Many investors today, as they learn more about the nature of
the Federal Reserve, are asking themselves how the US, the supposed land of the
free, permit a non-Government-based cartel to take control of its monetary system?
Who controls the Fed? And just how did they attain this unbelievable power to
operate with the Government’s approval?
To answer all of these questions, we need to put on our
winter coats and step back in time to a New Jersey train platform on a cold
wintery night in November 1910…
At first glance, nothing around us would look unusual. The
train at the platform was comprised of your standard chair cars which would be
converted to sleepers at night. Poorer passengers took the cars closer to the
engine, while the more well off sat and slept in cars behind the dining car.
However, one thing was very unusual about this particular
train. And that something unusual was a single private train car located at the
end of the train.
Unlike the others cars whose interiors were dreary affairs
of metal and wood, this car’s interior was filled with rich mahogany, velvet,
and polished brass. And unlike the other cars which had regular train porters,
this car had private servants who were scurrying about stocking the bar and
cigar boxes. Finally, unlike the other railcars whose sides were marked with
numbers, this particular car had a single plague reading “Aldrich.”
As in Senator Nelson
Aldrich, Republican “whip,” investment associate of JP Morgan, and father in
law to John D Rockefeller, Jr.
Aldrich arrived at the train car first, decked out in the
finest clothes imaginable and accompanied by several porters carrying his
luggage. However, once he arrived, he was soon joined at his private car by six
guests.
Each guest arrived separately so as not to imply that they
knew each other. Indeed, two of them bumped into each other on the platform,
they feigned ignorance of each other’s identity. They only addressed one another
by first name both in public and in Aldrich’s private car. In fact, their
identities were kept so secret that even Aldrich’s servants didn’t know who the
six guests were.
Fortunately for us, G. Edward Griffin, author of The Creature From Jekyll Island has
painstakingly proved their identities. As he notes, they were:
1)
Nelson Aldrich, Senator of Rhode Island and Republican
“whip,” Chairman of the National Monetary Commission business associate of JP
Morgan and father-in-law to John D. Rockefeller, Jr.
2)
Abraham Andrew, Assistant Secretary of the Treasury.
3)
Frank Vanderlip, President of National City Bank of New
York, the most powerful US bank at the time, representing William Rockefeller
and the international investment house of Kuhn, Loeb, & Co.
4)
Henry Davidson, Senior Partner at the JP Morgan
Company.
5)
Charles Norton, President of JP Morgan’s First National
Bank of New York.
6)
Benjamin Strong, head of JP Morgan’s Bankers Trust
Company.
7)
Paul Warburg, partner of Kuhn, Loeb, & Co, a
representative of the Rothschild banking dynasty in England and France, and
brother to Max Warburg who was head of the Warburg banking consortium in
Germany and the Netherlands.
Together, these six men, represented interests that
controlled one fourth of the world’s
entire wealth. That is not a typo. These individuals represented the
four most powerful groups in the Anglo-American banking
world. They were:
From the US From Europe
Rockefellers Rothschilds
Morgans Warburgs
The train took Aldrich’s private car to Georgia where it was
unfastened from the rest of the train. The men then boarded a ferry to Jekyll
Island: a private vacation resort recently purchased by JP Morgan and several
business associates. To maintain secrecy, the resort’s normal staff were put on
vacation and all new servants and porters were brought in.
During the next nine days, these seven men (still only using
their first names to avoid recognition) hatched out a plan to create the system
that would eventually become the Federal Reserve banking system.
The reason for their doing this was simple: competition.
The Nationals Vs. The
Non-Nationals
Before the creation of the Federal Reserve banking system,
the US’s banking system was divided into two types of banks: national banks and
non-national banks.
National banks received their charters from the Federal
Government and could issue their own notes, or money. These were the “old
money” vanguard of the banking system, the elite banks based in NY and backed
by the noble class families mentioned before.
In contrast, non-nationals were private banks that operated
without government charters. These were the “upstarts” of the US banking
industry, springing up mainly in the south and west.And the nationals were none
too pleased about their presence.
The upstarts were not only giving banking a bad name (the
industry suffered 1,748 bank failures from 1890 to 1910), but they were also
eating into the Old Vanguard’s profits: as early as 1896, non-national banks
controlled up to 54% of the US’s savings deposits.
A second, more pressing issue was also on the minds to the
Anglo-American banking giants as they journeyed to Jekyll Island: the US
monetary system was moving away from
debt usage to private capital.
Because there was no centralized system for determining
interest rates, banks set their own interest rates. This in turn, kept the
money supply relatively tight as there were strict limits on how many loans
banks could generate relative to their assets. Because of this, many
corporations were seeking funding privately or from operations (cash reserves).
G. Edward Griffin, in The
Creature From Jekyll Island, notes that from 1900 to 1910, some 70% of
corporate funding was generated internally, rather than taking out loans.
In other words, big business was moving away from dealing
with the banks. This was a huge issue for the Anglo-American banking giants as
I shall explain.
Let’s say that back in 1900, Joe America makes a deposit of
$100 in ABC bank, earning an interest rate of 1%. ABC then turns around and using
Joe’s $100 as reserves, lends out as much as $1,000 at an interest rate of 5%.
In essence the bank has just created $900 out of thin air.
However, by doing this the bank is now earning $50 in interest (5% on $1,000)
while paying out $1 to Joe (1% of $100) thus pocketing $49 in profits.
As you can imagine, this set-up was obscenely profitable for
the banks, which is why the Morgans, Rothschilds, et al were so concerned that
Corporate America was moving away from borrowing to fund growth.
Moreover, the fractured nature of the banking system (there
were no set rates or capital standards) meant that banks had a tendency to go
under. Consider that in the early 20th century, banks in general
often lent out ten times the amount of money they held in deposits, assuming it
unlikely that any large number of customers might decide to cash out at the
same time.
Even more insane, more reckless banks typically only had 3%
of deposits in actual cash on hand (the
rest was often tied up in short-term loans and investments).
This obviously put the bank in a very tenuous position.
Suppose Joe decides to withdraw his $100? Or what if Joe wrote a check for $50
to buy some groceries? Well, if the grocery store clerk used the same bank as
Joe, there was no problem because no physical cash had to actually leave its
vaults.
However, if the Grocer took the check to another bank and
cashed it, then $50 in actual physical cash would have to leave Joe’s bank and
be transferred to the other bank. Multiply this by a few hundred transactions
at a time when most banks only had 3% of reserves in physical cash and you
quickly realize why nearly 2,000 banks went under between 1890 and 1910.
I’ll continue to remainder of my analysis in the second
portion of this article.
Best Regards,
Graham Summers
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