in January, 1898. The second convention was a far grander
affair than the first, bringing together nearly 500 delegates
from 31 states. Moreover, the gathering was a cross-section
of America’s top corporate leaders. The purpose of this second
convention, as former Secretary of the Treasury Fairchild
candidly explained to the gathering, was to mobilize the nation’s
leading businessmen into a mighty and influential banking
reform movement. As he put it, “If men of business give serious
attention and study to these subjects, they will substantially
agree upon legislation, and thus, agreeing, their influence
will be prevailing.” Presiding officer of the convention,
Iowa’s Governor Leslie M. Shaw, was, however, a bit disingenuous
when he told the meeting: “You represent today not the banks,
for there are few bankers on this floor. You represent the
business industries and the financial interests of the country.”
For there were plenty of bankers there, too. Shaw himself,
later to be Secretary of the Treasury under Theodore Roosevelt,
was a small-town banker in Iowa, president of the Bank of
Denison, who saw nothing wrong with continuing in this post
throughout his term as governor. More important for Shaw’s
career was the fact that he was a long-time leading member
of the Des Moines Regency, the Iowa Republican machine headed
by powerful Senator William Boyd Allison. Allison, who was
later to obtain the Treasury post for Shaw, was in turn closely
tied to Charles E. Perkins, a close Morgan ally, president
of the Chicago, Burlington and Quincy Railroad, and kinsman
of the highly influential Forbes financial group of Boston,
long tied to the Morgan interests.

serving as delegates to this convention were several eminent
economists who, however, intriguingly came not as academic
observers but frankly as representatives of sections of the
business community. Thus Professor Jeremiah W. Jenks of Cornell,
a leading proponent of government cartelization and enforcement
of trusts and soon to become a friend and advisor of Theodore
Roosevelt as governor of New York, came as a delegate from
the Ithaca Business Men’s Association. Frank W. Taussig of
Harvard represented the Cambridge Merchant’s Association;
Yale’s Arthur Twining Hadley, soon to become president of
Yale University, came as representative of the New Haven Chamber
of Commerce; and Fred M. Taylor of the University of Michigan
came representing the Ann Arbor Business Men’s Association.
Each of these men held powerful posts in the organized economics
profession, Jenks, Taussig, and Taylor serving on the Currency
Committee of the American Economic Association. Hadley, a
leading railroad economist, also served on the board of directors
of two leading Morgan railroads: the New York, New Haven and
Hartford, and the Atchison, Topeka, and Santa Fe Railroads.

Taussig and Taylor were monetary theorists who urged reform
to make the money supply more elastic. Taussig wanted an expansion
of national bank notes, to inflate in response to the “needs
of business,” so that the currency would “grow without trammels
as the needs of the community spontaneously call for increase.”
Taylor, too, urged a modification of the gold standard by
“a conscious control of the movement of money” by government
“in order to maintain the stability of the credit system.”
Taylor went so far as to justify suspensions of specie payment
by the government in order to “protect the gold reserve.”[27]

In late
January, the Convention duly endorsed the preliminary report
with virtual unanimity, after which Professor Laughlin was
assigned the task of drawing up a more elaborate Final Report
of the Commission, which was published and distributed a few
months later. With the endorsement of the august membership
of the Convention secured, Laughlin’s Final Report finally
let the cat out of the bag: for the report not only came out
for a greatly increased issue of national bank notes, but
it also called explicitly for a Central Bank that would enjoy
a monopoly of the issue of bank notes.[28]

The Convention
delegates promptly took the gospel of banking reform and a
central bank to the length and breadth of the corporate and
financial communities. Thus, in April, 1898, A. Barton Hepburn,
monetary historian and president of the Chase National Bank
of New York, at that time the flagship commercial bank for
the Morgan interests, and a man who would play a leading role
in the drive to establish a central bank, invited Monetary
Commissioner Robert S. Taylor to address the New York State
Bankers’ Association on the currency question, since “bankers,
like other people, need instruction on this subject.” All
the Monetary Commissioners, especially Taylor, were active
during this period in exhorting groups of businessmen throughout
the nation on behalf of banking reform.[29]

the lobbying team of Hanna and Conant were extremely active
in Washington. A bill embodying the proposals of the Indianapolis
Monetary Commission was introduced into the House by Indiana
Congressman Jesse Overstreet in January, and was reported
out by the House Banking and Currency Committee in May. In
the meanwhile, Conant met also continually with the Banking
Committee members, while Hanna repeatedly sent circular letters
to the Convention delegates and to the public, urging a letter-writing
campaign in support of the bill at every step of the Congressional

this agitation, McKinley’s Secretary of the Treasury, Lyman
J. Gage, worked closely with Hanna, Conant, and their staff.
Gage sponsored several bills along the same lines. Gage, a
friend of several of the Monetary Commissioners, was one of
the top leaders of the Rockefeller interests in the banking
field. His appointment as Secretary of the Treasury had been
secured for him by Ohio’s Mark Hanna, political mastermind
and financial backer of President McKinley, and old friend,
high school classmate, and business associate of John D. Rockefeller,
Sr. Before his appointment to the Cabinet, Gage had been president
of the powerful First National Bank of Chicago, one of the
leading commercial banks in the Rockefeller ambit. During
his term in office, Gage tried to operate the Treasury Department
as a central bank, pumping in money during recessions by purchasing
government bonds in the open market, and depositing large
funds with pet commercial banks.

In 1900,
Gage called vainly for the establishment of regional central
banks. Finally, in his last annual report as Secretary of
the Treasury in 1901, Lyman Gage called outright for a governmental
central bank. Without such a central bank, he declared in
alarm, “individual banks stand isolated and apart, separated
units, with no tie of mutuality between them.” Unless a central
bank could establish such ties, he warned, the Panic of 1893
would be repeated.

Any reform
legislation, however, had to wait until the gold forces could
secure control of Congress in the elections of 1898. In the
autumn, the permanent executive committee of the Indianapolis
Monetary Convention mobilized its forces, calling on 97,000
correspondents throughout the country to whom it had distributed
its preliminary report. The executive committee urged its
readers to elect a gold standard Congress, a task which was
accomplished in November.

As a
result, the McKinley Administration now could submit its bill
to codify the single gold standard, which Congress passed
as the Gold Standard Act of March, 1900. Phase One of the
reformers’ task had been accomplished: gold was the sole standard,
and the silver menace had been crushed. Less well-known are
the clauses of the Gold Standard Act that began the march
toward a more “elastic” currency. Capital requirements for
national banks in small towns and rural areas were now loosened,
and it was made easier for national banks to issue notes.
The purpose was to meet a popular demand for “more money”
in rural areas at crop-moving time.

But the
reformers regarded the Gold Standard Act as only the first
step toward fundamental banking reform. Thus, Frank Taussig,
in Harvard’s economic journal, praised the Gold Standard Act,
and was particularly gratified that it was the result of a
new social and ideological alignment, sparked by “strong pressure
from the business community” through the Indianapolis Monetary
Convention. But Taussig warned that more reform was needed
to allow for greater expansion of money and bank credit.[30]

detailed in calling for reform in his comment on the Gold
Standard Act was Joseph French Johnson, Professor of Finance
at the Wharton School of Business at the University of Pennsylvania.
Johnson deplored the U. S. banking system as the worst in
the world, and pointed in contrast to the glorious central
banking systems existing in Britain and France. In the United
States, however, unfortunately “there is no single business
institution, and no group of large institutions, in which
self-interest, responsibility, and power naturally unite and
conspire for the protection of the monetary system against
twists and strains.” In short, there was far too much freedom
and decentralization in the banking system, so that the deposit
credit structure “trembles” whenever credit expansion leads
to demands for cash or gold.[31]
Johnson had been a mentor and close friend at the Chicago
Tribune of both Lyman Gage and Frank A. Vanderlip , who
was to play a particularly important role in the drive for
a central bank. When Gage went to Washington as Secretary
of the Treasury, he brought Vanderlip along as his Assistant
Secretary. On the accession of Roosevelt to the Presidency,
Gage left the Cabinet in early 1902, and Gage, Vanderlip,
and Conant all left for top banking positions in New York.[32]

The political
pressure for reform after 1900 was poured on by the large
bankers. A. Barton Hepburn, head of Morgan’s Chase National
Bank, drew up a bill as head of a commission of the American
Bankers Association, and the bill was submitted to Congress
in late 1901 by Representative Charles N. Fowler of New Jersey,
chairman of the House Banking and Currency Committee. The
Hepburn–Fowler Bill was reported out of the committee the
following April. The Fowler Bill allowed for further expansion
of national bank notes; it also allowed national banks to
establish branches at home and abroad, a step that had been
illegal (and has still been illegal until very recently) due
to the fierce opposition of the small country bankers. Third,
the Fowler Bill proposed to create a three-member board of
control within the Treasury Department to supervise new bank
notes and to establish clearinghouses. This would have been
a step toward a central bank. But, at this point, fierce opposition
by the country bankers managed to kill the Fowler Bill on
the floor of the House in 1902, despite agitation in its favor
by the executive committee and staff of the Indianapolis Monetary

the opposition of the small country bankers managed to stop
the reform drive in Congress. Trying another tack, Theodore
Roosevelt’s Secretary of Treasury Leslie Shaw attempted to
continue and expand Lyman Gage’s experiments in making the
U.S. Treasury function like a central bank. In particular,
Shaw made open-market purchases in recessions and violated
the Independent Treasury statutes confining Treasury funds
to its own vaults, by depositing Treasury funds in favored
large national banks. In his last annual report of 1906, Secretary
Shaw urged that he be given total power to regulate all the
nation’s banks. But by this time, the reformers had all dubbed
these efforts a failure; a central bank itself was deemed
clearly necessary.

The Central Bank Movement Revives, 1906–1910

the failure of the first drive toward central banking with
the defeat of the Fowler Bill in 1902, and the collapse of
Secretary Shaw’s efforts to use the Treasury as a surrogate
central bank, the bank reform forces decided to put their
cards on the table and push frankly for a Central Bank for
the United States.

The revived
campaign was kicked off by a fateful speech in January 1906
by the powerful Jacob H. Schiff, head of the Wall Street investment
banking firm of Kuhn, Loeb & Company before the New York
Chamber of Commerce. Schiff complained that the country had
“needed money” in the autumn of 1905, and couldn’t obtain
it from the Treasury. An “elastic currency” for the nation
was therefore imperative, and Schiff urged the New York Chamber’s
Committee on Finance to draw up a comprehensive plan for a
new modern banking system to provide for a comprehensive plan
for a new modern banking system to provide for an elastic
currency. A Kuhn, Loeb partner and kinsman of Schiff who had
agitated behind the scenes for a central bank was Paul Moritz
Warburg, who had suggested the idea to Schiff as early as
1903. Warburg had emigrated in 1897 from the German investment
banking firm of M. M. Warburg & Company and was devoted
to the central banking model that had developed in Germany.

the Finance Committee of the New York Chamber proved reluctant,
Frank A. Vanderlip reported this unwelcome development to
his boss, James Stillman, head of the National City Bank,
and Stillman suggested that a new five-man special commission
be set up by the New York Chamber to report on a plan for
currency reform. The important thing was to secure a commission
predisposed to be friendly, and Vanderlip managed to secure
a commission totally loaded in favor of a central bank. This
special commission of the New York Chamber consisted of Vanderlip,
a Rockefeller man; Schiff’s close friend Isidore Straus, a
director of R. H. Macy & Company; two Morgan men: Dumont
Clarke, president of the American Exchange National Bank and
a personal adviser to J. P. Morgan, and our old friend Charles
A. Conant, treasurer of Morton Trust Company. The fifth member
was John Claflin, of H. B. Claflin & Company, a large
wholesaling firm, who was a veteran of the Indianapolis Monetary
Convention. Coming on board as secretary of the new currency
commission was Vanderlip’s friend Professor Joseph French
Johnson, now of New York University.

The commission
revived the old Indianapolis questionnaire technique: acquiring
legitimacy by sending out a detailed questionnaire on currency
to a number of financial leaders. While Johnson mailed and
collated the questionnaires, Conant visited and interviewed
the heads of the central banks of Europe.

The special
commission delivered its “Currency Report” to the New York
Chamber in October, 1906. To eliminate instability and the
danger of an inelastic currency, the commission called for
the creation of a “central bank of issue under the control
of the government.” The following January, Paul Warburg went
public with his agitation for a central bank, publishing two
articles on its behalf. The big bankers recognized, however,
that ever since the defeat of the Fowler Bill, a prime task
would be to convert the large number of small bankers in the
nation to the cause of a central bank.

The Panic
of 1907 struck in October, the result of an inflation stimulated
by Secretary of the Treasury Leslie Shaw in the previous two
years. The Panic galvanized the big bankers to put on a concerted
putsch for a Lender of Last Resort in the shape of
a central bank. The big bankers realized that one of the first
steps in the march to a central bank was to win the support
of the nation’s economists, academics, and financial experts.
Fortunately for the reformers, two useful organizations for
the mobilization of academics were near at hand: the American
Academy of Political and Social Science (AAPSS) of Philadelphia,
and the Academy of Political Science of Columbia University
(APS), both of which comprised leading corporate liberal businessmen,
financiers, and corporate attorneys, as well as academics.
Each of these organizations, along with the American Association
for the Advancement of Science (AAAS), held symposia on monetary
affairs during the winter of 1907-1908, and each called for
the establishment of a central bank. The Columbia conference
was organized by the distinguished Columbia economist E. R.
A. Seligman, who not coincidentally was a member of the family
of the prominent Wall Street investment bank of J. & W.
Seligman and Company. Seligman was grateful that the university
was able to provide a platform for leading bankers and financial
journalists to promote a central bank, especially because
“it is proverbially difficult in a democracy to secure a hearing
for the conclusions of experts.” Emphasizing the importance
of a central bank at the meetings, in addition to Seligman,
was National City Bank’s Frank Vanderlip, Morgan’s Chase National
Bank’s A. Barton Hepburn, and Kuhn, Loeb’s Paul M. Warburg.

At the
American Academy of Political and Social Science symposium
in Philadelphia, several leading investment bankers as well
as Comptroller of the Currency William B. Ridgely came out
for a central bank. Members of the AAPSS’s advisory committee
on currency included Hepburn; Morgan personal attorney and
statesman Elihu Root; Morgan’s long-time personal attorney
Francis Lynde Stetson; and J. P. Morgan himself. In the meanwhile,
the AAAS symposium in January, 1908 was organized by none
other than Charles A. Conant himself, who happened to be chairman
of the AASS’s social and economic section that year. Speakers
favoring a central bank included Conant, Columbia economist
J. B. Clark, Vanderlip, and Vander-lip’s friend George E.
Roberts, head of the Rockefeller-oriented Commercial National
Bank of Chicago, who would later wind up at the National City

The task
of the bank reformers was well summarized by J. R. Duffield,
secretary of the Bankers Publishing Company, in January 1908:
“It is recognized generally that before legislation can be
had there must be an educational campaign carried on, first
among the bankers, and later among commercial organizations,
and finally among the people as a whole.”

the same month, the legislative lead in banking reform was
taken by Senator Nelson W. Aldrich (R., R.I.), head of the
Senate Finance Committee, and, as the father-in-law of John
D. Rockefeller, Jr., Rockefeller’s man in the U. S. Senate.
Aldrich’s Aldrich-Vreeland Act passed Congress that year,
its most prominent provision the increased amount of emergency
currency that national banks could issue. A more important
if widely neglected provision, however, established a National
Monetary Commission (NMC) that would investigate the currency
question and suggest proposals for comprehensive banking reform.
The underlying purpose of the NMC was revealed by two admirers
who hailed this new proposal. Seren S. Pratt of the Wall
Street Journal conceded that the real purpose of the
NMC was to swamp the public with supposed expertise, thereby
“educating” them into accepting banking reform. Pratt pointed
out that “in no other way can such education be effected more
thoroughly and rapidly than by … a commission.” Another
function of a commission, noted Festus J. Wade, a St. Louis
banker and member of the Currency Commission of the American
Bankers Association, was to “keep the financial issue out
of politics,” and put it squarely in the safe custody of carefully
selected “experts.” The Indianapolis Monetary Commission was
now being recreated on a national scale.

Aldrich lost no time in launching the NMC, in June 1908. The
Commission consisted of an equal number of Senators and Representatives,
but these members of Congress were mere window-dressing to
the advisors and staff who did the real work of the Commission.
From the beginning, Aldrich envisioned the NMC, and the banking
reform movement generally, to be run as an alliance of Rockefeller,
Morgan, and Kuhn, Loeb people. Aldrich chose as the leading
experts advising or joining the Commission two men suggested
by Morgan leaders. As his top adviser, Aldrich chose, on the
suggestion of J. P. Morgan, seconded by Jacob Schiff, probably
the most powerful of the Morgan partners, Henry P. Davison.
For leading technical economic expert and director of research,
Aldrich accepted the recommendation of Roosevelt’s close friend
and fellow Morgan man, Harvard University President Charles
Eliot, who had urged the appointment of Harvard economist
Abram Piatt Andrew. An-drew commissioned and supervised numerous
reports and studies on all relevant aspects of banking and
finance. In December, Aldrich hired the inevitable Charles
A. Conant for research, public relations, and agitprop for
the NMC. Meanwhile, Aldrich gathered around him inner circles
of influential advisers, who included Warburg and Vanderlip.
Warburg gathered around him subcircles who included Irving
T. Bush, head of the Currency Committee of the New York Merchants
Association, and men from the top ranks of the American Economic
Association, to which Warburg delivered an address advocating
central banking in December, 1908. Warburg met and corresponded
frequently with leading academic economists who favored banking
reform, including Seligman; Davis R. Dewey, historian of banking
at M.I.T., long-time secretary-treasurer of the American Economic
Association and brother of the progressive philosopher and
educator John Dewey; Frank W. Taussig; Irving Fisher of Yale;
and Oliver M. W. Sprague, Professor of Banking at Harvard,
of the Morgan-oriented Sprague family.

In the
month of September, 1909, the reformers accelerated their
drive for a central bank into high gear. Morgan-oriented Chicago
banker George M. Reynolds delivered a presidential address
to the American Bankers Association flatly calling for a central
bank for America. Almost simultaneously on September 14, President
William Howard Taft, speaking in Boston, suggested that the
country seriously consider a central bank. Taft had been close
to the reformers, especially to his Rockefeller-oriented friend
Nelson Aldrich, since 1900. The Wall Street Journal
understood the importance of this public address, as “removing
the subject from the realm of theory to that of practical

One week
later, the bank reformers organized a virtual government-bank-media
complex to drive through a central bank. On September 22,
the Wall Street Journal began an unprecedented front-page,
fourteen-part series of editorials entitled “A Central Bank
of Issue.” These unsigned editorials were actually written
by the ubiquitous Charles A. Conant, from his vantage point
as salaried chief propagandist of the U. S. government’s National
Monetary Commission. Building on his experience in 1898, Conant,
aided by Aldrich’s secretary, prepared abstracts of commission
materials and distributed them to newspapers in early 1910.
}. P. Gavitt, head of the Washington bureau of the Associated
Press, was recruited by the NMC to extract “newsy paragraphs”
for newspaper editors out of commission abstracts, articles,
and forthcoming books. And two ostensibly disinterested academic
organizations lent their coloration to the NMC: the Academy
of Political Science, publishing a special volume of its Proceedings
in collaboration with the NMC, “to popularize, in the best
sense, some of the valuable work of the Commission.” In the
meanwhile, the Academy of Political and Social Science published
its own special volume in 1910, Banking Problems,
introduced by Andrew, and including articles by veteran bank
reformers, including Johnson, Horace White, and Morgan Bankers
Trust official Fred I. Kent, as well as by a number of high
officials of Rockefeller’s National City Bank of New York.

Paul M. Warburg capped his lengthy and intensive campaign
for a central bank in a famous speech to the New York YMCA
on March 23, 1910, on “A United Reserve Bank for the United
States.” Warburg outlined the structure of his beloved German
Reichsbank, but he was careful to allay the fears
of Wall Street by insisting that the central bank would not
be “controlled by ‘Wall Street’ or any monopolistic interest.”
Therefore, Warburg insisted that the new Reserve Bank must
not be called a “central bank,” and that the Reserve
Bank’s governing board be chosen by government officials,
merchants and bankers; bankers, of course, were to dominant
the selections.

One of
the great cheerleaders for the Warburg Plan, and the man who
introduced the volume on banking reform featuring Warburg’s
speech and published by the Academy of Political Science (H.
R. Mussey, ed., The Reform of the Currency, New York,
1911), was kinsman and Seligman investment banking family
economist, E. R. A. Seligman. So delighted, too, with Warburg’s
speech was the Merchants’ Association of New York that it
distributed thirty thousand copies of the speech during the
spring of 1910. Warburg had carefully paved the way for this
action by the Merchants’ Association by regularly meeting
with the Currency Committee of the Merchants Association since
the fall of 1908. Warburg’s efforts were aided by the fact
that the resident expert for that committee was Joseph French

the same spring of 1910, the NMC’s numerous research volumes
on various aspects of banking poured forth onto the market.
The object was to swamp public opinion with a parade of impressive
analytic and historical scholarship, all allegedly “scientific”
and “value-free,” but all designed to further the agenda of
a central bank.

Culmination at Jekyll Island

Now that
the groundwork had been laid for a central bank among scholars,
bankers, and interested public opinion, by the latter half
of 1910 it was time to formulate a concrete practical plan
and to focus the rest of the agitation to push it through.
As Warburg wrote in the Academy of Political Science book
on Reform of the Currency: “Advance is possible only
by outlining a tangible plan” to set the terms of the debate.

The tangible
plan phase of the central bank movement was launched by the
ever-pliant Academy of Political Science of Columbia University,
which held a monetary conference in November, 1910, in conjunction
with the New York Chamber of Commerce and the Merchants’ Association
of New York. The members of the NMC were the joint guests
of honor at this conclave, and delegates to it were chosen
by governors of twenty-two states, as well as presidents of
twenty-four chambers of commerce. Also attending this conference
were a large number of economists, monetary analysts and representatives
of the nation’s leading bankers. Attendants at the conference
included Frank Vanderlip, Elihu Root, Jacob Schiff, Thomas
W. Lamont, partner of the Morgan bank, and J. P. Morgan himself.
The formal sessions of the conference were organized around
papers delivered by Laughlin, Johnson, Bush, Warburg, and
Conant. C. Stuart Patterson, Dean of the University of Pennsylvania
Law School and member of the finance committee of the Morgan-oriented
Pennsylvania Railroad, who had been the chairman of the first
IMC and a member of the Indianapolis Monetary Commission,
laid down the marching orders for the assembled troops. He
recalled the great lesson of the IMC, and the way its proposals
had triumphed because “we went home and organized an aggressive
and active movement.” He then exhorted the troops: “That is
just what you must do in this case, you must uphold the hands
of Senator Aldrich. You have got to see that the bill which
he formulates … obtains the support of every part of
this country.”

the movement fully primed, it was now time for Senator Aldrich
to write the bill. Or rather, it was time for the senator,
surrounded by a few of the topmost leaders of the financial
elite, to go off in seclusion, and hammer out a detailed plan
around which all parts of the central banking movement could
rally. Someone, probably Henry P. Davison, got the idea of
convening a small group of top leaders in a super-secret conclave,
to draft the bill. The eager J. P. Morgan arranged for a plush
private conference at his exclusive millionaire’s retreat,
at the Jekyll Island Club on Jekyll Island, Georgia. Morgan
was a co-owner of the club. On November 22, 1910, Senator
Aldrich, with a handful of companions, set forth under assumed
names in a privately chartered railroad car from Hoboken,
New Jersey to the coast of Georgia, allegedly on a duck-hunting

The conferees
worked for a solid week at the plush Jekyll Island retreat,
and hammered out the draft of the bill for the Federal Reserve
System. Only six people attended this super-secret week-long
meeting, and these six neatly reflected the power structure
within the bankers’ alliance of the central banking movement.
The conferees were, in addition to Aldrich (Rockefeller kinsman);
Henry P. Davison, Morgan partner; Paul Warburg, Kuhn Loeb
partner; Frank A. Vander-lip, vice-president of Rockefeller’s
National City Bank of New York; Charles D. Norton, president
of Morgan’s First National Bank of New York; and Professor
A. Piatt Andrew, head of the NMC research staff, who had recently
been made an Assistant Secretary of the Treasury under Taft,
and who was a technician with a foot in both the Rockefeller
and Morgan camps.

The conferees
forged the Aldrich Bill, which, with only minor variations,
was to become the Federal Reserve Act of 1913. The only substantial
disagreement at Jekyll Island was tactical: Aldrich attempted
to hold out for a straightforward central bank on the European
model, while Warburg, backed by the other bankers, insisted
that political realities required the reality of central control
to be cloaked in the palatable camouflage of “decentralization.”
Warburg’s more realistic, duplicitous tactic won the day.

presented the Jekyll Island draft, with only minor revisions,
to the full NMC as the Aldrich Bill in January, 1911. Why
then did it take until December, 1913 for Congress to pass
the Federal Reserve Act? The hitch in the timing resulted
from the Democratic capture of the House of Representatives
in the 1910 elections, and from the looming probability that
the Democrats would capture the White House in 1912. The reformers
had to regroup, drop the highly partisan name of Aldrich from
the bill, and recast it as a Democratic bill under Virginia’s
Representative Carter Glass. But despite the delay and numerous
drafts, the structure of the Federal Reserve as passed overwhelmingly
in December 1913 was virtually the same as the bill that emerged
from the secret Jekyll Island meeting three years earlier.
Successful agitation brought bankers, the business community,
and the general public rather easily into line.

The top
bankers were brought into camp at the outset; as early as
February, 1911, Aldrich organized a closed-door conference
of twenty-three leading bankers at Atlantic City. Not only
did this conference of bankers endorse the Aldrich Plan, but
it was made clear to them that “the real purpose of the conference
was to discuss winning the banking community over to government
control directly by the bankers for their own ends.” The big
bankers at the conference also realized that the Aldrich Plan
would “increase the power of the big national banks to compete
with the rapidly growing state banks, (and) help bring the
state banks under control.”[33]

By November,
1911, it was easy to line up the full American Bankers Association
behind the Aldrich Plan. The threat of small bank insurgency
was over, and the nation’s banking community was now lined
up solidly behind the drive for a central bank. Finally, after
much backing and filling, after Aldrich’s name was removed
from the bill and Aldrich himself decided not to run for reelection
in 1912, the Federal Reserve Act was passed overwhelmingly
on December 22, 1913, to go into effect in November of the
following year. As A. Barton Hepburn exulted to the annual
meeting of the American Bankers Association in late August
1913: “The measure recognizes and adopts the principles of
a central bank. Indeed, if it works out as the sponsors of
the law hope, it will make all incorporated banks together
joint owners of a central dominating power.”[34]

The Fed At Last: Morgan-Controlled Inflation

The new
Federal Reserve System had finally brought a central bank
to America: the push of the big bankers had at last succeeded.
Following the crucial plank of post-Peel Act Central Banking,
the Fed was given a monopoly of the issue of all bank notes;
national banks, as well as state banks, could now only issue
deposits, and the deposits had to be redeemable in Federal
Reserve Notes as well as, at least nominally, in gold. All
national banks were “forced” to become members of the Federal
Reserve System, a “coercion” they had long eagerly sought,
which meant that national bank reserves had to be kept in
the form of demand deposits, or checking accounts, at the
Fed. The Fed was now in place as lender of last resort; and
with the prestige, power, and resources of the U. S. Treasury
solidly behind it, it could inflate more consistently than
the Wall Street banks under the National Banking System, and
above all, it could and did, inflate even during recessions,
in order to bail out the banks. The Fed could now try to keep
the economy from recessions that liquidated the unsound investments
of the inflationary boom, and it could try to keep the inflation
going indefinitely.

At this
point, there was no need for even national banks to hold onto
gold; they could, and did, deposit their gold into the vaults
of the Fed, and receive reserves upon which they could pyramid
and expand the supply of money and credit in a coordinated,
nation-wide fashion. Moreover, with reserves now centralized
into the vaults of the Fed, bank reserves could be, as the
bank apologists proclaimed, “economized,” i.e., there could
be and was more inflationary credit, more bank “counterfeiting,”
pyramided on top of the given gold reserves. There were now
three inverted inflationary pyramids of bank credit in the
American economy: the Fed pyramided its notes and
deposits on top of its newly centralized gold supply; the
national banks pyramided bank deposits on top of their reserves
of deposits at the Fed; and those state banks who chose not
to exercise their option of joining the Federal Reserve System
could keep their deposit accounts at national banks and pyramid
their credit on top of that. And at the base of the
pyramid, the Fed could coordinate and control the inflation
by determining the amount of reserves in the member banks.

To give
an extra fillip to monetary inflation, the new Federal Reserve
System cut in half the average legal minimum reserve requirements
imposed on the old national banks. Whereas the national banks
before the onset of the Fed were required to keep an average
minimum of 20 percent reserves to demand deposits, on which
they could therefore pyramid inflationary money and credit
of 5:1, the new Fed halved the minimum reserve requirement
on the banks to 10 percent, doubling the inflationary bank
pyramiding in the country to 10:1.

As luck
would have it, the new Federal Reserve System coincided with
the outbreak of World War I in Europe, and it is generally
agreed that it was only the new system that permitted the
U.S. to enter the war and to finance both its own war effort,
and massive loans to the allies; roughly, the Fed doubled
the money supply of the U.S. during the war and prices doubled
in consequence. For those who believe that U.S. entry into
World War I was one of the most disastrous events for the
U.S. and for Europe in the twentieth century, the facilitating
of U.S. entry into the war is scarcely a major point in favor
of the Federal Reserve.

In form
as well as in content, the Federal Reserve System is precisely
the cozy government-big bank partnership, the government-enforced
banking cartel, that big bankers had long envisioned. Many
critics of the Fed like to harp on the fact that the private
bankers legally own the Federal Reserve System, but this is
an unimportant legalistic fact; Fed (and therefore possible
bank) profits from its operations are taxed away by the Treasury.
The benefits to the bankers from the Fed come not from its
legal profits but from the very essence of its operations:
its task of coordination and backing for bank credit inflation.
These benefits dwarf any possible direct profits
from the Fed’s banking operations into insignificance.

the beginning, the Fed has been headed by a Federal Reserve
Board in Washington, all appointed by the President with the
consent of the Senate. The Board supervises the twelve “decentralized”
regional Federal Reserve Banks, whose officers are indeed
selected by private banks in each region, officers who have
to be approved by the Washington Board.

At the
outset of the Fed, and until the “reforms” of the 1930s, the
major control of the Fed was not in the hands of the Board,
but of the Governor (now called “President”) of the Federal
Reserve Bank of New York, Wall Street’s main man in the Fed
The major instrument of Fed control of the money and banking
system is its “open market operations”: its buying and selling
of U.S. government securities (or, indeed, any other asset
it wished) on the open market. (We will see how this process
works below.) Since the U.S. bond market is located in Wall
Street, the Governor of the New York Fed was originally in
almost sole control of the Fed’s open market purchases and
sales, and hence of the Federal Reserve itself. Since the
1930s, however, the crucial open market policies of the Fed
have been decided by a Federal Open Market Committee, which
meets in Washing-ton, and which includes all the seven members
of the Board of Governors plus a rotating five of the twelve
largely banker-selected Presidents of the regional Feds.

are two critical steps in the establishment and functioning
of any cartel-like government regulation. We cannot afford
to ignore either step. Step one is passing the bill and establishing
the structure. The second step is selecting the proper personnel
to run the structure: there is no point to big bankers setting
up a cartel, for example, and then see the personnel fall
into the “wrong” hands. And yet conventional historians, not
geared to power elite or ruling elite analysis, usually fall
down on this crucial second task, of seeing precisely who
the new rulers of the system would be.

It is
all too clear, on examining the origin and early years of
the Fed, that, both in its personnel and chosen monetary and
financial policies, the Morgan Empire was in almost supreme
control of the Fed.

Morgan dominance was not wholly reflected in the makeup of
the first Federal Reserve Board. Of the seven Board members,
at the time two members were automatically and ex officio
the Secretary of the Treasury and the Comptroller of the Currency,
the regulator of the national banks who is an official in
the Treasury Department. The Secretary of Treasury in the
Wilson Administration was his son-in-law William Gibbs McAdoo,
who, as a failing businessman and railroad magnate in New
York City, had been personally befriended and bailed out by
J. P. Morgan and his close associates. McAdoo spent the rest
of his financial and political life in the Morgan ambit. The
Comptroller of the Currency was a long-time associate of McAdoo’s,
John Skelton Williams. Williams was a Virginia banker, who
had been a director of McAdoo’s Morgan controlled Hudson &
Manhattan Railroad and president of the Morgan-oriented Seaboard
Airline Railway.

Treasury officials on the Board were reliable Morgan men,
but they were members only ex officio. Governor (now
“Chairman”) of the original board was Charles S. Hamlin, whom
McAdoo had appointed as Assistant Secretary of Treasury along
with Williams. Hamlin was a Boston attorney who had married
into the wealthy Pruyn family of Albany, a family long connected
with the Morgan-dominated New York Central Railroad. Another
member of the Federal Reserve Board, and a man who succeeded
Hamlin as Governor, was William P. G. Harding, a protégé
of Alabama Senator Oscar W. Underwood, whose father-in-law,
Joseph H. Wood-ward, was vice-president of Harding’s First
National Bank of Birmingham, Alabama, and head of the Woodward
Iron Company, whose board included representatives of both
Morgan and Rockefeller interests. The other three Board members
were Paul M. Warburg; Frederic A. Delano, uncle of Franklin
D. Roosevelt and president of the Rockefeller-controlled Wabash
Railway; and Berkeley economics professor Adolph C. Miller,
who had married into the wealthy, Morgan-connected Sprague
family of Chicago.[36]

if we ignore the two Morgan ex-officios, the Federal
Reserve Board in Washington began its existence with one reliable
Morgan man, two Rockefeller associates (Delano and a leader
of close Rockefeller ally, Kuhn, Loeb), and two men of uncertain
affiliation: a prominent Alabama banker, and an economist
with vague family connections to Morgan interests. While the
makeup of the Board more or less mirrored the financial power-structure
that had been present at the Fed’s critical founding meeting
at Jekyll Island, it could scarcely guarantee unswerving Morgan
control of the nation’s banking system.

control was guaranteed, instead, by the identity of the man
who was selected to the critical post of Governor of the New
York Fed, a man, furthermore, who was by temperament very
well equipped to seize in fact the power that the structure
of the Fed could offer him. That man, who ruled the Federal
Reserve System with an iron hand from its inception until
his death in 1928, was one Benjamin Strong.[37]

Strong’s entire life had been a virtual preparation for his
assumption of power at the Federal Reserve. Strong was a long-time
protege of the immensely powerful Henry P. Davison, number
two partner of the Morgan Bank just under J. P. Morgan himself,
and effective operating head of the Morgan World Empire. Strong
was a neighbor of Davison’s in the then posh suburb of New
York, Englewood, New Jersey, where his three closest friends
in the world became, in addition to Davison, two other Morgan
partners; Dwight Morrow and Davison’s main protege as Morgan
partner, Thomas W. Lamont. When the Morgans created the Bankers
Trust Company in 1903 to compete in the rising new trust business,
Davison named Strong as its secretary, and by 1914 Strong
had married the firm’s president’s daughter and himself risen
to president of Bankers Trust. In addition, the Davisons raised
Strong’s children for a time after the death of Strong’s first
wife; moreover, Strong served J. P. Morgan as his personal
auditor during the Panic of 1907.

had long been a voluble advocate of the original Aldrich Plan,
and had participated in a lengthy August, 1911 meeting on
the Plan with the Senator Davison, Vanderlip and a few other
bankers on Aldrich’s yacht. But Strong was bitterly disappointed
at the final structure of the Fed, since he wanted a “real
central bank … run from New York by a board of directors
on the ground” — that is, a Central Bank openly and candidly
run from New York and dominated by Wall Street. After a weekend
in the country, however, Davison and Warburg persuaded Strong
to change his mind and accept the proffered appointment as
Governor of the New York Fed. Presumably, Davison and Warburg
convinced him that Strong, as effective head of the Fed, could
achieve the Wall Street-run banking cartel of his dreams if
not as candidly as he would have wished. As at Jekyll Island,
Warburg persuaded his fellow cartelist to bow to the political
realities and adopt the cloak of decentralization.

Strong assumed the post of Governor of the New York Fed in
October, 1914, he lost no time in seizing power over the Federal
Reserve System. At the organizing meeting of the System, an
extra-legal council of regional Fed governors was formed;
at its first meeting, Strong grabbed control of the council,
becoming both its chairman and the chairman of its executive
committee. Even after W. P. G. Harding became Governor of
the Federal Reserve Board two years later and dissolved the
council, Strong continued as the dominant force in the Fed,
by virtue of being named sole agent for the open-market operations
of all the regional Federal Reserve Banks. Strong’s power
was further entrenched by U.S. entry into World War I. Before
then, the Secretary of the Treasury had continued the legally
mandated practice since Jacksonian times of depositing all
government funds in its own sub-treasury branch vaults, and
in making all disbursements from those branches. Under spur
of wartime, however, McAdoo fulfilled Strong’s long-standing
ambition: becoming the sole fiscal agent for the U.S. Treasury.
From that point on, the Treasury deposited its funds with
the Federal Reserve.

Not only
that: wartime measures accelerated the permanent nationalizing
of the gold stock of Americans, the centralization of gold
into the hands of the Federal Reserve. This centralization
had a twofold effect: it mobilized more bank reserves to spur
greater and nationally-coordinated inflation of bank credit;
and it weaned the average American from the habit of using
gold in his daily life and got him used to substituting paper
or checking accounts instead. In the first place, the Federal
Reserve law was changed in 1917 to permit the Fed to issue
Federal Reserve Notes in exchange for gold; before that, it
could only exchange its notes for short-term commercial bills.
And second, from September, 1917 until June, 1919 the United
States was de facto off the gold standard, at least
for gold redemption of dollars to foreigners. Gold exports
were prohibited and foreign exchange transactions were controlled
by the government. As a result of both measures, the gold
reserves of the Federal Reserve, which had constituted 28
percent of the nation’s gold stock on U.S. entry into the
war, had tripled by the end of the war to 74 percent of the
country’s gold.[38]

The content
of Benjamin Strong’s monetary policies was what one might
expect from someone from the highest strata of Morgan power.
As soon as war broke out in Europe, Henry P. Davison sailed
to England, and was quickly able to use long-standing close
Morgan ties with England to get the House of Morgan named
as sole purchasing agent in the United States, for the duration
of the war, for war material for Britain and France. Furthermore,
the Morgans also became the sole underwriter for all the British
and French bonds to be floated in the U.S. to pay for the
immense imports of arms and other goods from the United States.
J. P. Morgan and Company now had an enormous stake in the
victory of Britain and France, and the Morgans played a major
and perhaps decisive role in maneuvering the supposedly “neutral”
United States into the war on the British side.[39]

The Morgan’s
ascendancy during World War I was matched by the relative
decline of the Kuhn, Loebs. The Kuhn, Loebs, along with other
prominent German-Jewish investment bankers on Wall Street,
supported the German side in the war, and certainly opposed
American intervention on the Anglo-French side. As a result,
Paul Warburg was ousted from the Federal Reserve Board, the
very institution he had done so much to create. And of all
the leading “Anglo” financial interests, the Rockefellers,
ally of the Kuhn, Loebs, and a bitter rival of the Angle-Dutch
Royal Dutch Shell Oil Company for world oil markets and resources,
was one of the very few who remained unenthusiastic about
America’s entry into the war.

World War I, Strong promptly used his dominance over the banking
system to create a doubled money supply so as to finance the
U. S. war effort and to insure an Anglo-French victory. All
this was only prelude for a Mor-gan-installed monetary and
financial policy throughout the 1920s. During the decade of
the twenties, Strong collaborated closely with the Governor
of the Bank of England, Montagu Norman, to inflate American
money and credit so as to support the return of Britain to
a leading role in a new form of bowdlerized gold standard,
with Britain and other European countries fixing their currencies
at a highly over-valued par in relation to the dollar or to
gold. The result was a chronic export depression in Britain
and a tendency for Britain to lose gold, a tendency that the
United States felt forced to combat by inflating dollars in
order to stop the hemorrhaging of gold from Great Britain
to the U.S.

The New Deal and the Displacement of the Morgans

It was
not only through Benjamin Strong that the Morgans totally
dominated American politics and finance during the 1920s.
President Calvin Coolidge, who succeeded Rockefeller ally
President Harding when he died in office, was a close personal
friend of J. P. Morgan, Jr., and a political protege of Coolidge’s
Amherst College classmate, Morgan partner Dwight Morrow, as
well as of fellow Morgan partner Thomas Cochran. And throughout
the Republican administrations of the 1920s, the Secretary
of the Treasury was multimillionaire Pittsburgh tycoon Andrew
W. Mellon, whose Mellon interests were long-time allies of
the Morgans. And while President Herbert Hoover was not nearly
as intimately connected to the Morgans as Coolidge, he had
long been close to the Morgan interests. Ogden Mills, who
replaced Mellon as Treasury Secretary in 1931 and was close
to Hoover, was the son of a leader in such Morgan railroads
as New York Central; in the meanwhile, Hoover chose as Secretary
of State Henry L. Stimson, a prominent disciple and law partner
of Morgan’s one-time personal attorney, Elihu Root. More tellingly,
two unofficial but powerful Hoover advisers during his administration
were Morgan partners Thomas W. Lamont (the successor to Davison
as Morgan Empire CEO) and Dwight Morrow, whom Hoover regularly
consulted three time a week.

A crucial
aspect of the first term of the Roosevelt New Deal, however,
has been sadly neglected by conventional historians: The New
Deal constituted a concerted Bringing Down and displacement
of Morgan dominance, a coalition of opposition financial out-groups
combined in the New Deal to topple it from power. This coalition
was an alliance of the Rockefellers; a newly-burgeoning Harriman
power in the Democratic Party; newer and brasher Wall Street
Jewish investment banks such as Lehman Brothers and Goldman
Sachs pushing Kuhn, Loeb into the shade; and such ethnic out-groups
as Irish Catholic buccaneer Joseph P. Kennedy, Italian-Americans
such as the Giannini family of California’s Bank of America,
and Mormons such as Marriner Eccles, head of a vast Utah banking-holding
company-construction conglomerate, and allied to the California-based
Bechtel Corporation in construction and to the Rockefeller’s
Standard Oil of California.

The main
harbinger of this financial revolution was the Rockefeller’s
successful takeover of the Morgan’s flagship commercial bank,
the mighty Chase National Bank of New York. After the 1929
crash, Winthrop W. Aldrich, son of Senator Nelson Aldrich
and brother-in-law ofJohn D. Rockefeller, Jr., engineered
a merger of his Rockefeller-controlled Equitable Trust Company
into Chase Bank. From that point on, Aldrich engaged in a
titanic struggle within Chase, by 1932 managing to oust the
Morgan’s Chase CEO Albert Wiggin and to replace him by Aldrich
himself. Ever since, Chase has been the virtual general headquarters
of the Rockefeller financial Empire.

The new
coalition cunningly drove through the New Deal’s Banking Acts
of 1933 and 1935, which transformed the face of the Fed, and
permanently shifted the crucial power in the Fed from Wall
Street, Morgan, and the New York Fed, to the politicos in
Washington, D.C. The result of these two Banking Acts was
to strip the New York Fed of power to conduct open-market
operations, and to place it squarely in the hands of the Federal
Open Market Committee, dominated by the Board in Washington,
but with regional private bankers playing a subsidiary partnership

The other
major monetary change accomplished by the New Deal, of course,
and done under cover of a depression “emergency” in the fractional
reserve banking system, was to go off the gold standard. After
1933, Federal Reserve Notes and deposits were no longer redeemable
in gold coins to Americans; and after 1971, the dollar was
no longer redeemable in gold bullion to foreign governments
and central banks. The gold of Americans was confiscated and
exchanged for Federal Reserve Notes, which became legal tender;
and Americans were stuck in a regime of fiat paper issued
by the government and the Federal Reserve. Over the years,
all early restraints on Fed activities or its issuing of credit
have been lifted; indeed, since 1980, the Federal Reserve
has enjoyed the absolute power to do literally anything
it wants: to buy not only U.S. government securities but any
asset whatever, and to buy as many assets and to inflate credit
as much as it pleases. There are no restraints left on the
Federal Reserve. The Fed is the master of all it surveys.

In surveying
the changes wrought by the New Deal, however, we should refrain
from crying for the Morgans. While permanently dethroned by
the first term of the New Deal and never returned to power,
the Morgans were able to take their place, though chastened,
in the ruling New Deal coalition by the end of the 1930s.
There, they played an important role in the drive by the power
elite to enter World War II, particularly the war in Europe,
once again on the side of Britain and France. During World
War II, furthermore, the Morgans played a decisive behind-the-scenes
role in hammering out the Bretton Woods Agreement with Keynes
and the British, an agreement which the U.S. government presented
as a fait accompli to the assembled “free world”
at Bretton Woods by the end of the war.[41]

World War II, indeed, the various financial interests have
entered into a permanent realignment: the Morgans and the
other financial groups have taken their place as compliant
junior partners in a powerful “Eastern Establishment,” led
unchallenged by the Rockefellers. Since then, these groups,
working in tandem, have contributed rulers to the Federal
Reserve System. Thus, the present Fed Chairman, Alan Greenspan,
was, before his accession to the throne a member of the executive
committee of the Morgans’ flagship commercial bank, Morgan
Guaranty Trust Company. His widely revered predecessor as
Fed Chairman, the charismatic Paul Volcker, was a long-time
prominent servitor of the Rockefeller Empire, having been
an economist for the Rocke-fellers’ Exxon Corporation, and
for their headquarters institution, the Chase Manhattan Bank.
(In a symbolically important merger, Chase had absorbed Kuhn,
Loeb’s flagship commercial bank, the Bank of Manhattan.) It
was indeed a New World, if not a particularly brave one; while
there were still to be many challenges to Eastern Establishment
financial and political power by brash newcomers and takeover
buccaneers from Texas and California, the old-line Northeastern
interests had themselves become harmoniously solidified under
Rockefeller rule.

Deposit “Insurance”

We have
not yet examined another important change wrought in the U.S.
financial system by the New Deal. In 1933, it proclaimed assurance
against the rash of bank failures that had plagued the country
during the Depression. By the advent of Franklin Roosevelt,
the fractional-reserve banking system had collapsed, revealing
its inherent insolvency; the time was ripe for a total and
genuine reform, for a cleansing of the American monetary system
by putting an end, at long last, to the mendacities and the
seductive evils of fractional-reserve banking. Instead, the
Roosevelt Administration unsurprisingly went in the opposite
direction: plunging into massive fraud upon the American public
by claiming to rescue the nation from unsound banking through
the new Federal Deposit Insurance Corporation (FDIC). The
FDIC, the Administration proclaimed, had now “insured” all
bank depositors against losses, thereby propping up the banking
system by a massive bailout guaranteed in advance. But, of
course, it’s all done with smoke and mirrors. For one thing,
the FDIC only has in its assets a tiny fraction (1 or 2 percent)
of the deposits it claims to “insure.” The validity of such
governmental “insurance” may be quickly gauged by noting the
late 1980s catastrophe of the savings and loan industry. The
deposits of those fractional-reserve banks had supposedly
nestled securely in the “insurance” provided by another federal
agency, the now-defunct, once-lauded Federal Savings and Loan
Insurance Corporation.

One crucial
problem of deposit “insurance” is the fraudulent application
of the honorific term “insurance” to schemes such as deposit
guarantees. Genuine insurance gained its benevolent connotations
in the public mind from the fact that, when applied properly,
it works very well. Insurance properly applies to risks of
future calamity that are not readily subject to the control
of the individual beneficiary, and where the incidence can
be predicted accurately in advance. “Insurable risks” are
those where we can predict an incidence of calamities in large
numbers, but not in individual cases: that is, we know nothing
of the individual case except that he or it is a member of
a certain class. Thus, we may be able to predict accurately
how many people aged 65 will die within the next year. In
that case, individuals aged 65 can pool annual premiums, with
the pool of premiums being granted as benefits to the survivors
of the unlucky deceased.

The more,
however, that may be known about the individual cases, the
more these cases need to be segregated into separate classes.
Thus, if men and women aged 65 have different average death
rates, or those with different health conditions have varying
death rates, they must be divided into separate classes. For
if they are not, and say, the healthy and the diseased are
forced into paying the same premiums in the name of egalitarianism,
then what we have is no longer genuine life insurance but
rather a coerced redistribution of income and wealth.

to be “insurable” the calamity has to be outside the control
of the individual beneficiary; otherwise, we encounter the
fatal flaw of “moral hazard,” which again takes the plan out
of genuine insurance. Thus, if there is fire insurance in
a certain city, based on the average incidence of fire in
different kinds of buildings, but the insured are allowed
to set the fires to collect the insurance without discovery
or penalty, then again genuine insurance has given way to
a redistributive racket. Similarly, in medicine, specific
diseases such as appendicitis may be predictable in large
classes and therefore genuinely insurable, but simply going
to the doctor for a checkup or for vague ills is not insurable,
since this action is totally under the control of the insured,
and therefore cannot be predicted by insurance firms.

are many reasons why business firms on the market can in no
way be “insured,” and why the very concept applied to a firm
is absurd and fraudulent. The very essence of the “risks”
or uncertainty faced by the business entrepreneur is the precise
opposite of the measurable risk that can be alleviated by
insurance. Insurable risks, such as death, fire (if not set
by the insured), accident, or appendicitis, are homogeneous,
replicable, random, events that can therefore be grouped into
homogeneous classes which can be predicted in large numbers.
But actions and events on the market, while often similar,
are inherently unique, heterogeneous, and are not random but
influencing each other, and are therefore inherently uninsurable
and not subject to grouping into homogeneous classes measurable
in advance. Every event in human action on the market is unique
and unmeasurable. The entrepreneur is precisely the person
who faces and bears the inherently uninsurable risks
of the marketplace.[42]

But if
no business firm can ever be “insured,” how much more is this
true of a fractional-reserve bank! For the very essence of
fractional-reserve banking is that the bank is inherently
insolvent, and that its insolvency will be revealed as soon
as the deluded public realizes what is going on, and insists
on repossessing the money which it mistakenly thinks is being
safeguarded in its trusted neighborhood bank. If no business
firm can be insured, then an industry consisting of hundreds
of insolvent firms is surely the last institution about which
anyone can mention “insurance” with a straight face. “Deposit
insurance” is simply a fraudulent racket, and a cruel one
at that, since it may plunder the life savings and the money
stock of the entire public.

How the Fed Rules and Inflates

examined the nature of fractional reserve and of central banking,
and having seen how the questionable blessings of Central
Banking were fastened upon America, it is time to see precisely
how the Fed, as presently constituted, carries out its systemic
inflation and its control of the American monetary system.

to its essence as a post-Peel Act Central Bank, the Federal
Reserve enjoys a monopoly of the issue of all bank notes.
The U. S. Treasury, which issued paper money as Greenbacks
during the Civil War, continued to issue one-dollar “Silver
Certificates” redeemable in silver bullion or coin at the
Treasury until August 16, 1968. The Treasury has now abandoned
any note issue, leaving all the country’s paper notes, or
“cash,” to be emitted by the Federal Reserve. Not only that;
since the U.S. abandonment of the gold standard in 1933, Federal
Reserve Notes have been legal tender for all monetary debts,
public or private.

Reserve Notes, the legal monopoly of cash or “standard,” money,
now serves as the base of two inverted pyramids determining
the supply of money in the country. More precisely, the assets
of the Federal Reserve Banks consist largely of two central
items. One is the gold originally confiscated from the public
and later amassed by the Fed. Interestingly enough, while
Fed liabilities are no longer redeemable in gold, the Fed
safeguards its gold by depositing it in the Treasury, which
issues “gold certificates” guaranteed to be backed by no less
than 100 percent in gold bullion buried in Fort Knox and other
Treasury depositories. It is surely fitting that the only
honest warehousing left in the monetary system is between
two different agencies of the federal government: the Fed
makes sure that its receipts at the Treasury are
backed 100 percent in the Treasury vaults, whereas the Fed
does not accord any of its creditors that high privilege.

The other
major asset possessed by the Fed is the total of U.S. government
securities it has purchased and amassed over the decades.
On the liability side, there are also two major figures: Demand
deposits held by the commercial banks, which constitute the
reserves of those banks; and Federal Reserve Notes, cash emitted
by the Fed. The Fed is in the rare and enviable position of
having its liabilities in the form of Federal Reserve Notes
constitute the legal tender of the country. In short, its
liabilities — Federal Reserve Notes — are standard
money. Moreover, its other form of liability — demand deposits
— are redeemable by deposit-holders (i.e., banks, who constitute
the depositors, or “customers,” of the Fed) in these Notes,
which, of course, the Fed can print at will. Unlike the days
of the gold standard, it is impossible for the Federal Reserve
to go bankrupt; it holds the legal monopoly of counterfeiting
(of creating money out of thin air) in the entire country.

The American
banking system now comprises two sets of inverted pyramids,
the commercial banks pyramiding loans and deposits on top
of the base of reserves, which are mainly their demand deposits
at the Federal Reserve. The Federal Reserve itself determines
its own liabilities very simply: by buying or selling assets,
which in turn increases or decreases bank reserves by the
same amount.

At the
base of the Fed pyramid, and therefore of the bank system’s
creation of “money” in the sense of deposits, is the Fed’s
power to print legal tender money. But the Fed tries its best
not to print cash but rather to “print” or create demand deposits,
checking deposits, out of thin air, since its demand
deposits constitute the reserves on top of which the commercial
banks can pyramid a multiple creation of bank deposits, or
“checkbook money.”

Let us
see how this process typically works. Suppose that the “money
multiplier” — the multiple that commercial banks can pyramid
on top of reserves, is 10:1. That multiple is the inverse
of the Fed’s legally imposed minimum reserve requirement on
different types of banks, a minimum which now approximates
10 percent. Almost always, if banks can expand 10:1
on top of their reserves, they will do so, since that is how
they make their money. The counterfeiter, after all, will
strongly tend to counterfeit as much as he can legally get
away with. Suppose that the Fed decides it wishes to expand
the nation’s total money supply by $10 billion. If the money
multiplier is 10, then the Fed will choose to purchase $1
billion of assets, generally U.S. government securities, on
the open market.

10 and 11 below demonstrates this process, which occurs in
two steps. In the first step, the Fed directs its Open Market
Agent in New York City to purchase $1 billion of U.S. government
bonds. To purchase those securities, the Fed writes out a
check for $1 billion on itself, the Federal Reserve Bank of
New York. It then transfers that check to a government bond
dealer, say Goldman, Sachs, in exchange

for $1
billion of U.S. government bonds. Goldman, Sachs goes to its
commercial bank — say Chase Manhattan — deposits the check
on the Fed, and in exchange increases its demand deposits
at the Chase by $1 billion.

did the Fed get the money to pay for the bonds? It created
the money out of thin air, by simply writing out a check on
itself. Neat trick if you can get away with it!

Manhattan, delighted to get a check on the Fed, rushes down
to the Fed’s New York branch and deposits it in its account,
increasing its reserves by $1 billion. Figure 10 shows what
has happened at the end of this Step One.

The nation’s
total money supply at any one time is the total standard money
(Federal Reserve Notes) plus deposits in the hands of the
public. Note that the immediate result of the Fed’s
purchase of a $1 billion government bond in the open market
is to increase the nation’s total money supply by $1 billion.

But this
is only the first, immediate step. Because we live under a
system of fractional-reserve banking, other consequences quickly
ensue. There are now $1 billion more in reserves in the banking
system, and as a result, the banking system expands its money
and credit, the expansion beginning with Chase and quickly
spreading out to other banks in the financial system. In a
brief period of time, about a couple of weeks, the entire
banking system will have expanded credit and the money supply
another $9 billion, up to an increased money stock of $10
billion. Hence, the leveraged, or “multiple,” effect of changes
in bank reserves, and of the Fed’s purchases or sales of assets
which determine those reserves. Figure 11, then, shows the
consequences of the Fed purchase of $1 billion of government
bonds after a few weeks.

that the Federal Reserve balance sheet after a few weeks is
unchanged in the aggregate (even though the specific banks
owning the bank deposits will change as individual banks expand
credit, and reserves shift to other banks who then join in
the common expansion.) The change in totals has taken place
among the commercial banks, who

pyramided credits and deposits on top of their initial burst
of reserves, to increase the nation’s total money supply by
$10 billion.

It should
be easy to see why the Fed pays for its assets with a check
on itself rather than by printing Federal Reserve Notes. Only
by using checks can it expand the money supply by ten-fold;
it is the Fed’s demand deposits that serve as the base of
the pyramiding by the commercial banks. The power to print
money, on the other hand, is the essential base in which the
Fed pledges to redeem its deposits. The Fed only issues paper
money (Federal Reserve Notes) if the public demands cash for
its bank accounts and the commercial banks then have to go
to the Fed to draw down their deposits. The Fed wants people
to use checks rather than cash as far as possible, so that
it can generate bank credit inflation at a pace that it can

If the
Fed purchases any asset, therefore, it will increase the nation’s
money supply immediately by that amount; and, in a few weeks,
by whatever multiple of that amount the banks are allowed
to pyramid on top of their new reserves. f I it sells
any asset (again, generally U.S. government bonds), the sale
will have the symmetrically reverse effect. At first, the
nation’s money supply will decrease by the precise amount
of the sale of bonds; and in a few weeks, it will decline
by a multiple, say ten times, that amount.

the major control instrument that the Fed exercises over the
banks is “open market operations,” purchases or sale of assets,
generally U.S. government bonds. Another powerful control
instrument is the changing of legal reserve minima. If the
banks have to keep no less than 10 percent of their deposits
in the form of reserves, and then the Fed suddenly lowers
that ratio to 5 percent, the nation’s money supply, that is
of bank deposits, will suddenly and very rapidly double. And
vice versa if the minimum ratio were suddenly raised to 20
percent; the nation’s money supply will be quickly cut in
half. Ever since the Fed, after having expanded bank reserves
in the 1930s, panicked at the inflationary potential and doubled
the minimum reserve requirements to 20 percent in 1938, sending
the economy into a tailspin of credit liquidation, the Fed
has been very cautious about the degree of its changes
in bank reserve requirements. The Fed, ever since that period,
has changed bank reserve requirements fairly often, but in
very small steps, by fractions of one percent. It should come
as no surprise that the trend of the Fed’s change has been
downward: ever lowering bank reserve requirements, and thereby
increasing the multiples of bank credit inflation. Thus, before
1980, the average minimum reserve requirement was about 14
percent, then it was lowered to 10 percent and less, and the
Fed now has the power to lower it to zero if it so wishes.

the Fed has the well-nigh absolute power to determine the
money supply if it so wishes.[43]
Over the years, the thrust of its operations has been consistently
inflationary. For not only has the trend of its reserve requirements
on the banks been getting ever lower, but the amount of its
amassed U.S. government bonds has consistently increased over
the years, thereby imparting a continuing inflationary impetus
to the economic system. Thus, the Federal Reserve, beginning
with zero government bonds, had acquired about $400 million
worth by 1921, and $2.4 billion by 1934. By the end of 1981
the Federal Reserve had amassed no less than $140 billion
of U.S. government securities; by the middle of 1992, the
total had reached $280 billion. There is no clearer portrayal
of the inflationary impetus that the Federal Reserve has consistently
given, and continues to give, to our economy.

What Can Be Done?

It should
by now be all too clear that we cannot rely upon Alan Greenspan,
or any Federal Reserve Chairman, to wage the good fight against
the chronic inflation that has wrecked our savings, distorted
our currency, levied hidden redistribution of income and wealth,
and brought us devastating booms and busts. Despite the Establishment
propaganda, Greenspan, the Fed, and the private commercial
bankers are not the “inflation hawks” they like to label themselves.
The Fed and the banks are not part of the solution to inflation;
they are instead part of the problem. In fact, they are
the problem. The American economy has suffered from chronic
inflation, and from destructive booms and busts, because that
inflation has been invariably generated by the Fed itself.
That role, in fact, is the very purpose of its existence:
to cartelize the private commercial banks, and to help them
inflate money and credit together, pumping in reserves to
the banks, and bailing them out if they get into trouble.
When the Fed was imposed upon the public by the cartel of
big banks and their hired economists, they told us that the
Fed was needed to provide needed stability to the economic
system. After the Fed was founded, during the 1920s, the Establishment
economists and bankers proclaimed that the American economy
was now in a marvelous New Era, an era in which the Fed, employing
its modern scientific tools, would stabilize the monetary
system and eliminate any future business cycles. The result:
it is undeniable that, ever since the Fed was visited upon
us in 1914, our inflations have been more intense, and our
depressions far deeper, than ever before.

is only one way to eliminate chronic inflation, as well as
the booms and busts brought by that system of inflationary
credit: and that is to eliminate the counterfeiting that constitutes
and creates that inflation. And the only way to do that
is to abolish legalized counterfeiting: that is, to abolish
the Federal Reserve System, and return to the gold standard,
to a monetary system where a market-produced metal, such as
gold, serves as the standard money, and not paper tickets
printed by the Federal Reserve.

there is no space here to go into the intricate details of
how this could be done, its essential features are clear and
simple. It would be easy to return to gold and to abolish
the Federal Reserve, and to do so at one stroke. All we need
is the will. The Federal Reserve is officially a “corporation,”
and the way to abolish it is the way any corporation, certainly
any inherently insolvent corporation such as the Fed, is abolished.
Any corporation is eliminated by liquidating its assets and
parcelling them out pro rata to the corporation’s

12 presents a simplified portrayal of the assets of the Federal
Reserve, as of April 6, 1994.

Of the
Federal Reserve assets, except gold, all are easily liquidated.
The $345 billion of U.S. government and other federal government
agency securities owned by the Fed should be simply and immediately
canceled. This act would immediately reduce the taxpayers’
liability for the public debt by $345 billion. And indeed,
why in the world should taxpayers be taxed by the U.S. Treasury
in order to pay interest and principal on bonds held by another
arm of the federal government — the Federal Reserve? The taxpayers
have to be sweated and looted, merely to preserve the accounting
fiction that the Fed is a corporation independent of the federal

Fed Assets,” whether they be loans to banks, or buildings
owned by the Fed, can be scrapped as well, although perhaps
some of the assets can be salvaged. Treasury currency,

old paper money issued by the Treasury, should quickly be
canceled as well; and SDR’s ($8 billion) were a hopeless experiment
in world governmental paper that Keynesians had thought would
form the basis of a new world fiat paper money. These two
should be immediately canceled.

We are
left with the $11 billion of the Fed’s only real asset — its
gold stock — that is supposed to back approximately $421 billion
in Fed liabilities. Of the total Fed liabilities, approximately
$11 billion is “capital,” which should be written off and
written down with liquidation, and $6 billion are Treasury
deposits with the Fed that should be canceled. That leaves
the Federal Reserve with $11 billion of gold stock to set
off against $404 billion in Fed liabilities.

for our proposed liquidation process, the “$11 billion” Fed’s
valuation of its gold stock is wildly phony, since it is based
on the totally arbitrary “price” of gold at $42.22 an ounce.
The Federal Reserve owns a stock of 260 million ounces of
gold. How is it to be valued?

The gold
stock of the Fed should be revalued upward so that the gold
can pay off all the Fed’s liabilities — largely Federal Reserve
Notes and Federal Reserve deposits, at 100 cents to the dollar.
This means that the gold stock should be revalued such that
260 million gold ounces will be able to pay off $404 billion
in Fed liabilities.

the United States was on the gold standard before 1933, the
gold stock was fixed by definition at $20 per gold ounce;
the value was fixed at $35 an ounce from 1933 until the end
of any vestige of a gold standard in 1971. Since 1971 we have
been on a totally fiat money, but the gold stock of the Fed
has been arbitrarily valued by U.S. statutes at $42.22 an
ounce. This has been an absurd undervaluation on its face,
considering that the gold price on the world market has been
varying from $350 to $380 an ounce in recent years. At any
rate, as we return to the gold standard, the new gold valuation
can be whatever is necessary to allow the Fed’s stock of gold
to be allocated 100 percent to all its creditors. There is
nothing sacred about any initial definition of the gold dollar,
so long as we stick to it once we are on the gold standard.

If we
wish to revalue gold so that the 260 million gold ounces can
pay off $404 billion in Fed liabilities, then the new fixed
value of gold should be set at $404 billion divided by 260
million ounces, or $1555 per gold ounce. If we revalue the
Fed gold stock at the “price” of $1555 per ounce, then its
260 million ounces will be worth $404 billion. Or, to put
it another way, the “dollar” would then be defined
as 1/1555 of an ounce.

this revaluation takes place, the Fed could and should be
liquidated, and its gold stock parcelled out; the Federal
Reserve Notes could be called in and exchanged for gold coins
minted by the Treasury. In the meanwhile, the banks’ demand
deposits at the Fed would be exchanged for gold bullion, which
would then be located in the vaults of the banks, with the
banks’ deposits redeemable to its depositors in gold coin.
In short, at one stroke, the Federal Reserve would be abolished,
and the United States and its banks would then be back on
the gold standard, with “dollars” redeemable in gold coin
at $1555 an ounce. Every bank would then stand, once again
as before the Civil War, on its own bottom.

One great
advantage of this plan is its simplicity, as well as the minimal
change in banking and the money supply that it would require.
Even though the Fed would be abolished and the gold coin standard
restored, there would, at this point, be no outlawry of fractional-reserve
banking. The banks would therefore be left intact, but, with
the Federal Reserve and its junior partner, federal deposit
insurance, abolished, the banks would, at last, be on their
own, each bank responsible for its own actions.[44]
There would be no lender of last resort, no taxpayer bailout.
On the contrary, at the first sign of balking at redemption
of any of its deposits in gold, any bank would be forced to
close its doors immediately and liquidate its assets on behalf
of its depositors. A gold-coin standard, coupled with instant
liquidation for any bank that fails to meet its contractual
obligations, would bring about a free banking system so “hard”
and sound, that any problem of inflationary credit or counterfeiting
would be minimal. It is perhaps a “second-best” solution to
the ideal of treating fractional-reserve bankers as embezzlers,
but it would suffice at least as an excellent solution for
the time being, that is, until people are ready to press on
to full 100 percent banking.


Thus, Armistead Dobie writes: “a transfer of the warehouse
receipt, in general, confers the same measure of title that
an actual delivery of the goods which it represents would
confer.” Armistead M. Dobie, Handbook on the Law of
Bailments and Carriers (St. Paul, Minn.: West Publishing,
p. 163.

W. Stanley Jevons, Money and the Mechanism of Exchange,
15th ed. (London: Kegan Paul, [1875] 1905), pp. 206–12.

See Murray N. Rothbard, The
Mystery of Banking
(New York: Richardson
& Snyder, 1983), p. 94. On these decisions, see J. Milnes
Holden, The Law and Practice of Banking, vol. 1,
Banker and Customer (London: Pitman Publishing,
1970), pp. 31–32.

A. Hewson Michie, Michie on Banks and Banking,
rev. ed. (Charlottesville, Va.: Michie, 1973), 5A, pp. 1–31;
and ibid., 2979 Cumulative Supplement, pp. 3–9.
See Rothbard, The Mystery of Banking, p. 275.

The Bank of Amsterdam, which kept faithfully to 100-percent
reserve banking from its opening in 1609 until it yielded
to the temptation of financing Dutch wars in the late eighteenth
century, financed itself by requiring depositors to renew
their notes at the end of, say, a year, and then charging
a fee for the renewal. See Arthur Nussbaum, Money in
the Law: National and International (Brooklyn: Foundation
Press, 1950), p. 105.

I owe this point to Dr. David Gordon. See Murray N. Rothbard,
The Present State of Austrian Economics (Auburn,
Ala.: Ludwig von Mises Institute Working Paper, November
1992), p. 36.

This holocaust could only be stopped by the Federal Reserve
and Treasury simply printing all the cash demanded and giving
it to the banks — but that would precipitate a firestorm
of runaway inflation.

An example of a successful cartel for bank credit expansion
occurred in Florence in the second half of the sixteenth
century. There, the Ricci bank was the dominant bank among
a half dozen or so others, and was able to lead a tight
cartel of banks that took in and paid out each other’s receipts
without bothering to redeem in specie. The result was a
large expansion and an ensuing long-time bank crisis. Carlo
M. Cipolla, Money in Sixteenth-Century Florence
(Berkeley and Los Angeles: University of California Press,
1987), pp. 101–13.

is likely that the establishment of the Bank of Amsterdam
in 1609, followed by other 100 percent reserve banks in
Europe, was a reaction against such bank credit-generated
booms and busts as had occurred in Florence not many years

For more on business cycles, see Murray N. Rothbard, “The
Positive Theory of the Cycle,” in America’s
Great Depression
, 4th ed. (New York: Richardson
& Snyder, 1983), pp. 11–38.

A minor exception: when admirably small governments such
as Monaco or Liechtenstein issue beautiful stamps to be
purchased by collectors. Sometimes, of course, governments
will seize and monopolize a service or resource and sell
their products (e.g., a forest) or sell the monopoly rights
to its production, but these are scarcely exceptions to
the eternal coercive search for revenue by government.

Printing was first developed in ancient China, and so it
should come as no surprise that the first government paper
money arrived in mid-eighth century China. See Gordon Tullock,
‘Paper Money — A Cycle in Cathay,” Economic History
Review 9, no. 3 (1957): 396.

It is a commonly accepted myth that the “state banks” (the
state-chartered private commercial banks) strongly supported
Andrew Jackson’s abolition of the Second Bank of the United
States — the Central Bank of that time. However (apart from
the fact that this was a pre–Peel Act Central Bank that
did not have a monopoly on bank notes and hence competed
with commercial banks as well as providing reserves for
their expansion) this view is sheer legend, based on the
faulty view of historians that since the state banks were
supposedly “restrained” in their expansion by the Bank of
the United States, they must have favored its abolition.
On the contrary, as later historians have shown, the overwhelming
majority of the banks supported retention of the Bank of
the United States, as our analysis would lead us to predict.
See John M. McFaul, The Politics of Jacksonian Finance
(Ithaca, N.Y.: Cornell University Press, 1972), pp. 16–57;
and Jean Alexander Wilburn, Biddle’s Bank: The Crucial
Years (New York: University Press, 1970), pp. 118–19.

When Morris failed to raise the specie capital legally required
to launch the BNA, he simply appropriated specie loaned
to the U.S. Treasury by France and invested it for the U.S.
government in his own bank. On this episode, and on the
history of the war over a Central Bank in America from then
through the nineteenth century, see “The Minority Report
of the U.S. Gold Commission of 1981,” in the latest edition,
The Ron Paul Money Book (Clute, Texas: Plantation
Publishing, 1991), pp. 44–136.

Strictly, this prohibition was accomplished by a prohibitive
10-percent tax on state bank notes, levied by Congress in
the spring of 1865 when the state banks disappointed Republican
hopes by failing to rush to join the National Banking structure
as set up in the two previous years.

See Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation
of American History, 1890–1916 (New York: Free Press,
1963), pp. 140–42.

See Gabriel Kolko, Railroads and Regulation, 1877–1916
(Princeton: Princeton University Press, 1965).

See Kolko, Triumph of Conservatism, pp. 1–56; Naomi
Lamoureaux, The Great Merger Movement in American Business,
1895–104 (New Cambridge University Press, 1985); Arthur
S. Dewing, Corporate Promotions and Reorganizations
(Cambridge, Mass.: Harvard University Press, 1914); and
idem, The Financial Policy of Corporations, 2 vols.,
5th ed. York: Ronald Press, 1953).

On meatpacking, see Kolko, Triumph of Conservatism,
pp. 98–108.

On the National Civic Federation, see James Weinstein, The
Corporate Ideal in the Liberal State, 1890–1918 (Boston:
Beacon Press, 1968). Also see David Eakins, “The Development
of Corporate Liberal Policy Research in the United States
1885–1965″ (doctoral dissertation, Department of History,
University of Wisconsin, 1966).

See, among others, Paul Kleppner, The Third Electoral
System, 1853–1892: Parties, Voters, and Political Cultures
(Chapel Hill: University of North Carolina Press, 1979).

Thus, see Philip H. Burch, Jr., Elites in American History,
Vol. 2: From the Civil War to the New Deal (New York:
Holmes & Meier, 1981).

J. P. Morgan’s fondness for a central bank was heightened
by the memory of the fact that the bank of which his father
Junius was junior partner — the London firm of George Peabody
and Company — was saved from bankruptcy in the Panic of
1857 by an emergency credit from the Bank of England. The
elder Morgan took over the firm upon Peabody’s retirement,
and its name was changed to J. S. Morgan and Company See
Ron Chernow, The House of Morgan (New York: Atlantic
Monthly Press, 1990), pp. 11–12.

For the memorandum, see by far the best book on the movement
culminating in the Federal Reserve System, James Livingston,
Origins of the Federal Reserve System: Money, Class,
and Corporate Capitalism, 1890–1913 (Ithaca, N.Y.:
Cornell University Press, 1986).

When Theodore Roosevelt became president he made Bacon Assistant
Secretary of State, while Henry Payne took the top political
job of Postmaster General of the United States.

Some examples: Former Secretary of the Treasury (under Cleveland)
Charles S. Fairchild, a leading New York banker, former
partner in the Boston Brahmin, Morgan-oriented investment
banking firm of Lee, Higginson & Company. Fairchild’s
father, Sidney T., had been a leading attorney for the Morgan-controlled
New York Central Railroad. Another member of the Commission
was Stuyvesant Fish, scion of two long-time aristocratic
New York families, partner of the Morgan-dominated New York
investment bank of Morton, Bliss & Company, and president
of the Illinois Central Railroad. A third member was William
B. Dean, merchant from St. Paul, Minnesota, and a director
of the St. Paul–based transcontinental railroad, Great Northern,
owned by James J. Hill, a powerful ally of Morgan in his
titanic battle with Harriman, Rockefeller, and Kuhn, Loeb
for control of the Northern Pacific Railroad.

Livingston, Origins, pp. 109–10.

Joseph Dorfman, The Economic Mind in American Civilization
York: Viking Press, 1949), vol. 3, pp. xxxviii, 269, 392–93.

The Final Report, including the recommendation for a Central
Bank, was hailed by Convention delegate F. M. Taylor in
Laughlin’s economic journal, the Journal of Political
Economy. Taylor also exulted that Convention had been
“one of the most notable movements of our time — the first
thoroughly organized movement of the business classes in
the whole country directed to the bringing about of a radical
change in national legislation.” F. M. Taylor, ‘The Final
Report to the Indianapolis Monetary Commission,” Journal
of Political Economy 6 (June 1898): 322.

Taylor was an Indiana attorney for General Electric Company.

Frank W. Taussig, “The Currency Act of 1900,” Quarterly
Journal of Economics 14 (May 1900): 415.

Joseph French Johnson, “The Currency Act of March 14, 1900,”
Political Science Quarterly 15 (1900): 482–507.

Gage became president of the Rockefeller-controlled U.S.
Trust Company; Vanderlip became vice-president at the flagship
commercial bank of the Rockefeller interests, the National
City Bank of New York; and Conant became Treasurer of the
Morgan-controlled Morton Trust Company.

Kolko, Triumph of Conservatism, p. 186.

Ibid., p. 235.

Because of the peculiarities of banking history, “Governor”
is considered a far more exalted title than “President,”
a status stemming from the august title of “Governor” as
head of the original and most prestigious Central Bank,
the Bank of England. Part of the downgrading of the regional
Federal Reserve Banks and upgrading of power of the Washington
Board in the 1930s was reflected in the change of the title
of head of each regional Bank from “Governor” to ‘President,”
matched by the change of title of the Washington board from
‘Tederal Reserve Board” to “Board of Governors of the Federal
Reserve System.”

Miller’s father-in-law, Otho S. A. Sprague, had served as
a director of the Morgan-dominated Pullman Company, while
Otho’s brother Albert A. Sprague, was a director of the
Chicago Telephone Company, a subsidiary of the mighty Morgan-controlled
monopoly American Telephone & Telegraph Company.

should be noted that while the Oyster Bay-Manhattan branch
of the Roosevelt family (including President Theodore Roosevelt)
had long been in the Morgan ambit, the Hyde Park branch
(which of course included F.D.R.) was long affiliated with
their wealthy and influential Hudson Valley neighbors, the
Astors and the Harrimans.

On the personnel of the original Fed, see Murray N. Rothbard,
“The Federal Reserve as a Cartelization Device: The Early
Years, 1913–1939,” in Money in Crisis, Barry Siegel,
ed. (San Francisco: Pacific Institute for Public Policy
Research, 1984), pp. 94–115.

On Benjamin Strong’s seizure of supreme power in the Fed
and its being aided by wartime measures, see Lawrence E.
Clark, Central Banking Under the Federal Reserve System
(New York: Macmillan, 1935), pp. 64–102–5; Lester V. Chandler,
Benjamin Strong: Central Banker (Washington, D.C.:
Brookings Institution, 1958), pp. 23–41, 68–78, 105–7; and
Henry Parker Willis, The Theory and Practice of Central
Banking (New York: Harper & Brothers, 1936), pp.

On the Morgans, their ties to the British, and their influence
on America’s entry into the war, see Charles Callan Tansill,
America Goes to War (Boston: Little, Brown, 1938).

See, in particular, Thomas Ferguson, “Industrial Conflict
and the Coming of the New Deal: the Triumph of Multinational
Liberalism in America,” in The Rise and Fall of the
New Deal Order, 1930–1980, Steve Fraser and Gary Gerstle,
eds. (Princeton: Princeton University Press, 1989), pp.
3–31. Also see the longer article by Ferguson, “From Normalcy
to New Deal: Industrial Structure, Party Competition, and
American Public Policy in the Great Depression,” Industrial
Organization 38, no. 1 (Winter 1984).

See G. William Domhoff, The Power Elite and the State:
How Policy is Made in America (New York: Aldine de
Gruyter, 1990), pp. 113–41; 159–81.

This crucial difference was precisely the most important
insight of the classic work by Frank H. Knight, Risk,
Uncertainty and Profit, 3rd ed. (London: London School
of Economics, [1921] 1940).

Traditionally, money and banking textbooks list three forms
of Fed control over the reserves, and hence the credit,
of the commercial banks: in addition to reserve requirements
and open market operations, there is the Fed’s “discount”
rate, interest rate charged on its loans to the banks. Always
of far more symbolic than substantive importance, this control
instrument has become trivial, now that banks almost never
borrow from the Fed. Instead, they borrow reserves from
each other in the overnight “federal funds” market.

Some champions of the free market advocate “privatizing”
deposit insurance instead of abolishing it. As we have seen
above, however, fractional-reserve bank deposits are in
no sense “insurable.” How does one “insure” an inherently
insolvent industry? Indeed, it is no accident that the first
collapse of Saving and Loan deposit insurance schemes in
the mid-1980s took place in the privately-run systems
of Ohio and Maryland. Privatizing governmental functions,
while generally an admirable idea, can become an unreflective
and absurd fetish, if the alternative of abolition
is neglected. Some government activities, in short, shouldn’t
exist at all. Take, for example, the government “function,”
prevalent in the old Soviet Union, of putting dissenters
into slave labor camps. Presumably we would want such an
activity not privatized, and thereby made more efficient,
but eliminated altogether.

N. Rothbard
(1926–1995) was the author of Man,
Economy, and State
, Conceived
in Liberty
, What
Has Government Done to Our Money
, For
a New Liberty
, The
Case Against the Fed
, and many
other books and articles
He was also the editor – with Lew Rockwell – of
Rothbard-Rockwell Report
, and academic vice president
of the Ludwig von Mises Institute.

Rothbard Collection

Betrayal of the American Right

Your Price: $20.00

Mystery of Banking

Your Price: $18.00

For a New Liberty
Your Price: $27.00

Perspective on the History of Economic Thought
(2 volume set)

Your Price: $47.00

in Liberty

MSRP: $100.00
Your Price: $75.00

Economic Sense

Your Price: $17.00

Enemy of the State: The Life and Times of Murray N. Rothbard

by Justin Raimondo
Your Price: $30.00

Egalitarianism as a Revolt Against Nature and Other Essays
as a Revolt Against Nature and Other Essays

Your Price: $15.00

of Austrian Economics DVD

Your Price: $19.00

of Liberty, The

Your Price: $22.00

Great Depression

Your Price: $29.00

Economy, and State with Power and Market (The Scholar’s

Your Price: $50.00

Has Government Done to Our Money?/Case for the 100 Percent
Gold Dollar

Your Price: $17.00

& Market

Your Price: $16.00

Irrepressible Rothbard: The Rothbard-Rockwell Report Essays of Murray N. Rothbard
Rothbard: The Rothbard-Rockwell Report Essays of Murray
N. Rothbard

Your Price: $29.00

History of Money and Banking in the United States
of Money and Banking in the United States (hardcover)

Your Price: $25.00

Street, Banks, and American Foreign Policy

Your Price: $12.00

Case Against the Fed, The

Your Price: $7.00

of the State Sweatshirt
(more colors available)
Your Price: $35.00


Your Price: $17.00


Your Price: $20.00

of 1819
Reactions and Policies

Your Price: $20.00

Rothbard T-Shirt

Your Price: $11.00

and Right: A Journal of Libertarian Thought
(Complete, 1965-1968)

Your Price: $40.00

Education: Free and Compulsory

Free and Compulsory

Your Price: $6.00

(2 Volume Set)

Your Price: $70.00


Your Price: $15.00


Copyright 1994
Mises Institute

Rothbard Archives

Email Print