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the Federal Reserve System virtually controls the nation's monetary system yet it is accountable to no one it has no budget it is subject to no audit and no congressional committee knows of or can truly supervise its operations these are the words of the late professor Murray and Rothbard economist and academic vice president of the ludwig von mises institute the institute is dedicated to the ideals of a free market and sound money this program is dedicated to the memory of Murray and Rothbard and his prolific work on money and banking you for more than 20 years the living standards of middle-class Americans have steadily declined incomes have remained flat or fallen and the opportunities and security we once took for granted have begun to fade for most families one income no longer pays the bills it requires two or more incomes to afford a home paid medical and child care expenses and put children through school unless present trends change young workers are unlikely to ever live as well as their parents good jobs with the future are harder to come by education doesn't count for what it once did taxes continue to rise while Social Security is going bankrupt private pensions are no longer reliable economic volatility and uncertainty are on the rise politicians espouse numerous theories about the cause of this country's economic woes seldom however do these officials look below the surface the roots of our economic ills can be traced to central banking and our present monetary system the Federal Reserve claims to manage our money instead it makes our money worth less and less every day it is generated continuous and worsening business cycles and lowered our living standards it's really no different from a burglar in your house wanted to steal your money that's what the Federal Reserve does it appreciates your savings it takes away your economic security and it ought to be treated as an institution that does that rather than something of a Ledge benefit money is supposed to serve as a reliable standard of economic value not a source of instability until we restore sound money and take away the government's ability to debase it we have little hope of restoring the freedom and prosperity that made America great and we really have a choice and what we wanted money do we want money that's going to be losing its value every year or do we want money that's going to be gaining in value if you are happy with me your money losing value then you want the present system if you want money to increase in value than you want a gold standard what is money as the good that makes exchange possible it's the foundation of every economic activity in the earliest times people traded goods and services directly this form of exchange is known as barter that is um if a fishing tribe desired to them to have maybe week which they themselves did not produce they would seek out other individuals that produced week and then they would exchange their for fish but barter had limitations in the marketplace well actually people perceived pretty quickly problems with that direct exchange if you wanted for example fish and that you had week but the people who had fish didn't desire the week you were stuck okay unless you went out and found some other good possibly berries that everyone in that society consumed then you would trade your week for the fort for the berries in full confidence then that you could turn around and trade the berries for the fish or anything else that you desired eventually the most widely accepted goods in a society became valued for their use in indirect exchange money is simply another name for the most generally accepted medium of exchange throughout history many goods have served as money feathers from the Quetzal bird were used for exchange by the Mayan Indians up to the 15th century in Central America tea leaves compressed into bricks were traded in East Asia through the 1800s wampum shells were money to North American Indians while early American colonists traded beaver pelts which had a high value both at home and abroad metal coins first emerged in grace and Asia Minor during the 7th century BC gold and silver were valued for their use and beauty and jewelry than the decorative arts they were durable easily divisible and limited in supply these precious metals also had a high value to weight ratio making them easily transportable we might think that or we can think back to a time when when iron was used as one for example in Africa but imagine going into a into sears roebuck and trying to purchase some let's say a lawnmower for three hundred fifty dollars that would take a ton of iron rise would only take an ounce of gold in 1536 less than 50 years after Christopher Columbus set foot on American soil a Spanish mint in Mexico City struck the first coins made in the New World the silver coins eventually found their way into the British colonies great britain's mercantilist policies deliberately tried to keep precious metals out of america so the Spanish milled dollar became the unofficial currency it was often divided into eight pieces for smaller transactions hence the term pieces of eight with one quarter of the coin being two bits in 1792 Thomas Jefferson adopted the dollar as this country's official monetary unit he looked around he investigated see what were the American the dollar and so that's why that that dollar became Z stand in the United States and we went on to a gold and silver standard and start admitting gold coins of american eagle 10-hour going gone Jefferson in particular spoke eloquently of the dangers of paper money during the war for independence the Continental Congress printed vast sums of paper money out of thin air to finance the army the deluded money supply naturally depreciated to almost nothing leading to the phrase not worth a continental the people who held on to these notes who tended to be patriotic Americans concerned about what an America to be free of British British control lost everything whereas the Tories who wanted nothing to do with this American government money immediately got rid of it were benefited and pellet I Webster for the first American economist and others who looked at this saw that this paper money unpacked by my gold was extremely dangerous as early as the 16th century in Europe Goldsmith's stored gold coins for their customers for a fee and issued receipts for the gold to the depositor thus began the use of paper as money in other words if you came in and deposited ten ounces of gold for safekeeping that you got back a receipts in the amount of ten gold ounces and those receipts entitled you to instantaneously redeem that gold these receipts soon became widely accepted as a means of exchange since it was easier and safer to use the receipts for significant transactions this was the origin of banknotes as money substitutes these first bankers then took this process one step further in effect if the Goldsmith had 1,000 ounces of gold and 1,000 ounces of legitimate receipts being held by the deposit of that goal he could increase his profits by merely printing up another thousand ounces worth of receipts and lending them out okay in which case you would effectively get fifty percent reserve banking or fractional reserve banking only a fraction fifty percent of of the receipts were now backed by gold there was no longer a one-to-one ratio of paper to go now there could be three or four pieces of paper in circulation for every unit of gold in the vault these bankers were no longer simply storing or warehousing gold for a fee they were artificially inflating the money supply and loaning out these phoney receipts at interest this system became known as fractional reserve banking and was later transported to the early American colonies it formed the root of American commercial banking and ultimately the Federal Reserve System this is a fraudulent system it's not allowed in any other business if you had a grain warehouse that had loaned out the grain it was supposed to have in storage that's considered criminal a guy go to jail but the banks are the one industry that's allowed to get away with this and to profit from it Alexander Hamilton became the first Treasury secretary and in 1791 set up the first bank of the United States as america's central bank to expand the supply of paper money for the benefit of the government and the commercial banks Alexander Hamilton believed in a strong central government and he saw a central bank as one of the means by which the the government could be centralized and by which its power could be expressed thomas jefferson opposed this view he saw a central bank as an undemocratic tool of the northeastern banking establishment it was dismantled after 20 years the jefferson was an opponent of the strong central government and at all costs wanted to remove the central bank in 1816 the federal government made another attempt to set up an inflationary central bank but this second bank of the United States was denounced by President Andrew Jackson as a monster bank for benefiting a few at the expense of many they inflated the money supply which brought about a boom initially that is plus bearing to the country followed by a bust when they stopped inflating the money supply many businesses that had depended on the low interest rates that were introduced or induced by the the initial inflation went out of business Jackson succeeded in abolishing the second central bank in 1836 but by then speculators had set up hundreds of new private banks with little or no gold to back the notes they issued the nation's monetary system became more stable when the United States introduced a gold standard in 1834 the dollar was worth approximately one twentieth of an ounce of gold the gold standard was understood by by the founding fathers by Andrew Jackson and others as being money of the people that is it was a hard money a money that could not be tampered with that could not be inflated to permit government expenditures skyrocketing but by 1862 Abraham Lincoln needed to fund his invasion of the south so once again the government began to print up paper money basically the United States went off the gold standard in order to finance the Civil War and you'll find in history that almost every large war every major war has involved a departure from the golden because the gold standard puts strict limits on government financing Lincoln's notes became known as greenbacks because they were printed in green ink rather than the usual black ink on the reverse side these so-called fiat notes were deemed legal tender by the government but they were not redeemable in gold war issued tremendous numbers of greenbacks gold was still circulating with people of forced to accept these greenbacks as if they were part of a goal the government's power to print unpacked paper notes would later become the pillar of the Federal Reserve System after the Civil War the nation's monetary system became sounder when the u.s. adopted a gold standard we were back on the gold standard in eighteen seventy nine and had probably the greatest period of growth and prosperity ever in the country's history for nearly 20 years the total output of goods and services grew at an unprecedented rate of four percent per year with the reason being that come with a sound money and without the ability to manipulate the interest rate we have a lot of genuine saving and investment which then led to more capital goods and higher labor productivity in the United States in the midst of this prosperity the big industrialists and finance ears were plotting to expand their Empires with the help of government with the passage of the Interstate Commerce Act of 1887 the large railroad succeeded in blocking their smaller competitors through regulation the ICC was put in place in order to protect the the railroad owners from competition it was not the case that that is going to protect consumers or shippers in fact consumers were hurt because ultimately with higher railroad rates they were forced to pay higher prices for the goods and services that were that were shipped across the country by 1896 they were poised to do the same thing with the bank's two camps emerged as leaders in this economic war they were led by JP Morgan the world's most powerful private banker and john d rockefeller the oil tycoon morgan and rockefeller were great adversaries but despite their business differences they both favorite a central bank they wanted cheap credit and an inflated money supply to finance the expansion of their empires together they led the campaign to sell the idea to the American public which later led to the founding of the Federal Reserve if the American people got wind of the fact that this bank was not in their interests in fact they they understood that it was in the interests of the financial elites who would use it to inflate the money supply and in doing so increase their own revenues there would have been held to pay the legislation would have never passed under those conditions so it had to be sold to the American people as a way of making their currency more elastic the bank reform campaign received a boost in 1907 when there was a run on some of New York's biggest banks thanks to their fractional reserves panic spread among depositors who got wind of the bank's insolvency and tried to withdraw their money the Knickerbocker trust failed and two other institutions went to the brink of bankruptcy despite a 35 million dollar bailout from JPMorgan Wall Street swiftly adopted the fear of bank failures to sell the idea of a central bank or lender of last resort to the American public so the Federal Reserve was to be the lender of last resort in case any bank on in trouble they wouldn't have to worry making the cash from Washington DC the question is however whether it is really desirable to have such a thing as a lender of last resort the correct position appears to me that every single bank should be responsible for its own debts and contractual obligations and if banks through imprudent policy then go bankrupt this should not be considered a bad thing but in fact consider to be a magnificent thing because bankruptcies the danger of bankruptcies is precisely what makes banks adhere to sound policies bank runs and failures continued at an alarming rate in 1908 the national monetary commission headed by john d rockefeller juniors father in law senator Nelson Aldrich was set up to push for a central bank in November of 1910 under the guise of a duck hunting trip six men took a secret train ride to an exclusive private club on Jekyll Island Georgia to write a central banking act the classified gathering read like a who's who of American banking there were two Rockefeller Aldrich and Frank Vanderlip of the National City Bank of New York to Morgan men and repeat Davidson from Morgan bank and Charles the Norton president of Morgan's first national bank of new york paul warburg acute low partner and assistant treasury secretary AP at andrew who is friendly to both camps they spent a week at the luxurious club as Morgan's guests crafting the proposals that would form the basis of the Federal Reserve System it would be three years before their vision was realized just before Christmas 1913 the Federal Reserve Act was passed by congress and signed by President Wilson it established a Federal Reserve System to oversee monetary policy and regulate the commercial banks snow coincidence that the federal reserve system was established by the Wilson administration this was the height of the progressive ear a time of tremendous government expansion of special interest deals in Washington there are 12 regional Reserve Bank's concentrated in the east and the Midwest the board of governors of the Federal Reserve controls and coordinates their activities the board is made up of seven members appointed by the president even though there were 12 regional banks Wall Street soon ran the show as president of the New York Fed Morgan Protege Benjamin strong seized control of the board's Open Market Committee operations strong would remain the dominant force at the Fed until his death in 1928 the Federal Open Market Committee now based in Washington directs the feds most important ins
rument of monetary policy the purchase and sale of government securities on the open market to increase the supply of money and credit that is to inflate the Fed buys government securities from a few hand-picked firms with newly created money to tighten money and credit the Fed sells securities in this it can act on its own discretion every government wants the ability to create new money it's an alternative to raising taxes taxes as we said when they're raised tend tend to be evoked a lot of resistance among the public it's much less painless to increase the money supply the effects the negative effects don't occur until six months a year two years later at which time the increasing prices can be blamed on other factors the weather speculators and so on another device the Fed uses to control the amount of money in circulation is setting the discount rate this is the interest rate charged to member banks when they borrow short-term from the so called discount window if the Fed lowers the discount rate for its loans commercial banks will likely borrow more from the Fed this increases the amount of funds banks have to lend bank credit thus becomes cheaper as reflected in lower interest rates on bank loans and credit cards the increase in funds available for banks to lend also increases the amount of money in the economy the Fed can also manipulate the nation's money supply by raising or lowering the reserve requirement banks are required to set aside a percentage of their deposits as reserves to meet depositors demands when the Fed was established in 1913 it cut reserve requirements in half over the next four years doubling the money supply by the end of World War 1 but the feds real power lies in its monopoly to create money although the US was still on the gold standard in 1913 it was quickly eroded as the Fed continued to expand the money supply the first step was backing Federal Reserve notes by only forty percent in gold allowing the money supply to be increased two and a half times the inflationary effect of fractional reserve banking was also heightened by the central bank the commercial banks are permitted to create checkbook money on top of Federal Reserve notes that is to say the commercial banks are only obliged by law to hold reserves in the form of Federal Reserve notes of ten percent to bec all demand deposits that they have ninety percent of the demand deposits are backed by nothing the Federal Reserve System adds another inflationary layer to an already unstable banking system for example if the central bank has one hundred dollars worth of gold reserves in its vaults and a ten percent reserve requirement it can print up one thousand dollars of new notes and deposits which become the reserves of the commercial banks the commercial banks take this one thousand dollars and if they're required to hold ten percent again in reserve they can multiply the one thousand dollars into ten thousand dollars through fractional reserve loans so an inverted pyramid is created with one hundred dollars worth of gold or real money at the bottom and ten thousand dollars of inflated paper money at the top as this ten thousand dollars in new paper money circulates in the economy it drives prices up therefore reducing the buying power of ordinary citizens when they spend that money the people who get the new money first and are able to buy products with it benefit and the people who get it at the end lose because when they go to spend it prices have already gone up and so they're able to buy less and so there's a transfer of wealth and of power from some segments of the economy to others because of the actions of the central bank and basically those who benefit are the government itself big banks and government contractors and anybody is closely associated with the federal government by making enormous amounts of credit easily available the Fed can also drive down interest rates sending out the wrong signal to investors it sets in motion an unsustainable investment boom that carries with it the seeds of its own destruction it's this business cycle that is ultimately responsible for economic disasters such as the Great Depression soon after the Federal Reserve was a step the u.s. entered World War 1 once again the government temporarily abandoned the gold standard to print more money to finance the war the US government borrowed heavily and the national debt balloon from 1 billion to 27 billion dollars a sharp spike of inflation followed this set off a cycle of rapid expansion and contraction in the economy to dampen the overheated economy the Fed halted its inflation causing interest rates to nearly double over the next 18 months by 1921 the market began to recover new technology helped to increase productivity markets developed for new cars and appliances the 1920s were a period of extraordinary growth but behind the scenes much of this growth was distorted by a Fed generated inflationary credit expansion this was the Roaring Twenties this was a period of increasing affluence that hid the inflation from American economist the Fed generated bubble bursts in the Wall Street Crash of October 1929 speculators who had borrowed money to buy shares when bank credit was readily available saw the stock market lose one-third of its value bank loans totalling seven billion dollars were outstanding as the speculators defaulted on their loans bank failures spiraled and the great depression set in the positives lost their bank accounts both their savings deposits and checking deposits they saw them disappear into thin air in 1932 franklin d roosevelt was elected president and quickly implemented a new deal policy of spending us to prosperity even though we needed lower taxes and lower spending his administration would seek unprecedented amounts of money to finance its big government programs in his inaugural speech on march forth 1933 roosevelt vowed to put an end to poverty and the unemployment lines and get people back to work it didn't work the Depression got worse thanks to increased central planning FDR only succeeded in making the monetary system even less sound just after taking office the president declared afford a nationwide bank holiday absolving the bankrupt fractional reserve banks than they need to repay their depositors but before the banks reopened the Roosevelt administration had to come up with a scheme that would lead people to believe that new deposits would be safe it created the Federal Deposit Insurance Corporation tool all the public into a sense of security in reality the Federal Deposit Insurance Corporation holds just half of one percent of all the deposits it ensures but what people are counting on is that the Fed as the lender of last resort would step in and print whatever money would be necessary to prevent a massive bank run by the mid-1930s control of the fed by the New York bankers was drawing to a close the Morgan era ended when President Roosevelt who was no friend of the Morgans appointed marriner eccles as its governor Eccles a Republican from Utah moved the activities of the open market committee to Washington President Roosevelt was on hand for the dedication of a new three and a half million dollar building to house the Fed I dedicate this building today to progress to progress toward the ideal of an America in which every worker will be able to provide his family at all times with an ever rising standard of American 1933 also marked the beginning of the end for the gold standard there was no end to Roosevelt's appetite for spending on such New Deal programs as the gigantic 13 billion dollar Tennessee Valley Authority which flooded vast areas of productive farmland to provide government subsidized electricity the Works Progress Administration which spent 11 billion dollars on make-work jobs and pork-barrel public works but the US currency was tied to gold which limited the amount of money the Fed could print to pay for these costly projects so the government scrapped the gold standard for American citizens in 1933 and then Roosevelt confiscated the people's gold as in World War one the warring parties in the Second World War abandoned the gold standard to finance the war with central bank generated inflation after the war there was an attempt to use the prestige of the gold standard to establish a global inflationary system the world's financial leaders met at Bretton Woods in New Hampshire under the direction of the famous economist John Maynard Keynes their idea was to set up a new international monetary system that would have both gold and inflation under this system the US dollar would be redeemable in gold but only for foreign official institutions central banks and foreign governments at the rate of thirty five dollars per ounce all other currencies would have fixed exchange rates with the US dollar and they would be redeemable in u.s. dollars the New York Times editorialist Henry Hazlitt was one of the first to realize that this semi gold standard would not succeed even from the very beginning it was doomed to failure and this very outstanding journalist at that time Henry Hazlitt predicted a wooden work because he says the temptation will always be that the government will print more money because they will accept these dollars and they won't demand the gold and won't hold the government in check and he was absolutely right during the 1960s the US government was trying to meet the cost of massive social welfare programs at home and the vietnam war abroad by printing more money President Lyndon Johnson believed the US government could accomplish its goals without raising taxes which may have caused a taxpayer revolt in other words he could have both guns and butter we will make sure that every dollar is spent with the thrift under the common sense which recognizes how hard the taxpayer works in order to earn it but the more money the US printed the more it eroded the value of the dollar nervous foreigners began redeeming their dollars in gold as they were entitled to do under the bretton woods agreement after paying out billions in gold the US was left with 36 billion dollars worth of outstanding debt to foreign creditors and gold reserves worth just 18 billion dollars rather than stop the inflation in 1971 President Richard Nixon refused to redeem any more dollars by a directed secretary Conley to suspend temporarily the convertibility of the dollar in the gold or other reserve assets except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States it was the death knell for the Bretton Woods semi gold standard and a triumph for the Federal Reserve the dollar would no longer have even the illusion of a fixed value against other currencies it would float against them causing even more dislocation in foreign trade and massive uncertainties for businessmen worse the final check on dollar creation disappeared creating endless possibilities for inflation it's running at more than three hundred percent since 1971 thanks to the feds power to create money out of thin air and to ensure deposits no US federal budget has been balanced since it abandoned the gold standard I don't think that that's something that enhances the efficiency of our economy I believe that that the best money is a market-determined money okay such as the goals such as we had under the gold standard in order to get back to a market-determined money the Fed has to be abolished there is not now nor has there ever been any direct control over the fed by the President or Congress the meetings of the Federal Reserve Board are held in secret and nobody knows exactly what goes on if you watch the business report every night commentators are constantly speculating about what the Fed might do all eyes were on Washington today as the Federal Reserve met to decide the future direction of interest rates most economists expect the Fed to leave monetary policy unchanged it has spawned a whole industry of fed watchers who try to second-guess the Fed for the reserve has been surrounded by secrecy ever since its planning its installation and its operations to the present day and the reason is because they can't tell the truth if they told the truth that be a revolution will be a bunch of Americans they're ready to all toss them out of the building a recent attempt to open the feds of public scrutiny came in 1993 the head of the House Banking Committee representative Henry Gonzalez of Texas called for an independent audit of the feds operations he wanted the Proceedings of the open market committee videotape with the tailed minutes released within a week instead of vague summaries issued several weeks later Gonzalez also proposed that the president choose the 12 heads of the feds regional banks instead of powerful bankers predictably Fed Chairman Alan Greenspan resisted the changes what was surprising was President Bill Clinton's position he declared the reforms would quote run the risk of undermining market confidence in the bed after the mexican government inflated and devalued the peso in 1995 the mexican economy went into a tailspin alan greenspan lobbied congress and the clinton administration for a 52 billion dollar bailout as it turned out the feds member banks held as much as 26 billion dollars in mexican debt with no choice in the matter american taxpayers and savers paid the bill the congressman themselves from my experience there they're pretty naive and they don't understand that the few that have to like the chairman of the Banking Committee is aware of this and goes along with it and they and they continue to perpetuate this myth that the Federal Reserve brings about stability and they do good things for economic growth even though they're the culprits they're the ones who have caused all the problems the other ones who caused the recession the unemployment and the downsizing of big business and all the ill effects that we have to witness but their PR job is excellent because they have convinced most congressmen that they are very necessary to maintain stability and economic growth and all these wonderful things that they claim credit for it is clear that the United States cannot rely on Alan Greenspan or any other Fed Chairman to fight the chronic inflation that has wrecked our savings distorted our economy redistributed income and wealth and brought us devastating booms and busts despite the established view Greenspan the Fed and big commercial bankers are not the inflation fighters they pretend to be the Fed and it's alive banks are not part of the solution to inflation in the business cycle they are the problem itself to limit chronic inflation and boom-bust business cycles the currency must be backed 100% buy gold that would remove the feds ability to print money which amounts to no more than legalized counterfeiting instead there would be a monetary system where gold serves to anchor the dollar rather than the fiat reserves created by the Fed if we were to establish a real gold standard the average American family would benefit tremendously first of all there be more jobs better jobs more secure jobs more business opportunities for more business cycle normal recessions and depressions people savings would be secure you wouldn't have to worry if you put away money for your old age that its value would be stolen by the central bank and by the central government as they are today under a 100-percent gold standard there would be no place for fractional reserve banking for checking accounts and other demand deposits the banks would keep reserves on hand to meet depositors claims banks would receive a fee from their customers for keeping their gold in loan banking investors would hand over their money for a fixed period of time to earn interest once the gold standard is in place individual bank depositors would always have access to their money and investors would be kept informed of their balance sheet and at a national level a tight rein would be kept on government spending you have relatively price stability you have a stable purchasing power for the money you eliminate the business cycle you have reasonable interest rates rather than gyrating interest rates and you get rid of the political mani
ulation of interest rates and political manipulation of the money supply and this then preserves wealth and builds wealth and allows for economic growth it's as simple as this sound money means economic prosperity and limited government unsound money means inflation recessions and depressions and big government what sort of system do we want for our families don't we want prosperity and security that we can hand on to future generations transition to a gold standard will not be easy but as murray rothbard put it the alternative is much worse since 1980 the Fed has enjoyed the absolute power to do literally anything it wants to buy not only US government securities but any asset whatever to buy as many assets and to inflate credit as much as it pleases there are no restraints on the Federal Reserve the Fed is master of all it controls you
