Part Two: How the Scam Works
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” –John Kenneth Galbraith
So how does the Federal Reserve system work? What does it do? Who owns and controls it? These are the basic questions that would get to the heart of the fundamental question: ‘what is money?’ And that is why the answer to these questions have been shrouded in impenetrable economic jargon.
Even the Federal Reserve’s own educational propaganda, which has an unusual tendency toward cutesy animation and talking down to its audience, has a difficult time summarizing the Fed’s mission and responsibilities. According to the Fed:
To achieve [its] goals, the Fed, then and now, combines centralized national authority through the Board of Governors with a healthy dose of regional independence through the reserve banks. A third entity, the Federal Open Market Committee, brings together the first two in setting the nation’s monetary policy.
SOURCE: In Plain English
Precisely what imaginary gaggle of schoolchildren is this economic gibberish aimed at?
The simple truth, hidden behind the sleight of hand of economic jargon and magisterial titles, is that a banking cartel has monopolized the most important item in our entire economy: money itself.
We are taught to think of money as the pieces of paper printed in government printing presses or coins minted by government mints. While this is partially true, in this day and age the actual notes and coins circulating in the economy represent only a tiny fraction of the money in existence. Over 90% of the money supply is in fact created by private banks as loans that are payable back to the banks at interest.
Although this simple fact is obscured by the wizards of Wall Street and gods of money who want to make the money creation process into some special art of alchemy carefully overseen by the government, the truth is not hidden from the public.
In December 1977, the Federal Reserve Bank of New York published another of its dumbed-down cartoon-ridden information pamphlets for the general public attempting to explain the functions of the Federal Reserve System. There in black and white they carefully explain the money creation process:
“Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars to accounts on their books in exchange for a borrower’s IOU.[…]Banks create money by ‘monetizing’ the private debts of businesses and individuals. That is, they create amounts of money against the value of those IOUs.”
There it is, in plain English: the vast majority of money in the economy, the “checkbook” money in our accounts at the bank and that we use in our electronic transfers and digital payments, is created not by a government printing press, but by the bank itself. It is created out of thin air as debt, owed back to the bank that created it at interest. This means that bank loans are not money taken from other bank depositors, but new money simply conjured into existence and placed into your account. And the bank is able to create much more money than it has cash to back up those deposits.
The Fed claims to be the entity overseeing and backing up the banking industry. It was established, according to its own propaganda, to stabilize the system and prevent bank runs like the Panic of 1907 from happening again:
Throughout much of the 1800s, almost any organization that wanted could print its own money. As a result, many states, banks, and even one New York druggist, did just that. In fact at one time there were over 30,000 different varieties of currency in circulation. Imagine the confusion.
Not only were there multitudes of currencies, some were redeemable in gold and silver, others were backed by bonds issued by regional governments. It was not unusual for people to lose faith both in the value of their currency and in the entire financial system. With many people trying to withdraw their deposits at once, sometimes the banks didn’t have enough money on hand to pay their depositors. Then when the funds ran out the banks suspended payment temporarily and some even closed. People lost their entire savings. Sometimes regional economies suffered.
Obviously something had to be done. And in 1913, something was. In that year, President Woodrow Wilson signed into effect the Federal Reserve Act. This act created the Federal Reserve system to provide a safer and more stable monetary and banking system.
SOURCE: The Fed Today
If that was indeed its aim, it signally failed to do so in running up one of the greatest bubbles in American history to that point in the 1920s, just a decade after its creation. The popping of that bubble, of course, led directly into the Great Depression and one of the greatest periods of mass poverty in American history. Economists have long argued that the Fed itself was the cause of the depression by its complete mismanagement of the money supply. As former Federal Reserve Chairman Ben Bernanke admitted in a speech commemorating Fed critic Milton Friedman’s 90th birthday: “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
“Price stability” is another cited tenet of the Federal Reserve’s mandate. But here, too, the Fed has completely failed to live up to its own standards:
Aside from the banking system, the Federal Reserve has another responsibility that’s probably even more important. It’s in charge of something called “monetary policy.” Basically, it means trying to keep prices stable to avoid inflation. Say you buy a CD today for $14. But what if next year the price of the CD jumped to $20 or $50, not because of a change in supply or demand, but because all prices were going up. That’s inflation.
There are a lot of different causes of inflation, but one of the most important is too much money. The Fed can adjust the money supply by injecting money into the system electronically, or by withdrawing money from the economy.
Think of it: the Federal Reserve has the ability to create money, or make it disappear. What’s most important is what happens as a result. Any time the supply of money is altered, the effects are felt throughout the economy.
The Fed’s methods have changed over time to take advantage of the latest computers and electronics, but its mission remains the same: to aim for stable prices, full employment and a growing economy.
SOURCE: Inside The Fed
100 years ago, in 1913, the Fed was created, and we’ve marked it with a vertical line there. Consumer prices now are about 30 times higher than they were when the Fed was created in 1913.
SOURCE: Bloomberg
Paper money, too, is the responsibility of the Federal Reserve. Hence the dollars in circulation are not Treasury notes, not bills of credit, but Federal Reserve Notes, debt-based notes backed up ultimately by the government’s own promise to pay, its “sovereign bonds” secured by the taxpayers themselves. At one time, the Federal Reserve Banks were legally required to keep large stockpiles of gold in reserve to back up these notes, but that requirement was abandoned and today the notes are backed up mostly by government securities. The Fed no longer keeps any actual gold on its books, but gold “certificates” issued by the treasury and valued not at the spot price of $1300 per troy ounce, but an arbitrarily fixed “statutory price” of $42 2/9 per ounce.
Ron Paul: But I do have one question: During the crisis or at any time that you’re aware of, has the Federal Reserve or the Treasury participated in any gold swap arrangements?
Scott Alvarez: The Federal Reserve does not own any gold at all. We have not owned gold since 1934 so we have not engaged in any gold swaps.
Ron Paul: But it appears on your balance sheet that you hold gold.
Scott Alvarez: What appears on our balance sheet is gold certificates. When we turned in…before 1934, we did…the Federal Reserve did own gold. We turned that over by law to the Treasury and received in return for that gold certificates.
Ron Paul: If the Treasury entered into…because under the Exchange Stabilization Fund I would assume they probably have the legal authority to do it…they wouldn’t be able to do it then because you have the securities for essentially all the gold?
Scott Alvarez: No, we have no interest in the gold that is owned by the Treasury. We have simply an accounting document that is called “gold certificates” that represents the value at a statutory rate that we gave to the Treasury in 1934.
Ron Paul: And still measured at $42 an ounce which makes no sense whatsoever.
Clearly, there is a discrepancy between what we are led to believe is motivating the Fed and what it actually does. To understand what the Fed is actually intended to do, it’s first important to understand that the Federal Reserve is not a bank, per se, but a system. This system codifies, institutionalizes, oversees and undergirds a form of banking called fractional reserve banking, in which banks are allowed to lend out more money than they actually have in their vaults.
G. Edward Griffin: The process of decay and corruption starts with something called “fractional reserve banking.” That’s the technical name for it. And what that really means is that as the banking institution developed over several centuries, starting of course in Europe, it developed a practice of legalizing a certain dishonest accounting procedure.
In other words, in the very, very beginning (if you want to go all the way back), people would bring their gold or silver to the banks for safe keeping. And they said, “give us a paper receipt, we don’t want to guard our silver and our gold because people could come in in the middle of the night and they could kill us or threaten us and they’ll get our gold and silver so we can ‘t really guard it so we’ll take it to the bank and have them guard it and we just want a paper receipt. And we’ll take our receipt back and get our gold anytime we want.” So in the beginning money was receipt money. Then, instead of changing or exchanging the gold coins, they could exchange the receipts, and people would accept the receipts just as well as the gold, knowing that they could get gold. And so these paper receipts being circulated were in essence the very first examples of paper money.
Well the banks learned early on in that game that here they were sitting on this pile of gold and all these paper receipts out there. People weren’t bringing in the receipts anymore, very few of them, maybe five percent maybe seven percent of the people would bring in their paper receipts and ask for the gold. So they said, “Ah ha! Why don’t we just sort of give more receipts out then we have gold? They’ll never know because they only ask for, at the best, seven percent of it. So we can create more receipts for gold then we have. And we can collect interest on that because we’ll loan that into the economy. We’ll charge interest on this money that we don’t really have. And it’s a pretty good gimmick don’t ya think?” And they go, “Well, yeah, of course.” And so that’s how fractional reserve banking started.
And now it’s institutionalized and they teach it in school. No one ever questions the integrity of it or the ethics of it. They say, “Well, that’s the way banking works, and isn’t it wonderful that we now have this flexible currency and we have prosperity” and all these sorts of things. So it all starts with this concept of fractional reserve banking.
The trouble with that is that it works most of the time. But every once and a while there are a few ripples that come along that are a little bit bigger than the other ripples. Maybe one of them is a wave. And more than seven percent will come in and ask for their gold. Maybe twenty percent or thirty percent. And well, now the banks are embarrassed because the fraud is exposed. They say, “well we don’t have your gold” “What do you mean you don’t have my gold!! I gave it to you and put it on deposit and you said you’d safe guard it.” “Well we don’t have it, we loaned it out.” So then the word gets out and everyone and their uncle comes out and lines up for their gold. And of course they don’t have it, the banks are closed, and they have bank holidays. Banks are embarrassed, people lose their savings. You have these terrible banking crashes that were ricocheting all over the world prior to this time. And that is what caused the concern of the American people. They didn’t want that anymore. They wanted to put a stop to that.
And that was the whole purpose, supposedly, of the Federal Reserve system. Was to put a stop to that. But since the people who designed the plan to put a stop to it were the very ones who were doing it in the first place, you can not be surprised that their solution was not a very good one so far as the American people were concerned. Their solution was to expand it. Not to control it, to expand it. See, prior to that time, this little game of fractional reserve banking was localized at the state level. Each state was doing its own little fractional reserve banking system. Each state, in essence, had its own Federal Reserve. Central banks were authorized by state law to do this sort of thing. And that was causing all this problem. So the Federal Reserve came along and said, “No no, we’re not going to do this at the state level anymore, because look at all the problem it’s causing. We’re going to consolidate it all together and we’re going to do it at the national level.”
SOURCE: Interview with G. Edward Griffin
The key to the system, of course, is who controls this incredible power to “regulate” the economy by setting reserve requirements and targeting interest rates. The answer to this question, too, has been deliberately obscured.
The Federal Reserve system is a deliberately confusing mish-mash of public and private interests, reserve banks, boards and committees, centralized in Washington and spread out across the United States.
Andrew Gavin Marshall: So you have the Federal Reserve Board in Washington appointed by the President. That’s the only part of this system that is directly dependent on the government for input that’s the “federal” part: that the government–the president specifically–gets to choose a few select governors. The twelve regional banks–the most influential of which is the Federal Reserve Bank of New York which is essentially based in Wall Street to represent Wall Street–is a representative of the major Wall Street banks who own shares in the private, not federal, but private Federal Reserve Bank of New York. All of the other regional banks are also private banks. They vary according to how much influence they wield but the Kansas City fed is influential, the St. Louis fed, the Dallas fed, but the New York Fed is really the center of this system and precisely because it represents the Wall Street banks who appoint the leadership of the New York fed.
So the New York fed has a lot of public power, but no public accountability or oversight. It does not answer to Congress the way that the chairman of the Federal Reserve Board of Governors does and even the chairman of the Federal Reserve board who is appointed by the President, does not answer to the President, does not answer to Congress. He goes to Congress to testify but the policy that they set is independent. So they have no input from the government. The government can’t tell them what to do legally speaking, and of course they don’t.
Rep. John Duncan: Do you think it would cause problems for the Fed or for the economy if that legislation was to pass?
Ben Bernanke: My concern about the legislation is that if the GAO is auditing not only the operational aspects of our programs and the details of the programs, but is making judgements about our policy decisions, that would effectively be a takeover of monetary policy by the Congress, a repudiation of the independence of the Federal Reserve which would be highly destructive to the stability of the financial system, the dollar, and our national economic situation.
SOURCE: Bernanke Threatens Congress
The Federal Open Market Committee is responsible for setting interest rates. Now this committee, which is enormously powerful, has as its membership the Governor and Vice Chair of the Federal Reserve Board, but on the Federal Open Market Committee most of the membership is the presidents of the regional Federal Reserve Banks representing private interests. So they have significant input into setting the interest rates. Interest rates are not set by a public body, they’re set by private financial and corporate interests. And that’s whose interests they serve, of course.
The reason that the Federal Reserve goes to such great lengths to make its organizational structure as confusing as possible is to cover up the massive conflicts of interest that are at the heart of that system. The fact is that the Federal Reserve system is comprised of a Board of Governors, 12 regional banks, and an open market committee. The privately-owned member banks of each Federal Reserve Bank vote on the majority of the Reserve Bank’s directors, and the directors vote on members to serve on the Federal Open Market Committee which determines monetary policy. What’s more, Wall Street is given a prime seat at the table, with tradition holding that the President of the powerful New York Federal Reserve Bank be given the Vice Chairmanship of the FOMC and be made a permanent committee member. In effect, the private banks are the key determinants in the composition of the FOMC which regulates the entire economy.
According to the Fed “its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.”
Or, in the words of Alan Greenspan: “The Federal Reserve is an independent agency and that means there is no other agency of government that can overrule actions that we take.”
The Fed goes on in its self-mythologization to state that it is “not a private, profit-making institution.” This characterization is dishonest at best, and an outright lie at worst.
The regional banks are themselves private corporations, as noted in a 1928 Supreme Court ruling: “Instrumentalities like the national banks or the federal reserve banks, in which there are private interests, are not departments of the government. They are private corporations in which the government has an interest.” This point is even admitted by the Federal Reserve’s own senior counsel.
Yvonne Mizusawa: Our regulations do specify overall terms for the lending, but the day to day operation of the banking activities are conducted by the Federal Reserve Banks. They are banks, and indeed they do lend…
Peter W. Hall: So they’re their own agency, then, essentially, in that regard.
Yvonne Mizusawa: They are not agencies, your honor, they are “persons” under FOIA. Each Federal Reserve Bank, the stock is owned by the member banks in the district, 100% privately held, they are private boards of directors. The majority of those boards are appointed by the independent banks, private banks in the district. They are not agencies.
SOURCE: Freedom of Information Cases
These private corporations issue shares that are held by the member banks that make up the system, making the banks the ultimate owners of the Federal Reserve Banks. Although the Fed’s profits are returned to the Treasury each year, the member banks’ shares of the Fed do earn them a 6% dividend. According to the Fed, the fixed nature of these returns mean that they are not being held for profit.
Despite the dishonest nature of this description, however, it is important to understand that the bankers who own the Federal Reserve indeed do not make their money from the Fed directly. Instead, the benefits are much less obvious, and much more insidious. The simplest way that this can be understood is that, as a century of history and the specific example of the last financial crisis shows, the Fed was used as a vehicle to bail out the very bankers who own the Fed banks in the most obvious example of fascistic collusion imaginable.
Michel Chossudovsky A handful of financial institutions have enriched themselves as a result of institutional speculation on a large scale, as well as manipulation of the market. And secondly what they have done is that they have then gone to their governments and said, “Well, we are now in a very difficult situation and you need to lend us…you need to give us money so that we can retain the stability of the financial system.”
And who actually lends the money, or brokers the public debt? The same financial institutions that are the recipients of the bailout. And so what you have is a circular process. It’s a diabolical process. You’re lending money…no, you’re not lending money, you’re handing money to the large financial instutions, and then this is leading up to mounting public debt in the trillions. And then you say to the financial institutions “We need to establish a new set of treasury bills and government bonds, etc.” which of course are sold to the public, but they are always brokered through the financial institutions which establish their viability and so on and so forth. And the financial institutions will probably buy part of this public debt so that in effect what the government is doing is financing its own indebtedness through the bailouts. It hands money to the banks, but to hand money to the banks, it becomes indebted to those same financial institutions, and then it says “We now have to emit large amounts of public debt. Please can you help us?” And then the banks will say: “Well, your books are not quite in order.” And then the government will say: “Obviously they’re not in order because we’ve just handed you 1.4 trillion dollars of bailout money and we’re now in a very difficult situation. So we need to borrow money from the people who are in fact the recipients of the bailout.”
So this is really what we’re dealing with. We’re dealing with a circular process.
SOURCE: The Banker Bailouts
The 2008 crisis and subsequent bailouts are merely the latest and most brazen examples of the fundamental conflicts of interest at the heart of America’s privately-owned central banking system.
Beginning with the collapse of Lehman Bros. in September of that year, the Federal Reserve embarked on an unprecedented program of bailouts and special zero interest lending facilities for the very banks that had caused the subprime meltdown in the first place. By the cartelization of the Federal Reserve structure, and thus not by accident, it was the very bank presidents who had overseen their banks’ lending practices that ended up in the director positions of the Federal Reserve Banks that voted on where to direct the trillions of dollars in bailout money. And unsurprisingly, they directed it toward their own banks.
A stunning 2011 Government Accountability Office report examined $16 trillion of bailout facilities extended by the Fed in the wake of the crisis and exposed numerous examples of blatant conflicts of interest. Jeffrey Immelt, chief executive of General Electric served as a director on the board of the Federal Reserve Bank of New York at the same time the Fed provided $16 billion in financing to General Electric. JP Morgan Chase chief executive, Jamie Dimon, meanwhile, was also a member of the board of the New York Fed during the period that saw $391 billion in Fed emergency lending directed to his own bank. In all, Federal Reserve board members were tied to $4 trillion in loans to their own banks. These funds were not simply used to keep these banks afloat, but actually to return these Fed-connected banks to a period of record profits in the same period that the average worker saw their real wages actually decrease and the economy on main street slow to a standstill.
Then Fed Chairman Ben Bernanke was confronted about these conflicts of interest by Senator Bernie Sanders upon the release of the GAO report in June 2012.
Ben Bernanke: Senator, you raised an important point, which is that this is not something the Federal Reserve created. This is in the statute. Congress in the Federal Reserve Act said “This is the governance of the Federal Reserve.” And more specifically that bankers would be on the board…
Bernie Sanders: 6 out of 9.
Ben Bernanke: Sorry?
Bernie Sanders: 6 out of 9 in the regional banks are from the banking industry.
Ben Bernanke: That’s correct. And that is in the law. I’ll answer your question, though. The answer to your question is that Congress set this up, I think we’ve made it into something useful and valuable. We do get information from it. But if Congress wants to change it, of course we will work with you to find alternatives.
SOURCE: Conflicts at the Fed
Bernanke is completely right. These conflicts are in fact a part of the institution itself. A structural feature of the Federal Reserve that was baked into the Federal Reserve Act itself over 100 years ago by the bankers who conspired to cartelize the nation’s money supply. You could not ask for a more succinct reason why the Federal Reserve itself, this admitted cartel of banking interests, needs to be abolished…but you could get one.
Part Three: End the Fed
“They who control the credit of a nation, direct the policy of Governments and hold in the hollow of their hands the destiny of the people.” – Reginald McKenna
We now know that for centuries the people of the United States have been at war with the international banking oligarchs. That war was lost, seemingly for good, in 1913, with the creation of the Federal Reserve. With the passage of the Federal Reserve Act, President Woodrow Wilson consigned the American population to a century in which the money supply itself has depended on the whims of the banking cabal. A century of booms and busts, bubbles and depressions, has led to a wholesale redistribution of wealth toward those at the very top of the system. At the bottom, the masses toil in relative poverty, single-income households becoming double-income households out of necessity, their quality of life being slowly eroded as the Federal Reserve Notes that pass for dollars are themselves devalued.
Worse yet, the fraud itself perpetuates Alexander Hamilton’s persistent myth that a national debt is necessary at all. The US is now locked into a system whereby the government issues bonds to generate the funds for their operations, bonds that are backed up by the taxation of the public’s own labor.
The perpetrators of this fraud, meanwhile, remain in the shadows, largely ignored by a general public that could instantly recognise the latest Hollywood heartthrob or pop idol, but have no clue what the head of Goldman Sachs or the New York Fed does, let alone who they are. This cabal bear allegiance to no nationality, no philosophy or creed, no code of ethics. They are not even motivated by greed, but power. The power that the control of the money supply inevitably brings with it.
It did not take long for this lust for power to rear its head. In 1921, just 7 years after the Fed began operations, the same J.P. Morgan-connected banking elite that founded the Federal Reserve incorporated an organization called The Council on Foreign Relations with the goal of taking over the foreign policy apparatus of the United States, including the State Department. In this quest, it was remarkably successful. Although there are only about 4000 members in the organization today, its membership has included 21 Secretaries of Defense, 18 Treasury Secretaries, 18 Secretaries of State, 16 CIA directors and many other high-ranking government officials, military officers, business elite, and, of course, bankers. The first Director of the CFR was John W. Davis, J.P. Morgan’s personal lawyer and a millionaire in his own right.
Continued on next page…
