Wealth by Stealth: America's Trojan Horse

© Copyright 2013 Rolf Hackmann.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the written prior permission of the author.

isbn: 978-1-4907-1347-2 (sc)

isbn: 978-1-4907-1346-5 (hc)

isbn: 978-1-4907-1345-8 (e)

Library of Congress Control Number: 2013915907

Trafford rev. 10/02/2013

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Contents

Foreword

Part I

The Background Of The U.S. Federal Reserve System

A Brief History Of The United States Banking System

The Federal Reserve Act Of 1913

The Fed’s Mandated Functions

Organizational Structure Of The Federal Reserve

Reserve Banks And Profit Sharing

Government Regulation And Supervision Of The Fed

Legislative Framework Affecting The Federal Reserve

Generation Of United States Money

The Federal Reserve Banking System

Political Views Of U.S. Banking

Ownership Of Federal Reserve System

The Fed’s Official Position

Other Sources

Tentative Conclusion

The Fed, A Trojan Horse

Funding The Fed

Introduction

How Is The Federal Reserve Funded?

Operations And Services

The Fed’s Annual Report

Statutory Fed Functions

Unresolved Issues

Part II

The History Of Fed Policies And Actions

The Historic Record of FED Policies

Summing Up: The True Fed Mandate

Evaluation Of The Fed’s Performance

The Integrity Of The Dollar.

The Rise Of Deficits And Debt At All Levels Of The Economy

Regulatory And Supervisory Duties.

The Fed’s Management Of Economic Cycles.

The Massive Changes In Monetary Policy.

Management Of The Money Supply

Is the Fed’s Independence Coming To An End?

Safeguards Of The International Banking System

Management Of The National Debt Under The Fed

Crisis Management

Part III

The American Banking System

Commercial And Investment Banking

Introduction

Commercial Banks

Investment Banks

The Shadow Banking System

Hedge Funds

Size Of Investment Banking Sector

Financial Institutions Playing Prominent Roles In Subprime Crisis

Investment Banks, Hedge Funds, And Other Financial Organizations

Investment Banks And Commodity Trading

Legal Aspects

Part IV

Derivatives—The Trigger Of The Crisis

Derivatives Origin, Financial Role, And Contribution To Economic Collapse

Present Situation

Origin And Nature Of Financial Derivatives

So Many Different Derivative Categories And Only Two Markets

OTC Derivatives Trading

Practical Differences Between Regulated And OTC Derivatives

Characteristics Of Specific OTC Derivatives

Derivatives As Weapons Of Mass Destruction

Derivatives And The Regulatory Environment

The S&L Crisis

The Role Of Shadow Banks In Derivatives Market Busts

The Subprime Share In U.S. Security Markets

A History Of Rogue Derivatives Traders

The Mortgage Securitization Process

General Comments

Brief History Of U.S. Mortgage Market

Introduction To Mortgage-Backed Securities And Other Securitized Assets

The Step-by-Step Mortgage Market Conversion.

The Question Of Risk Ownership

Investor Protection

Bookkeeping Function

The Future

Conclusion

Part V

The Actors Behind The Financial Crisis

Rating Agencies

Financial Risk Insurance

The Role of Individual Banks, Hedge Funds, Etc. In Crisis Creation

The Big Movers And Shakers

Collateral Damages

Part VI

Economic Cost of Failed Policies

A History of Major Financial Crises and Bailout Programs Since World War II

The Savings & Loan Bailout

The Dot.com Bubble

The Housing Bubble

The Overall Bailout Packages

Preliminary Loss Estimates from the Housing Bubble.

The American Recovery and Reinvestment Act of 2009 (ARRA)

The Fed’s Quantitative Easing Programs: QE 1, 2 & 3

The Derivatives Time Bomb

Other Damages Coming to Light

The Legality and Morality of the Bailouts

Subprime Fallout Statistics

Bankruptcies

The Foreclosures Crisis

A Different Tally

Part VII

Miscellaneous Observations

The Question Of Culpability

The Government Role In The Financial Crises.

The Subprime Crisis

The S&L Crisis

Does The Fed Play A Role In The New World Order?

The New World Order

A Secret Mission for the Fed?

The Council On Foreign Relations

Trilateral Commission

The Bilderberg Group

Genetically Modified Organisms (GMO)

Conclusions

Conclusion 1. The Federal Reserve Is A Private, For-Profit Bank.

Conclusion 2. The Ambiguous Fed Stewardship Of The U.S. Economy

Conclusion 3. Wealth Destruction As A Means Of Wealth Transfer

Conclusion 4. Inflation And Collapse Of Dollar Purchasing Power

Conclusion 5. Debt Accumulation

Conclusion 6: Real Economic Impact Of Fed Policies

Conclusion 7: America’s Changing Financial Demographics Under The Fed

Conclusion 8. Reform and Code Of Ethics For A Global Banking System

Abolishing the Fed

Can Congress Abolish the Fed?

Part VIII

Appendix

Bibliography

Glossary

I dedicate this text to my family, my parents, my wife

and our children who encouraged me to write it

in the defense of traditional values.

Foreword

The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People by their Property until their Children will wake up homeless on the continent their Fathers conquered. (Thomas Jefferson 1743-1826).

T he world economy has been brought to the brink of collapse twice in the last century and both times the United States were the epicenter of the upheavals. One fact connecting both events without a question is America’s financial system under the aegis of the Federal Reserve System, the Central Bank of the country, whose official mission was to prevent exactly such catastrophes.

Were these unfortunate mishaps, mere accidents, the result of negligence, ineptitude, or even by design as the unflattering observation by Thomas Jefferson, suggests? How could he possibly issue such an incisive, clairvoyant, and clear warning, speaking about an institution, that came into existence almost nine decades after his death in 1826.

Jefferson, of course, spoke of personal experience. He witnessed the struggle of the colonies with their own central banking system firsthand. The fact that England tried to impose its monetary control over the colonies by the hated Bank of England, was vigorously rejected by him and other Founding Fathers as the last straw of English hegemony, and became the main cause behind the American Revolutionary War.

He also saw the first attempts at instituting a central bank in the opening of the Bank of North America in 1782, which lasted for only three years; a second attempt came with the formation of the First Bank of the United States by Congressional Charter in 1791, which lasted for its charter period of 20 years to also fail; the third attempt chartered the Second Bank of the United States, which lasted again for only 20 years from 1816-1836. All of them failed for reasons explained in the following pages.

It was not until 1913, that the U.S. succeeded in establishing a permanent central banking institution, the Federal Reserve System, but despite the long wait they might not have gotten anything better than what they fought so hard and long to avoid.

Despite the 200-year time lapse since Jefferson’s comments, there is good reason to give them some thought. The Fed came to life on the promise it would solve the country’s financial and banking problems once and for all. That hope was enshrined in the mandate given the bank by Congress in 1913, and again in 1977: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.

While the Fed’s mission is clearly laid down for everyone to see, there is a conspicuous absence of a second and equally important provision: definition of a parliamentary control system for monitoring the Fed’s performance. It proved to be a serious congressional slip. In the hundred years of its existence the Fed has been audited only once, and that was only a partial audit at that in 2011 by the Government Accountability Office. In other words, the Fed was free to do what it wanted to do, and not what it was expected to do for the nation.

This incredible oversight has given the Fed an undue feeling of independence in setting monetary and financial policies as it sees fit, never mind the congressional mandate. The most visible results are the two devastating economic and financial crises under the 100-year reign of the Fed, the big depression of the 1930s and the financial crisis of 2008. Both shook the global economy to its foundation, with the last one still reverberating through the U.S., despite assurances that it had ended by mid-2009, and Europe mired in the morass of one sovereign debt crisis after another. No one has been assigned responsibility for the devastations, which as a minimum presents a serious violation of good management principles, which demand the power to make decisions to be balanced by full accountability for the results.

But, there is no appointed authority to ask questions, nor demand corrective actions, much less insist on personal consequences. This lack is an invitation, indeed a license, for the wheelers and dealers to continue with business as usual. A disturbing realization, and eerily reminiscent of Jefferson’s warnings.

The Fed was a most enigmatic organization from the beginning and specific reasons, which explain much about its political power and actions. For one thing, the bank harbors strange similarities to its predecessors which, in their case, ended in a short life for them, but not the Fed. To start with, its ownership is not clear. The only fact known here is that the federal government has no financial share in the institution, not even the twenty percent granted its forerunners. There is also a lot of conjecture about the nationality of the actual shareholders, but no clear-cut documentary evidence.

It is the key element in the Fed’s claim to total independence, that is to say, it proudly stresses the unusual fact of not being a government agency; besides the missing share capital, it is also not funded by the government, nor is there any trace of actual and effective regulatory, supervisory control over the institution by the U.S. government, Congress, or any other designated official body, beyond vague references to reporting relationships in the Act of 1913. The only concession made, is the fact that the Chair of the bank’s Board of Governors is appointed by the President of the U.S.

This leads to only one conclusion. If the Fed is not a bona-fide government agency, it is merely a private bank acting as a central bank, even though with congressional blessing.

In all official matters related to its mission of formulating the monetary policy and related financial matters of the country, the Fed maintains a fiercely independent stance internally as well as externally, that makes it virtually impenetrable to constitutional scrutiny and supervision, essentially putting it above American laws as a sovereign power in a sovereign nation, strangely reminiscent of the old colonial power structure.

Bolstering this formal independence came with the Banking Act of 1935, which established the policy-setting organ of the Federal Open Market Committee as a separate legal entity, and removed the Treasury Secretary and the Comptroller of the Currency, both federal government agencies, from the Fed’s Board of Governors.

There was, however, a Congressional Mandate in the 1913 Federal Reserve Act laying down guidelines for the Fed’s expected mission, more as recommendation than strictly binding commitments as it turned out. But it offers an opportunity to compare the stipulations of the mandate with the Fed’s actions, leading to a justified conclusion that most of them were not only ignored but openly violated.

Starting with the plea for a strong currency and stable price levels, for instance, the record shows that the dollar has lost more than 95% of its purchasing power since 1913. One source claims a basket of goods costing $100 in 1790 cost only $108 in 1913, but has risen to $2,422 today.

More serious than the declining purchasing power, is the Fed’s obviously deliberate debasement of the dollar, by removing its gold backing through the 1933 confiscation of privately held gold, initially, and gradually converting it into a fiat paper currency whose value rests on the legal tender imprint on notes and the officially declared backing by the full faith and credit of the government. Obviously a poor substitute for gold, but it took place over a period lasting from 1913 to 1971, when America’s gold standard was finally buried for good. The transition was accompanied by the disappearance not only of gold, but also silver from notes and coins.

All that remains from the golden period of America’s money, is the burning question of what happened to the country’s official gold reserves. No one, including Fed and government officials, seems to know or do not want to touch the subject, preferring to issue reassuring statements about its secure location. The question, though, has been smoldering for decades, but takes on renewed importance with the rehabilitation of gold as a 100% monetary asset by the Basel Accords after eighty years of serious attempts to heap disrepute on its traditional role.

Furthermore, the gold dollar of the pre-Fed era carried the proud statement United States of America. It was substituted by Federal Reserve Notes. Official national money exchanged for private bank money.

Since the final transition to a full-fledged fiat currency, America’s fortunes have turned into a decline. Its wealth is disappearing by a currency hollowed-out by inflation, violating the mandated obligation of price stability, the impoverishment of the middle class in favor of the money elite, rising poverty levels, and ballooning debts for consumers, trade, commerce, and the public hand.

On that latter point, experts contend that the country is already in technical default, unable to pay for all the public debts accumulating at a fast and accelerating pace. In 1913, federal debt amounted to 7.5% of the nation’s GDP. Today it stands at 103%. Once the 100% mark has been crossed it signifies bankruptcy. At least, that is what financial experts claim, including the Chinese who are fearful about the return of their large investments in U.S. treasuries.

Also, the official name—Federal Reserve Bank—is misleading many people into believing this to mean a solid and official endorsement of a governmental institution. It clearly is no such thing. Even if it were, the name in no way conveys the impression of its exalted position and functions as would the designation Central Bank of the United States, which is standard procedure for such institutions worldwide.

Its behind-the-scene influence over America’s political power structures in Washington is legendary. By simply following a revolving door policy for important personalities that circulate between the Fed and governmental, congressional, industrial, banking, and think-tank appointments, it assures a maximum of cross-fertilization of ideas and control over the script written by the Fed.

Here is where the Fed’s true power over America’s financial and political life, beyond mere observations by its critics about ignoring its parliamentary mandate and independent policy making, can be clearly demonstrated. Another demand of the mandate was development and maintenance of economic stability. As the country’s economic history proves. The frequency of economic turbulence is rising instead of dropping. Recent examples include real estate markets collapses in 1979, 1990, and spectacularly so in 2008. Financial services did so in 1986, 1990, and 2008. Tech companies followed suit in 2000 and 2008, to be joined by bond market convulsions in 1969, 1994, and most likely the mother of all crashes predicted to occur in 2014/15.

This could be triggered, according to observers, by investors shunning further treasury auctions in view of the country’s crushing debt burden, and interest rates that misjudge the risks of further investments involved. No less than $93 tn are at stake here, and any upward adjustment in interest rates beyond the control of the Fed, could set off another catastrophe dwarfing even the subprime c

That is 10 major downturns in about 30 years with the destructive impact of a war on peoples’ wealth. The costs for these events are measured in the tens of trillions, not just billions, which would be bad enough, and will impact not only the present generation, but generations to come.

Other examples of where the Fed neglected its duties is its failure to assert a powerful and effective regulatory and supervisory regimen over the banking sector. Thus, it officially regulates only the commercial banks, and that only partially, while leaving a much larger financial community in the hands of government agencies, or even totally unregulated. This neglect is the principal cause of the subprime crisis.

Based on hard evidence, it can be claimed further that the Fed assisted in or directed sweeping regulatory reforms, which amounted essentially to deregulation of previously existing legislation, or the absolute prevention of such norms for the derivatives that contributed to the financial meltdown in 2008.

Another subject arises from the handling of the bailout programs in the aftermath of that financial near—collapse of the world economy. Many of the funds went to banks not related to the Fed’s official responsibilities, domestic and foreign entities alike, and major disbursements were made in total secrecy.

The Fed’s role in the historic collapse is indisputable. It shielded the para-legal creation of derivatives by preventing their regulation, and similarly the distributors of these toxic assets, which were for some reason outside its jurisdiction, and lavished trillions of aid dollars on domestic violators and foreigners as well, allegedly even including foreign central banks. Without detailed figures it is impossible to shed full light on what really happened, and these data are suppressed on the advice of Fed officials. But, where are official investigations into the murky backgrounds?

Related to this subject are questions about the use, or abuse, of the Fed’s credit policies. It was held to preserve economic stability by its mandate, but there is ample history of boom and bust events, especially after the 1970s, which incidentally coincides with Nixon’s closing of the gold window. Hand-in-hand with divorcing money from its value backing went its conversion to debt or credit money, money that was not earned through productive processes, but simply based on bank money created by the fractional reserve system out of the blue against the signature of loan applicants, private and public alike. Offering an avenue to practically unlimited expansion of credit operations, artificial purchasing power associated with fiat money systems, not backed by real assets or savings, it opened the door to inflationary economic distortions, misallocations of economic resources from real, tangible production to creation of financial asset bubbles, and the depreciation of the dollar.

This switch from value money to value-less fiat paper money is a masterly coup of deception and stealthy wealth transfer. It is also another manifest violation of the Fed’s mandate laid down in the Federal Reserve Act of 1913, by opening the door to policies designed to extract the value produced by the working masses via violent economic fluctuation, exemplified by alternating cycles of inflationary expansion and deflationary contraction, political intrigues in collusion with pliable power brokers in high places, and international bankers.

A vital part of Fed strategies for the pursuit of its own interests, is the deliberate use of America’s banking system, that should be an important and constructive partner in achieving its mandated duties, to its own advantage. The Fed was loosely appointed to be the regulator for the U.S. banks in general in 1913. But, by a legal maneuver, the overarching regulatory and supervisory functions were split into two in 1933, effectively separating commercial and investment banking, with the Fed left in charge of commercial banks.

In another revision, the banking system became even more complicated, byzantine, and less transparent by the enactment of Bank Holding Company Act in 1935. It requires all companies falling into this category to register with the Board of Governors of the Federal Reserve System, which wields the powers of supervision and regulation over these holding companies, even though the banks covered under the statute are also under the primary supervision of the Office of the Comptroller of the Currency (Treasury), or the FIDC. If more than 300 shareholders exist, the holding company is also required to register with the SEC, essentially subjecting these banks to several administrative masters at the same time.

Investment banking is, or rather was, regulated by a variety of government agencies not connected with the Fed, and together with the shadow banking system, another mostly unsupervised and unregulated financial complex, harbors more assets than the commercial sector. It is the home to rogue super banks, the speculative elements with little respect to moral, ethical, or legal principles, that are primarily responsible for masterminding the financial crisis of 2008. There is no direct, official connection to the Fed, which turns out to be all smoke and mirrors, when looking at the bailout history.

Why did the Fed park all the trillions in bailout funds, as well the unlimited QE largesse unleashed by Mr. Bernanke, in the hands of the big Wall Street investment banks and their foreign cronies, if they were not closely associated with the Fed? And where is the Fed’s credible accounting for this money tsunami? On its balance sheet for sure, but while it discloses an explosive and unprecedented expansion of the money stock, it says little about the fund recipients, nor Fed plans for the prevention of monumental inflation to follow from all this. Then, who is eventually paying for it? The taxpayer, no doubt, either directly through increased taxation, or indirectly, by charging interest on the burgeoning national debt, by unleashing the devastations of inflation, or all of them combined. Any one of them represents a time-tested way of separating working and saving people from their money. The first sign of a new wave of reaching into the pockets of America’s middle class is already visible. The tax burden for the average family is slated to increase by $1,257 in 2013 over the prior year. In combination with prices for corn, wheat, soybeans and beef going up by 50% in one year, tremendous increases for healthcare costs under Obamacare, college tuition, and gas despite a growing glut of American oil production, rising taxes as far as the eye can see, the scissor movement for America’s next financial haircut becomes clearly visible.

How are these loose money operations in any sense compatible with its mandate talking clearly of currency and price stability, balanced economic growth, maximum employment, etc. Isn’t the obvious discord between the mandate and reality solid proof of a calculated Fed strategy, which is totally out of sync with promises of prosperity, accumulation of wealth, and higher standard of living for all, made by its mouthpiece politicians?

Fed policies appear more and more as a cruel game the Fed is playing with human aspirations of wealth, prosperity, and happiness in America and worldwide in conjunction with mega-banks and international financial institutions. How else can the recent events be interpreted, when the originators of cataclysmic events and damages, clearly seasoned and experienced professionals with long-term tenure in banking, public administration, and business, were released of all accountability under the flimsy excuses of being to big to fail and jail, or the need to prevent systemic risks.

It amounts to an astounding perversion of moral standards, when comparing these slogans exonerating the managerial class and banking elite from personal responsibilities for their misdeeds, with their demands for holding the taxpayer liable for all damages, that were not of their doing.

Summing up the comments about the widening abyss between the Fed’s mission and the reality of its policies and actions raises serious questions about its constitutional legitimacy, purpose and functions, accountability for its actions and, most importantly, its loyalties. All of these questions were already addressed by President Woodrow Wilson when he expressed his profound regrets for ever having signed the Federal Reserve Bank Act into law. He saw already then that his creation was not to the benefit of the nation, but for the benefit of the masters owning this Trojan Horse.

In a different light, we look at the demise of America’s democracy under the inevitable 200-year life cycle for classic democracies ending in totalitarian societies, postulated by the Scottish historian Alexander Tyler in 1750.

Part I

The Background Of The U.S. Federal Reserve System

A Brief History Of The United States Banking System

T he history of U.S. banking is rich, if not somewhat tumultuous. Before reaching national independence, the Bank of England controlled the political and economic life of the colonies, acting as a sort of central bank with an overseas reach. ( Source : The Money Masters). After founding of the nation and up to the establishment of the Federal Reserve System in 1913, there were three attempts to introduce monetary institutions acting as central banks, all of which failed.

The first attempt at a national central bank came with the opening of the Bank of North America in 1782, which came into existence on Congressional sovereign powers to emit bills of credit. To this end, Congress passed an ordinance in late 1781, allowing incorporation of the privately subscribed national bank, modeled after the Bank of England.

It failed as the intended nationwide central bank on strong opposition over alleged foreign influence and fictitious credit, favoritism to foreigners and unfair policies against less corrupt local state banks issuing their own notes. Sentiments against the bank rose to the point where Pennsylvania’s legislature had to repeal the bank’s charter in 1785, only three short years after its opening.

A second attempt at a central bank came in 1791, with the formation of the First Bank of the United States again by Congressional Charter. It was a bona-fide replica of the Bank of England, with foreign shareholders entitled to part of its profits. Curiously, it was only allowed to supply 20% of the country’s currency, with state banks furnishing the rest. Distrust and opposition to the bank was strong in some quarters, with Thomas Jefferson calling it an engine for speculation, financial manipulation, and outright corruption. Its 20-year charter was thus not renewed in 1811 by Congress, and the second bank expired.

Both banks were privately owned with a 20% minority government participation. Both were also modeled after the Bank of England, which did not exactly increase their appeal with the newly independent nation. Nonetheless, the U.S. government was required by law to put up 20% of the stock, and 20% of the directors. Clearly, this was not a favorable power distribution in the eyes of government representatives, nor the public. Given the banking sector’s important role for the development of the young republic, and the prevailing sensitivities from its colonial past, this was not an auspicious beginning to see the majority vote over such a sensitive matter as banking in the hands of private investors with suspected close ties to England.

A third attempt was made by chartering the Second Bank of the United States, which lasted again for 20 years from 1816-1836. James Madison signed the document establishing a carbon-copy of the First Bank, but this time with branches all over the country. It quickly drew the ire of President Andrew Jackson, who became president in 1828, and he labeled it an engine of corruption using Jefferson’s words, and terminated it by simply refusing to renew its charter as a central bank, but letting it continue as an ordinary financial institution.

His spirited politics against the bank in the 1830s, often laced with acrid biblical quotes, were answered by the central bankers with an unusual 61% expansion of the money supply between 1832-1837. Setting off a round of serious inflation their reactionary maneuver led Jackson to issue an executive order stipulating all federal land payments to be made in gold or silver, which forced all banks to require payments in hard money, gold and silver.

It is claimed that this step caused the 4-year depression of 1837-1843, which coincided with a 58% contraction in the money supply, evidence of a retaliatory bank strategy against the Presidency, and the first demonstration of a deliberate boom-bust policy, of which the United States have seen so many more in recent times under the reign of the Fed.

This series of confrontations ended with the popular rejection of big money bankers on the opposition by state-chartered banks who saw them only as overpowering competitors and cartels working against the interests of the small man. In an unprecedented step President Andrew Jackson vetoed legislation to extend the charter of the Second Bank stating his conviction that:

every monopoly and all exclusive privileges are granted at the expense of the public, which ought to receive a fair equivalent. The many millions which this act proposes to bestow on stockholders of the existing bank must come directly or indirectly out of the earnings of the American people.

His opposition to the big banking interests was founded on well-taken and factual observations. Among the most prominent ones he cited the concentration of financial interests in a single institution, exposure of government to foreign control, enrichment of the rich, too much influence peddling over members of Congress, control by a few select families from the northeastern states, the long history of banks instigating foreign wars, forcing nations to go into debt. Astute and unwelcome observations, that are as applicable today as they were then.

Despite heavy lobbying by big bank promoters against him, Andrew Jackson was elected by a landslide for a second term in 1832, and succeeded in destroying the Bank in 1833 by withdrawing all U.S. funds and not renewing its charter in 1836. In its place a new system of national banks was established in 1863 to help with the financing of the Civil War. They were administered by the Office of the Comptroller of the Currency. The office is still functioning today as examiner and supervisor of all nationally chartered banks, and acting as part of the U.S. Treasury Department.

The first three attempts at giving the country a central bank worthy of the name failed for a number of related reasons. First, they were private banks with substantial foreign capital interests entitled to a share in the profits. Second, the fact that they were replicas of the hated Bank of England, offended the colonies’ determination to be free from the British crown once and for all. Third, they competed with state banks for the issuance of bank notes, in other words they did not really represent an independent central monetary authority, and failed to provide financial stability with different currencies of unclear backing by specie (gold or silver) circulating in the economy. Lastly, with only a twenty percent capital participation by the federal government and given their unclear shareholder credentials, they were suspected of undue foreign influence over internal finances and politics.

All of this collided with the very clear visions the founding fathers had laid down for the political life after independence from the British crown and the Bank of England. The United States were to be built on the principles of liberty, personal freedom from oppression, the majority rule by the people, ideas which had driven the French revolution at the time and made nations truly strong and independent. Strange as it may sound today, this excluded a democracy, which they held to be weak and prone to abuse by groups pursuing individual interests rather than a common goal. They favored a republican form of government, ruled by law and not political factions.

They also well understood and respected the foundations of a healthy, powerful, and prosperous state, which they implanted in the country’s constitution: a strong rule of law, fair and honest courts, strong defenses for property rights and personal liberties, and a strong banking system for the creation and preservation of individual wealth.

After three failures of establishing a central bank authority, the U.S. decided to depend on state-chartered banks from 1837-1862, and national banks from 1863-1913. State banks could issue bank notes backed by specie, gold and silver coins, their reserve requirement were regulated by the different states, as were interest rates for loans and deposits, capital ratios, etc. An unsatisfactory solution as it turned out. Real values of bank bills were often below their face value because of undercapitalization, interest rates were set by the banks themselves, and the number of poorly regulated banks proliferated rapidly from 24 chartered banks in 1797 to 712 in 1837. They normally enjoyed only a short life span averaging 5 years, and a 50% failure rate mostly due to their inability to redeem their own notes.

The disorderly situation led to the National Banking Act of 1863, trying to establish a stable system of national banks with higher operating standards as far as reserves and business practices were concerned, and putting them under the supervision of the newly established Comptroller of the Currency. These banks had to introduce the first uniform national currency of sorts, by requiring them to accept each other’s currencies at par value.

It proved to be a band aid solution, because state bank money drove out national bank money. This was remedied by introducing a 10% tax on state bank bills, forcing most banks to become national banks. In 1865 there were 1,500 national banks, and 1,638 in 1870, but only 325 state banks.

But still, their tenure lasted from 1863 to 1913, even though it was subject to repeated bank crises. The system had inherent weaknesses preventing it from meeting all the credit needs of the young and expanding economy, because it was based on Treasury Bonds, whose value tended to fluctuate wildly. The ensuing liquidity problems of any of the national bank were caused also by a pyramidal reserve system, which required national charter banks to set aside their reserves in reserve city banks, which in turn were forced to keep reserves in central city banks.

This meant practically, that a national bank being drained of reserves could only replace them by selling stocks and bonds, by borrowing from a clearing house, or by calling in loans. Deposit insurance had not yet been introduced and a mere rumor a bank having liquidity problems was enough to cause a run on that bank by panicked depositors.

It was a period marked by economic instability, and dreaded runs on the banks by desperate depositors trying to salvage their money from distrusted banks and bankers. One of these panics was particularly severe in 1907, and sparked demands for urgent banking and currency reform. A year later Congress passed legislation that provided for an emergency currency and the establishment of the National Monetary Commission to study banking and currency reform. (Source: Wikipedia).

This was the long-awaited chance for the international money lenders to launch another assault on gaining private supremacy over America’s money system, a plan that had eluded them for more than seven decades. This time they were successful. Their plans were well laid out and succeeded through duplicitous, super secretive, and even conspiratorial actions of their promoters, the New York banking interests and members of Congress in creating the Federal Reserve System in 1913.

The cabal went back to 1910, when Senator Nelson Aldrich, Senate Republican leader; Henry Davison, senior partner of J.P. Morgan Company; Frank A. Vanderlip, president of National City Bank of New York and associated with the Rockefellers; Charles D. Norton, president of the First National Bank of New York; Col. Edward House, the later closest advisor of President Woodrow Wilson; and Paul Warburg, executive of Kuhn, Loeb & Co went in total secrecy to Jeckyll Island in Georgia to draft a banking bill. It was introduced by Senator Aldrich, a close confidant of J.P. Morgan and father-in-law of John D. Rockefeller, Jr., for discussion in Congress. This lasted until the end of 1913, indicating the pitched battles of opinion raging in both houses of Congress, a tug-of-war between the New York Money Trust and outside interests.

The Federal Reserve Act Of 1913

The bill was finally passed as the Federal Reserve Act of 1913 on a Sunday, December 23, 1913 two days before Christmas when most of Congress were on vacation. It was presented to President Wilson and signed within the hour after passage into law. At the signing ceremony Wilson expressed his gratitude for having a part: in completing a work… . of lasting benefit for the country. Words that he would later bitterly regret when he said:

"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world—no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men." (Woodrow Wilson on the Federal Reserve Act).

The Act created the third true central bank for the United States assigning it many basic functions normally associated with such important institutions. Yet, its role does not fully conform to the traditional understanding of sovereign institutions and, actually, portrays a picture of contradictions and outright lack of a homogeneous American banking system. Yet, herein lies the key to understanding the history of disturbing political, financial and economic inconsistencies associated with the Fed since its inception, and the origin of two devastating economic upheavals in its 100-year reign.

It starts with the official name Federal Reserve Bank. which does not fit the customary national image associated with central banks. Conspicuously absent in its official title is the worldwide standard reference to the Bank of the United States, for instance, or something similar.

The term Federal does not convey the same meaning, even though it might superficially create the impression, that the bank is part of the U.S. federal government. It is not, and it proudly proclaims its independence from the constitutional framework of government, with minor exceptions. The fact that the U.S. government is not even holding a minority share in the bank’s capital stock, makes it unique among its peers throughout the world, where full or partial sovereign participation is the norm.

The second important component of its quasi-official name, the term Reserve is claimed to alludes to the fractional reserve system of money creation, which is another way of saying it can supply any amount of money at the discretion of the institution, by ballooning bank deposits several-fold by means of requiring the retention of only a fraction of those deposits as reserves and lending the excess funds out for increased profit opportunities. This will be explained in detail later on.

Two additional technicalities are noteworthy. It is clearly a debt based system of money creation, with mandatory payments of principal and interests leaving the borrower, government or private, in a state of permanent debt servitude to the lender. In order to make sure the national debts would be paid, the formation of the Federal Reserve System coincided with the introduction of the national income tax in 1912 for the first time in U.S. history, by way of the Sixteenth Amendment to the U.S. Constitution.

Some people wonder why there are 12 regional reserve banks. It is a concession to the fears persisting for so long among American politicians that the powerful eastern money trust could unfairly take advantage of their strength in determining the policies of the central bank to the detriment of weaker money aristocracies of the country and the country’s legitimate, overall economic interests.

That is not to say that all member banks hold equal power and influence over the decision making process of the Federal Reserve Board of Governors. The Federal Reserve Bank of New York, for instance, thus holds sole responsibility for conducting open market operations at the direction of the Federal Open Market Committee, cementing its special position in the system. (Source: Wikipedia).

It thus meets the description of the perfect, yet pernicious modern banking system run by private money interests penned by the late Carroll Quickley, a prominent historian at Georgetown University:

"The growth of financial capitalism made possible a centralization of world economic control and a use of that power for the direct benefit of financiers and the indirect injury of all other economic groups.

The powers of financial capitalism had (a) far reaching (plan), nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.

This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. (Source: The Money Masters).

Another oddity is the parallel existence of the United States Department of the Treasury, which is a full-fledged branch of the U.S. federal government since 1789, and still performs many functions falling under central bank responsibilities, giving it the appearance of a Siamese twin sharing a duplicity of purpose. It raises the legitimate question, whether both are really needed to serve the nation’s financial requirements. The law governing the Treasury, 31 U.S.C. 〈 301, establishes clearly that: a) the Department of the Treasury is an executive department of the U.S. Government at the seat of the Government and b) the Head of the Department is the Secretary of the Treasury. The Secretary is appointed by the President, by and with the advice and consent of the Senate. The head of the Fed does not even carry the title of a Secretary, denoting an official government status, but is simply called a Chairman, a term associated with private business organizations.

Among the major official functions of the Treasury one finds:

-   managing federal finances

-   collecting taxes, duties and monies paid to and due to the U.S. and paying all bills of the U.S.

-   producing all postage stamps, currency, and coinage

-   managing government accounts and the United States public debt

-   supervising national banks and thrift institutions (which excludes state chartered commercial banks);

-   advising on domestic and international financial, monetary, economic, trade and tax policy

-   fiscal policy being the sum of these, and ultimate responsibility of Congress;

-   enforcing Federal finance and tax laws; ((Source: Wikipedia).

There are other curious aspects, where the interests of the Treasury and Fed intersect, giving rise to occasional cross-purposes, conflicts and turf fights, but clearly distinguishes the Fed as a private, for-profit organization acting as the central bank, which makes it very unique among all countries.

The Fed’s Mandated Functions

Its key mission is to prevent destructive bank panics, which occurred with great regularity before 1913, which was clearly spelled out in the Federal Reserve Act. The list of prioritized other functions includes:

-   act as the central bank of the United States

-   establish a number of Federal Reserve Banks

-   furnish an elastic currency responsive to the needs of the economy

-   strike a balance between private interests of banks and the centralized responsibility of government

-   supervision and regulation of banking institutions

-   protection of consumer credit rights

-   management of the money supply through monetary policy to achieve the goals of

-   maximum employment

-   stable prices, including prevention of either inflation or deflation

-   moderate long-term interest rates

-   maintain the stability of the financial system and contain systemic risk in financial markets

-   provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

-   facilitate the exchange of payments among regions

-   respond to local liquidity needs and

-   strengthen U.S. standing in the world economy.

-   other purposes (no further details furnished) (Source: Wikipedia)

The list gives the Fed full management authority over the monetary policy on the macro- and micro level, that is control of the money volume required to assure a smooth functioning of the private and public sectors without causing inflationary or deflationary imbalances. This point seems to be in direct conflict with the dollar’s history, and the explicitly stated slightly inflationary money expansion pursued by the Fed, as described in the following discussions of Fed policies.

In everyday practice, the monetary policy is in effect set by influencing the Federal Funds Rate, a rate established by interbank lending of excess funds among each other. It is a short-term interest rate under the control of the Federal Open Market Committee (FOMC). In essence, it allows the Fed to control the amount of reserves that are available for expanding or contracting the money supply in the economy.

The Fed uses three different tools to accomplish this task. The open market operations; the discount rate for loans issued from the regional reserve bank’s lending facility called the discount window; and actual reserve requirements, establishing the percentage of all deposits in the bank that must be retained as contingency reserves which cannot be used for lending purposes.

This latter reserves issue is the link to the so-called fractional reserve system, allowing banks to build credit beyond the bank’s reserves from its equity capital base and customer deposits on hand. In the U.S. practice this means, only 10% of assets have to be retained in reserve on the books while 90% are available to meet credit demand. A de-facto 10 times expansion of the money supply over and above actual assets available is possible.

A second primary function is the regulation and supervision of the banking system as a whole, which consists of two different bank types: private banks that are Fed member banks, and those that are not. Further duties extend to serving as a supervising and regulating authority for America’s banking institutions in the public interest. Other duties include maintenance of a safe and efficient payment system. For private banks, which makes the Fed the bankers’ bank.

For clarification of this point, it must be noted that the American banking system is multi-tiered. There are nationally chartered, and state chartered banks, a remnant of America’s pre-Fed history. The Fed supervises and regulates all national banks, which are members of the Fed by law, and state chartered banks only to the extent that they are voluntary members of the 12 Federal Reserve District banks; bank holding companies; the foreign activities of member banks; the U.S. activities of foreign banks, plus some others.

But the Fed does not act alone in performing these functions. Other federal agencies share the supervision of even commercial banks. The Office of the Comptroller of the Currency thus shares in the supervision of all national banks, and the Federal Deposit Insurance Corporation supervises those state banks that are not members of the Fed. This splitting of responsibilities is difficult to comprehend under the seemingly assigned duties for the whole banking sector.

The Fed also acts as the government’s bank and fiscal agent, in a curious symbiosis with the Treasury. As such it handles Treasury accounts for the receipt or disbursement of federal government funds, like the income tax for instance. Another part of the arrangement is the responsibility of the Fed to manage the public debt, that is federal government debt as distinguished from state and local government debt, by buying or selling U.S. government securities like U.S. savings bonds, Treasury bills, notes and bonds, all issued by the Treasury Department. This way the Fed can increase or decrease the money in circulation, giving it another means of implementing its monetary policy, the provision of purchasing power for the economy. But it does not come free of charge. All requests from the federal government for additional funds, for instance, to meet budgetary deficits, are channeled through the Treasury, which issues Federal government debt obligations in exchange for electronic money transfers from the Fed into Treasury accounts after receiving federal government debt instruments. They, in turn, now form the basic accounting tool for the national debt statistics, and related interest payments due to the Fed.

Lastly, the Fed issues the national currency, coins and paper alike. Once more, in a strange symbiosis the issuance of the currency is split between the Fed and the Treasury. The U.S. Treasury owns the Bureau of the Mint, and the Bureau of Engraving and Printing. Both produce the coin and paper money. Upon request, the coins are sold by the Treasury to the Fed at face value, and the paper bills at manufacturing costs. In 2008 a total of 7.7 bn notes thus changed hands at an average cost of 6.4 cents per note. The Fed is then accountable for the distribution to its various member institutions, which may at times involve exchange for used bills withdrawn from circulation. (Source: Wikipedia).

This arrangement gives tremendous financial power to the Fed, as their cost for a dollar bill with a face amount of $100 is acquired for far less than 1% of its circulation or market value.

To sum it up, the primary motivation for creating the Federal Reserve system was the prevention of frequent and disruptive bank panics, that had plagued the American system of national banks since their inception in 1863. Two additional priorities were the introduction of an elastic currency by means re-discounting commercial paper, check-clearing for all private banks, which makes the Fed the bankers’ bank, and establishing a more effective regulatory supervision of banking in the United States.

Organizational Structure Of The Federal Reserve

Considering the importance of a central bank for the financial health of a nation, the Fed has a relatively simple structure to accomplish its mission. A curious aspect in comparison to other central banks is its hybrid nature combining public and private organizational aspects. That is to say it shows strong elements of a private for-profit banking institution that proudly claims a large measure of independence from governmental influence over its official operations. Setting the monetary policy is the exclusive right of the Fed without input from the legislative and executive branches, and supervisory or regulatory powers over the Fed are more pro-forma than real. All in all, the Fed gives the impression of being a hybrid sovereign-private entity within the country and running its internal and external financial affairs as it sees fit.

Having such political and executive latitude raises serious questions about the true nature of the bank’s loyalties. Does their scale of priorities allow it to give preference to public interests over its private profit pursuits, the choice between America’s welfare and that of its stockholders? The curious way in which the Fed combines both private and public elements, and the way it can make its independent decisions without approval from Congress or the President resulted from the historic private bank opposition to a central bank exclusively directed by political appointees, which might have interfered with bankers’ independence.

David L. Kohn, vice chairman of the Board of Governors clarified this compromise on 2006 by stating: "The legislation that Congress ultimately adopted in 1913 reflected the hard-fought-battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today."

The Fed is that purported part of the U.S. government regulating only about 40% of America’s private banks. The dual regulatory structure is imbedded in the way its functionaries are appointed or elected. Private member banks located in each of the twelve Federal Reserve Bank districts, elect the board of directors at those regional Federal Reserve Banks, while the members of the Board of Governors are appointed by the President and confirmed by the Senate for 14-year terms. This arrangement gives private banks the necessary latitude in running their own affairs, but they are overseen and regulated by the Fed, ostensibly an official part of the U.S. government. Its operation and administration are equivalent to private, for-profit institutions. They are financially self-funded and thus independent of public budgets, as they emphatically pronounce in all publications and public statements. (See: Funding of the Fed).

The Board of Governors is the administrative head and main governing body of the Fed system. It consists of seven members charged with the oversight of the twelve district member banks, the regulation and supervision of the U.S. banking system, and development of the monetary policy.

The Board is a federal agency and is required to submit an annual report to the Speaker of the U.S. House of Representatives.

The Board of Governors has a number of supervisory and regulatory responsibilities in the U.S. banking system, which are limited in scope as mentioned by the Fed itself. Its supervisory responsibilities cover state-chartered banks that are members of the Federal Reserve System by law, bank holding companies, the foreign activities of member banks, the U.S. activities of foreign banks, and Edge Act and agreement corporations (limited-purpose institutions that engage in foreign banking business). The Board and, under delegated authority, the 12 Federal Reserve District Banks, supervise approximately 900 state member banks and 5,000 commercial banks and bank holding companies. This means that not all commercial banks in the U.S. fall under the regulatory and supervisory power of the Fed.

A peculiar aspect of this enigmatic construct called the Fed, but enshrined in the fact that other federal agencies also serve as the primary federal supervisors of commercial banks. The Office of the Comptroller of the Currency, for instance, also supervises all national banks, and the Federal Deposit Insurance Corporation supervises state banks that are not members of the Federal Reserve System.

Some regulations issued by the Board apply to the entire banking industry, all national banks, which by law are members of the system as mentioned, others only to state banks that are members of the Fed. Despite their name, investment banks and other financial institutions are not subject to Fed regulations.

Later, this list of duties was expanded to include the application of federal laws on consumer credit protection, which includes Truth in Lending, Equal Credit Opportunity, and Home Mortgage Disclosure Acts. Many of these protective regulations may also cover lenders outside the banking industry.

The Chairman and Vice Chairman of the Board of Governors are appointed by the President of the United States from among the sitting Fed governors.

The Federal Open Market Committee consists of twelve members, seven from the Board of Governors and five from the twelve regional member banks.

Setting the monetary policy for the private sector is the primary responsibility of the Federal Open Market Committee, the FOMC. It meets 8 times during the year, to evaluate and implement proper responses to needs identified by careful assessments of sector developments.

The committee’s powers affect the money supply in two principal ways. At the macro-level it adjusts the total money volume by means of buying or selling operations in the open market involving mostly U.S. Treasury securities, or other assets held by member banks are the most direct and potent means of affecting the supply. Purchasing such assets expands the money supply in the banking system, selling shrinks it.

Once the liquidity has been influenced on the macro-level, the Fed’s tool kit allows it to influence the money creation at the micro-level, that is within the banking system itself.

Here, it can make use of the Federal Funds Rate which it applies to interbank lending of excess funds among member banks, a short-term interest rate entirely controlled by the FOMC. In essence, it allows the Fed to control the amount of bank reserves available for expanding or contracting the money supply in the economy.

Other tools the Fed may use include the discount rate for loans granted to commercial banks by the regional reserve bank’s lending facility, the discount window, and the actual bank reserve requirements, establishing the percentage of all deposits in the bank that must be retained as reserves and cannot be used for lending purposes.

This is the so-called fractional reserve system, allowing banks to build credit beyond the bank’s reserves from its equity capital base and customer deposits. In the U.S. practice this means, only 10% of assets have to be retained in reserve on the books while 90% are available to meet credit demand. A de-facto 10 times expansion of the money supply over and above actual assets held in bank vaults is thus possible.

In actual practice it works in this way. A customer goes to his/her bank and asks for a loan. If approved by the bank and signed by the customer on a debt instrument, the loan becomes instant money. The customer takes the loan and deposits it in his account which becomes a bank or reserve asset from which only 10% have to be retained by the bank as a reserve, a sort of insurance against unforeseen liquidity demands. It keeps the bank liquid enough to face any eventualities. This system is the so-called fractional reserve system used throughout the world’s banking system. It is a very powerful tool for inflating or deflating a country’s liquidity pool. Critics have called it somewhat derisively money generation out of the blue sky.

It is also charged with performing a number of other functions including transactions in foreign exchange markets. Interestingly, the member from the Federal Reserve Bank of New York is the only permanent member of the FOMC, while the others rotate on a regular base.

Major operational assets of the Fed are the twelve Federal Reserve Banks scattered across the country. They act as the implementation conduits for the monetary policies and as supervisory organs for the commercial member banks under their jurisdiction. Each bank is headed by a Governor as the chief executive.

These Federal Reserve Banks are technically not federal agencies, but may have aspects of quasi-federal functions in some cases, according to the U.S. Court of Appeals for the Ninth Circuit. Otherwise, they are privately owned, independent, and