How the Federal Reserve Began



Aug 2, 2020
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I've always been fascinated by certain aspects of history. No, not the boring parts, but the much more entertaining and telling financial parts. Believe it or not, most of history was spurred by financial interests and most of those interests have never been described, much less mentioned. That's academia for you. Cherry picking what they want to tell. There's a lot of history out there that's disingenuous at best and flat out false, or shall we say, not very complete, at worst. I've seen history written in my years on this planet and it ain't pretty. It's actually really bad. I can't believe people teach much of what they teach.

Anyway, one of the most consequential pieces of history to have ever occurred, occurred on Jekyll Island, Georgia. I've actually read about the bill that was written to create the Federal Reserve system a number of times. I take everything that was said with a grain of salt because it's full of drama that simply doesn't need to be there. For example, take a look at this excerpt written by B.C. Forbes of Forbes Magazine:

Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily hieing hundreds of miles South, embarking on a mysterious launch, sneaking on to an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance.

I mean, c'mon. Do we need adjectives and adverbs like: greatest, stealing, private, cover of darkness, hieing, embarking, mysterious, sneaking, deserted, rigid secrecy, strangest, secret, and expedition? It's almost like watching one of those "documentaries" that's full of ominous music playing quietly in the background. It's almost as if the setting is meant to persuade the reader or watcher into believing something, simply because the story isn't that interesting in and of itself. It's like English politics where they call everything a "scheme" that they don't like and a "plan" that they do. Give me a break.

But much of what I've read I believe to be true. Never mind the drama. Let's look at the facts as they've been described:

- From 1871 through 1914, there was a balance of no monetary inflation at all. This was due to most of the world having their currencies linked to gold, or otherwise known as being on the gold standard.

I need to break in here for a moment. I'd like to talk about how trading occurred under the gold standard. Basically, when one nation has its currency pegged to gold and others do too, those multiple currencies are essentially linked to one another. Trading is fair because all parties involved know what the costs will be far ahead of time. Also, each party is confident in the other's worth because of the currency being linked to gold and silver. Part of the reason having a groups of nation's currencies linked to gold was beneficial was because of the parity the system created. Think about it this way: when one economy did well, the people of that economy spent their money. This was akin to gold leaving their economy toward other economies, creating less spending power for the first economy. Because of the lack of spending power, the initial spenders became less wealthy, creating less demand. And because of that lack of demand, the economy of the spenders suffered, driving down prices. When prices fell, demand from others rose, resulting in an influx of currency and wealth. This cyclical pattern repeated itself over and over through the years and worked very well. Sure, you'll read about various crashes and the like, but if you dig a bit deeper, you'll discover that most, if not all, of those crashes occurred because of bankers and speculation.

Okay, back to the facts:

- During the years of the gold standard, actual gold was stored in the various nations' treasuries. Any currency that was printed was linked to the amount of gold that was stored.

- The Federal Reserve is not a government agency.

- The Federal Reserve has stockholders and is a private corporation. It pays dividends to those stockholders.

- The Federal Reserve has no congressional oversight. It can print money (offer debt) as it sees fit. It also can not be audited by anyone.

- In 1907, there was a stock market crash called the Panic of 1907. It was alleged that Wall Street was causing crashes and buying stock on the cheap when unsuspecting businesses and individuals sold theirs out of fear. Wall Street would later sell these purchases at a profit.

- In 1908, congress created the National Monetary Commission to study the crashes and to devise a way to fix the problem. Senator Nelson Aldrich was made chairman of the commission.

- The senator visited Wall Street as well as Europe and gathered some of the world's wealthiest banking men to devise a strategy for fixing the stock market crash situation. The problem was, the men he gathered were suspected of being the ones who caused the crashes in the first place.

- In 1910, these men (Paul Warburg, Abraham Pete Andrew, Frank Vanderlip, Henry P. Davison, Charles D. Norton, and Benjamin Strong, among others) met on Jekyll Island for a week to hammer out the details of a new private corporate bank that would assume the responsibility of handling the United States' economy.

- The plan these men devised was called The Aldrich Plan. It didn't pass congress in 1910, but was renamed The Federal Reserve Act and was passed in 1913.

- It was at the moment of this plan's passage that the United States handed over it's authority to mint its own coin and control the value thereof to a private bank.

And that's it in a nutshell. Think what you want of the Federal Reserve Act, but when you do, remind yourself that you're likely reading this post on a mobile phone or a computer, neither of which would probably be in existence if we had a currency bound by gold. Gold purists love to spout their adoration of precious metals because it keeps people honest. But think about this: how is an economy supposed to grow if there's a limited amount of financial resources? How were we supposed to put a man on the moon? How was the Large Hadron Collider supposed to be built? How were the COVID vaccines supposed to be paid for? And also think about this: how would developing nations or nations that have no gold ever develop? Things are much more advanced these days and it's not out of the realm of possibility that a fully detached currency can do the job very well. Actually, that's fairly obvious if you look at the last 100 years. Yes, there have been problems, but most of those years have been great, financially speaking. And most importantly, remember this: all currency is backed by something. It never gets printed without being linked to some sort of asset. So if the Federal Reserve loans the U.S. government trillions of dollars, don't think for one moment that it does so for free. Remember, the Federal Reserve is a bank. It's there to make money. If the government fails to pay, the Fed will take its collateral, whatever that may be. If you'd like to know more and learn about the theorized collateral, I suggest you read The Creature From Jekyll Island.

So there it is. The shortest version of how the Fed was created that you'll ever read. What's your opinion on all this? I'm in no way a Fed hater. I actually like the fact that what was once thought of as an economic law has been beaten. That's not to say that there won't be tough times in the future due to some weird crash and "solution," but for now, people are able to take out very cheap loans to buy their dream houses. That wouldn't have been possible with the gold standard.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
How the Federal Reserve Began was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.

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