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How the Federal Reserve Runs the US – III

…Jefferson and Madison understood the dangers of commercial monopolies of all types and tried to assure they never would exist in the new nation. They, in fact, wanted two additional amendments added to the “Bill of Rights” in the Constitution but never got them. They believed to protect the liberty of the people the nation should have “freedom from monopolies in commerce” (what are now giant corporations including the big international banks and Wall Street investment firms) and “freedom from a permanent military,” or standing armies…

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Note: This is the third of a five-part series.

Our Founding Fathers Had Different Ideas Than the Powerful Men who Met on Jekyll Island

Throughout our history, there was disagreement over who should control the power of the nation’s money supply and the right to issue it.  The Founding Fathers understood that the British Parliament was forced to levy unfair taxes on its American colonies and its own citizens because the Bank of England had run up so much debt the government needed revenue to reduce it.  Benjamin Franklin, in fact, believed that was the real cause of the American Revolution.  Most of the Founders also understood the danger that could result from bankers’ accumulating too much wealth and power.  James Madison, the main drafter of our Constitution, called them “Money Changers,” referring to the Bible that said Jesus twice drove the Money Changers from the Temple in Jerusalem 2,000 years ago.  Madison said:

“History records that the Money Changers have used every form of abuse, intrigue, deceit and violent means possible to maintain their control over governments by controlling money and its issuance.”

Thomas Jefferson was just as strong in his condemnation when he said:

“I sincerely believe that banking institutions are more dangerous to our liberties than standing armies.  Already they have raised up a money aristocracy that has set the government at defiance.  The issuing power should be taken from the banks and restored to the people to whom it properly belongs.”

Jefferson and Madison understood the dangers of commercial monopolies of all types and tried to assure they never would exist in the new nation.  They, in fact, wanted two additional amendments added to the “Bill of Rights” in the Constitution but never got them.  They believed to protect the liberty of the people the nation should have “freedom from monopolies in commerce” (what are now giant corporations including the big international banks and Wall Street investment firms) and “freedom from a permanent military,” or standing armies.  Try to imagine what the country would be like today if Jefferson and Madison had gotten their way – a country without giant predatory corporations exploiting everyone for profit and without a rampaging military waging war on the world, threatening to destroy it, and doing it so those corporate giants could earn even greater profits.

They never did, of course, and the people have paid dearly ever since including the great harm caused because the government relinquished its right to control the nation’s money supply.  It gave it away secretly with the public none the wiser, never knowing how greatly it’s been harmed.  It’s been even worse since the 1980s because the power of the Fed grew under a friendly Republican president, and the corporate media led cheerleading for it hid the effect.  For them, no public demeaning of it, its giant member banks or Wall Street allies is allowed. 

Things were especially out of hand during the tenure of Alan Greenspan – a Fed chairman no one should have found much reason to cheer either before he headed the Fed when he was a presidential advisor or during the time he did.  It was only after his economic consulting firm failed that he went into government service likely because he needed a new line of work.  There he managed to become a larger than life seer of central banking who was elevated to near sainthood by the business pundits who thought under his tenure the skies were only blue and the few clouds in sight always had silver linings.  Now Alan is retired to the greener pastures of lucrative book contracts and speaking engagements, which shows when you do your job well for the rich and powerful (at the expense of the rest of us) who gave it to you, you’ll be well rewarded in the end.  It’s likely the new Fed chairman has taken note and will dutifully try to follow in the tradition that preceded him. 

But try imagining a different sort of Fed chairman, one who knew, believed in and practiced the words and wisdom of another American president of some note – Abraham Lincoln.  In 1862 Lincoln said the following: “The money powers prey upon the nation in times of peace and conspire against it in times of adversity.  It is more despotic than a monarch, more insolent than autocracy and more selfish than a bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes.  I have two great enemies, the Southern Army in front of me and the bankers in the rear.  Of the two, the one at the rear is my greatest foe.”

Lincoln also appears to have said (although some dispute it): “I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country…..corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”  Imagine what Lincoln might say today.

Given Lincoln’s sentiment about the bankers and money power of the country, it would seem to beg the obvious question: did it play a role in, or was it the reason for, his untimely death at the hands of John Wilkes Booth?  The international bankers clearly disliked Lincoln after he managed to get the Congress to pass the Legal Tender Act in 1862 that empowered the US Treasury to issue paper money called “greenbacks.”  Lincoln needed this legislation after he declined to pay the bankers the usurious 24 – 36% interest rates they demanded on the loans he needed to fund his war with the South.  With the new banking law, Lincoln was then able to print up the millions of dollars he needed which was debt and interest free.  Clearly this was not what the greedy bankers wanted as they can only profit when they get their pound of flesh from financial transactions they control.  Right after the war ended Lincoln was assassinated, and shortly thereafter the so-called Greenback law was rescinded, a new national banking act was passed, and all money became interesting-bearing again.

How the Federal Reserve System Works

The Federal Reserve System is the result of the Congress and President having agreed to privatize the nation’s money system and relinquish the power that should have remained the government’s exclusive right.  That act was so outrageous the Fed had to be deliberately designed to look like a branch of the federal government to hide the fact that it’s really an all-powerful privately owned banking cartel whose member banks (including all the national ones) share in the vast profits earned from having the most important of all franchises governments alone should have – the right to print money in any amount, control its supply and price, and benefit hugely by loaning it out for a profit including to the government itself that must pay interest on the money it should never have to if it simply printed its own.  Think of what happened as the government having legalized the right to counterfeit the national currency for private gain.  It’s no exaggeration to claim this is the greatest ever of all financial scams causing incomprehensible harm with the public none the wiser.  Here’s how it works in simple terms:

The Fed was given the authority to conduct the nation’s monetary policy with the power to control the supply and price of money.  It has three ways to do it – through open market operations, the discount rate it charges member banks, and the reserve requirement percentage of member banks assets it requires them to hold and not loan out.  The Board of Governors is responsible for handling the discount rate and reserve requirements while the Federal Open Market Committee (FOMC) is in charge of the open market operations of buying or selling bonds explained further below.  Using these tools, the Fed is able to influence the supply and demand for money and thus directly control the federal funds short-term rate that’s always fixed unless the Fed wishes to raise or lower it.  Longer rates are controlled by the powerful institutional traders in the bond market.

The FOMC and How It Works

The Federal Open Market Committee is really key to the whole process of money creation or contraction.  It consists of 12 members – seven members of the Board of Fed Governors, the president of the New York Fed Bank (the most important one of all) and four of the remaining 11 Reserve Bank presidents who serve one year terms on a rotating basis.  The FOMC holds eight regularly scheduled meetings a year to assess economic conditions and decide how loose or tight it wants monetary policy to be to further its stated goal of sustainable economic growth and price stability.

The FOMC literally has the power to create money out of nothing.  It does it in a four step process:

Step 1 – The FOMC first approves the purchase of US government bonds on the open market.

Step 2 – The New York Fed bank buys them from sellers (financial markets always have an equal number of buyers and sellers).

Step 3 – The Fed pays for its purchases with electronic credits to the sellers’ banks, which, in turn, credit the sellers’ bank accounts.  These credits are literally created out of nothing.

Step 4 – The banks receiving the credits can then use them as reserves to enable them to loan out as much as 10 times their amount (if their reserve requirement is 10%) through the magic (only banks have) of fractional reserve banking and, of course, collect interest on all of it.  What a business, and it’s all legal.  Imagine how rich we might all be if we as private individuals could do the same thing.  Borrow a million from the Fed and like magic it becomes 10 times as much, and we get to collect interest on all but the 10% of it we must hold in reserve.  This is the magic of fractional reserve banking money creation and explains how powerful an economic stimulus it is when the Fed wants to enhance economic growth.

When the Fed wishes to contract the economy by reducing the money supply, it simply reverses the above process.  Instead of buying bonds, it sells them so that money moves out of the buyers’ bank accounts instead of into them.  Bank loans must then be reduced by 10 times if the reserve requirement is 10%.

Written by Stephen Lendman, (email – lendmanstephen@sbcglobal.net) who lives in Chicago. Stephen maintains a blog at http://sjlendman.blogspot.com, and writes a regular column at www.populistamerica.com

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