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the bank's attempted to organize during the latter part of the 19th century trying to put Andhra Bank under the strains of war the government did assist in the 1860s under the national currency and banking acts these efforts actually only allowed for more credit expansion made the system more unstable and the panics continued at a faster rate there was a very prominent banking family during this time by the name of Morgan in the end of the 19th century in the beginning of the 20th century the patriarch was JP Morgan he was all too aware of the limitations and risks posed by the current banking system even his the largest and most powerful bank in America could be destroyed by a bank run like any other another banking family emerged after the Morgans the name of the family was Rockefeller the patriarch of this family was JD rockefeller Rockefeller started making his fortune in the oil business he became amazingly wealthy drilling black gold but even he was lured into the easy gains possible in the banking industry there was a major banking panic in 1907 that nearly brought Wall Street to its knees the story goes that the only thing that prevented the system from a complete crash was JP Morgan who acted as lender of last resort recapitalized the banks and halted the bank run there's evidence that the initiation of the crash was actually planned by mr. Morgan whether by design or happenstance the panic of 1907 provided an opportunity for the banking industry to take a page out of Nicholas Biddle's playbook they would attempt to persuade the public as well as political opinion to insist that the only answer to panics such as the one in 1907 was a central bank a central bank would be a governmental solution and under the control of the government after all it was JP Morgan's Bank that halted the last crash what if a private entity did not have the will or the ability to stop the next crisis a governmental solution was needed or so the argument for yet another central bank one the banking interests went to work in both politics and the newspapers to attempt to put another central bank in place this scheme required tremendous coordination and a secret meeting was held between representatives from the Rockefellers the Morgans as well as senator Aldrich the political arm of the banking industry an academic from Harvard was also included in the meeting for good measure this meeting was held on Jekyll Island a resort along the Georgia coast the meeting was held under tight secrecy to the point that the representatives traveled under assumed names the point of this meeting was not to determine how to set up the bank so as to best serve the American people but to find a way to sell the idea of a central bank to the people and their representatives in the Senate and House of Representatives the meeting was denied for years afterward but eventually the truth of the secret meeting was acknowledged the Federal Reserve Act founding the Federal Reserve Bank of the United States was passed in December 1913 besides gold and silver and established the Federal Reserve Note as the only legal tender of the land private banks would no longer issue their own currency there's a quote of JP Morgan before Congress several years later that makes his own feelings of this new currency more clear Gold is money everything else is credit the Federal Reserve Bank though it sounds like a government institution and its board members are appointed by the president has shareholders just like the prior US central banks these shareholders they're not known by name are presumed to be the large American banks they are paid a dividend by law the Fed doesn't sound like any other government agency it sounds like a corporation or more descriptively since it includes all the banks working in concert a cartel the Federal Reserve Act and the currency and banking acts of the 1860s allowed for a completely new basis for the nation's money prior to that point money could be created from debt through fractional reserve bank loans but the basis for those loans was always gold and silver barring the issuance of completely unbanked fiat paper money called greenbacks during the Civil War the new Federal Reserve had the ability to create new money based only on debt for the first few years only corporate debt could be used as the basis for initial money creation a few short years later government bonds could also be used this money is backed by the entity originating the debt having the ability to pay it back so in the case of corporate debt the money would be backed by the Corporations profits considering the corporate debt based money is backed by the corporation only means of paying back its debt its profit then it's understandable that money based on government debt will be backed by the only form of revenue the government has its ability to tax its citizens isn't it ironic that earlier that year the government passed an amendment to the Constitution to be able to directly tax their citizens income yep the birth of our third central bank coincided with the income tax the creation of this new debt based money is simple a corporation or the US government wants to borrow money and issues bonds the bonds are traded for money created by the Federal Reserve and then the government or corporation spends that money into the economy voila money is created this new money is then further expanded through the normal fractional reserve banking system as the famous economist John Kenneth Galbraith said the process by which banks create money is so simple that the mind is repelled before we move on I'd like to drill down a debt based monetary system to only one and the first transaction the bank makes a loan to a merchant for a thousand dollars and like all loans it has interests we'll say five percent after one year after that year the bank attempts to collect the merchant has the thousand dollars and pays it back but since these 1,000 dollars are the only money in existence how could he ever pay back the additional $50 in interest well there is one way the bank could ask the merchant to wax the bank's floor or for some other service that the bank could pay the merchant $50 out of the original 1000 the merchant would then have the $50 to pay the bank back with so simplifying it even further the banker through essentially no effort created the money and the loan the merchant takes the loan and is beholden to provide a service to the banker this seems like a great scheme for the banker to be able to put whoever is foolish enough to take on the loan into servitude said another way the banker makes the bar his slave though there is certainly some of the scheme that has gone on allowing the bankers to once again take more than their fair share they cannot remove the thousand dollars from the economy without dire consequences as we have shown decreasing the money supply would result in a crash so to ensure that there's not a deflationary crash under a purely debt based monetary system the debt outstanding must grow each year based on the interest accrued the year before the money in the system will also grow but at a slower rate in the example above it's easy to see that when money is created the $1,000 more debt is created the $1,050 the mathematically inclined probably just had their ears perk up they will know that whenever something is growing by a certain percentage each year it sets up an exponential system granted it's based on changing interest rates but it still acts as an exponential system will show this in more detail later this requirement of debt to continually grow at a faster and faster pace is at the heart of many of the policies our nation undertook over the next century many of the policies are touted as progress but are only in place to perpetuate the debt based monetary system through ever expanding credit or loan creation think of all the governmental programs that involve loans another point should be made if a debt based monetary system must grow based on the interest rate it would put it in direct conflict with the other monetary system being used at the time precious metals gold and silver in an economy can only grow based on mine supply or by trade surplus the growth of the two money supplies are based on completely different variables this makes the two completely incompatible some different types of money can be used together and can even complement each other precious metals and debt based money do not there was a provision under the Federal Reserve Act that there was to be a 40 percent gold backing for Federal Reserve notes this can be completely ignored the reason this can be ignored is it had no real effect on how debt-based money functioned if a hundred dollars of Federal Reserve notes were created 40 of them would act no differently than gold certificates or gold itself in the autonomy this is not the case with the remaining 60 dollars of debt based money this provision was put in place to calm the concerns of some lawmakers in 1913 who may have thought this would put some kind of control as to how much money could be created but practice every time the connections to gold limited or threatened to limit the debt based money creation the laws would be changed to allow further expansion the only substantive reining in of fractional reserve banking was done by Andrew Jackson from that point in the 1830s till the Civil War the government mainly stayed neutral the currency and banking acts of the 1860s begins a trend of cooperation between the government and the banking industry with the creation of America's third central bank that trend intensifies and perpetual strengthening of debt based money fractional reserve banking and the ties between banking and government become the norm some of these events were large some small and all were portrayed as beneficial to the American people but nothing could be further from the truth to say the government strengthened the debt based monetary system might be misleading fractional reserve banking is inherently weak and prone to breaking without government help it would fail debt based monetary systems are like communism weak non-organic and without strong governmental support destined to fall apart under their own poor structure it would be more accurate to say that the government spent the next century supporting debt based money the banks in the government over the following century continually added patches to continue the credit expansion that is so vital for fractional reserve banking to continue their hands may seem forced but only in the light that debt based money and fracturing reserve banking is the only option which it clearly is not one thing that is very consistent when observing these patches is they will always directly benefit the government and/or the banks while at the same time publicly touted to be for the greater good shortly after the creation of the Federal Reserve the world fell into the largest war the world had ever seen the creation of the new central bank allowed for credit and monetary expansion in the United States similar to the central banks of Europe this credit extended by the central banks of the time financed World War one but the real effects of the new Federal Reserve occurred during the following decade as mentioned during the first world war the Federal Reserve gained the ability to purchase government debt in addition to corporate debt this was forbidden under the original structure to prevent debt monetization debt monetization is when a central bank creates money to trade for existing government debt to fund the government when rational investors will not initially it was assumed that private debt would add to the goods and services in the economy commensurate with the added money that was created when the Fed bought corporate loans this would prevent prices from increasing but when buying government debt particularly the kind fund war there would be a much better chance of price inflation some terminology also changed her in this time period the term inflation was deemed to be synonymous with price increases when the government started tracking price increases and calling the measure inflation in addition the term panic that had been used to describe a crash was replaced with recession and depression these changes probably were not a natural progression of the English language it is more likely they were changed to induce confusion about economics and the effects of increasing the money supply then came the roaring 20s which were roaring simply because it was a boom created through credit and monetary expansion brought on by the strengthening of fracture reserve banking and the introduction of a truly debt based monetary system this the largest credit created boom to that point was punctuated by a crash in the stock market this crash ushered in the Great Depression as previously discussed credit created booms are often defined by misallocation of resources but a generally accepted cause of this crash was that investors were taking on debt to buy stocks this debt is called margin debt using debt to buy any asset is also termed levering up it's called levering because if you borrow to buy assets big gains if that asset goes up in value are intensified just like the force when using a lever the other side of the coin when using borrowed money to buy assets is the losses can also be amplified if you put 20% down to buy say a hundred thousand dollars worth of stock and it drops by 20% you've just lost all of your investment not to mention you still owe the full eighty thousand dollars an interest so you can lose much more than the amount you invested this exacerbates the panicked CEL when a credit driven investment bubble begins to pop the drop in asset prices put tremendous pressure on the banks but before we delve into the banks and government's response to the inevitable crash of the roaring 20s I would like to revisit the second portion of von Mises quote mentioned earlier here's the quote in its entirety there's no means to avoid the final collapse of a boom brought on by credit and expansion the alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved I finish the quote now while we are discussing the 1920s because in the beginning of the 1920s a very prominent government of the time took the second option to ending a credit expansion the nation was the Weimar Republic also known as Germany the debt that caused the crash was imposed on them by the victors of World War one in the form of reparations the debt wasn't payable in real terms but Germany attempted to make good on those debts in a very familiar fashion they turned to the printing press the German central bank used their power to print money but France and England quickly caught on and demand of repayment of reparations in gold though in the beginning of this experiment a small economic boom did occur in Germany the conditions were right for monetary inflation to quickly cause prices to start to rise and in turn an infamous hyperinflation any Germans holding their savings in the currency lost it all an interesting development considering the Federal Reserve was in many ways modelled off the German central bank the hyperinflation destroyed the German economy for years to come and made it vulnerable to a charismatic yet dangerous and insane leader now back to the United States that abandoned further credit expansion the banks understood what the falling stock prices could precipitate into in an attempt to instill confidence a representative of the banks arrived on the trading floor on the stock exchange and began to buy stock even above market prices of the time at its essence this attempt to instill confidence was a market manipulation and like most market manipulations the attempt failed this one found faster than most the commercial banks even with their considerable resources were getting into trouble themselves and not have the ability to stem the tide of selling the one entity that may have been able to extend the boom that it created the Federal Reserve did not the real action after the crash took place in the overnmental arena one of the major reasons for this was an economist named John Maynard Keynes Keynes looked at the booms and busts that occurred throughout the history of fractional reserve banking and concluded that the booms causing real economic growth could be extended indefinitely there is no doubt that Keynes was brilliant his logic appears sound at first glance and many were lulled into believing it his thoughts did have a huge advantage over other kinds of economic thought it told the banks and government exactly what they wanted to hear his ideas boiled down to two key points first interest rates were generally too high and central banks should intervene to lower them during economic downturns the crash second during the crash the government could act as borrower of last resort to pick up the slack from the private economy until confidence was revived the opposite should be done during the booms the central bank could raise rates and the government pay back what it had borrowed during the downturn while the private sector started borrowing again the idea was the booms associated with credit expansion via fractional reserve banking could be smoothed out and the crashers' could be eliminated it was a very tempting theory but upon further examination and in practice proves to be false the huge you've managed this thought had and has was it not only enticed banks to continue their scheme it also asks governments to spend more as a necessity for economic growth now to define power power is the ability of a person or entity to give or withhold something another once or NEADS power is far from a bad thing the breadwinner in a household holds power over the family but if that person is benevolent and has the family's best interests at heart there's nothing wrong with that power there are many examples of power being held over others that isn't necessarily bad but often powers sought after by the worst among us in a capitalist society there are many examples of power but in a free-market place the powers divided purely based on voluntary transactions the economic theory put forth by Keynes require the government to take a larger role in the economy thus the government would become more powerful Herbert Hoover started to pursue some of these policies by borrowing to start public works projects and in an attempt to put the American people back to work but the central bank did not follow the second portion of Keynes's economic vision loosened monetary policy and lower interest rates in fact at times they even did the opposite and increase interest rates next we have an example of the incompatibility of a debt based fractional reserve monetary system and gold the president following Hoover Franklin D Roosevelt attempted to file came his economic cure he wanted to loosen monetary policy which means creating more money the question was had accomplished this with failing banks who didn't want to lend and potential borrowers becoming more cautious as is normal during an economic downturn thus there was no demand for loans all that while the Fed was raising interest rates this ruled out the possibility of money creation through the normal means of fractional reserve banking another means to add to the money supply was to revalue gold already in the hands of the American people if each ounce of gold and circulation was worth a percentage more in dollars than its original $20.67 the inflation of the money supply would help stave off the deflation going on in the banking system the easiest way to complete this would be to have all Americans holding gold return it to the u.s. mints for every ounce of gold that was stamped with $20 that individuals turned in they would receive an ounce of gold stamped with $35 who wouldn't sign up for that people would have flocked with their gold to have it revalue and the deflation would have quickly been halted bars would have had an easier time paying off the debt overhang this allowing the American people to retain their wealth would not be allowed instead the president issued executive order 6102 the executive order stated that all Americans were required to turn in their gold to the Federal Reserve Banks in return for their gold they would receive $20.00 in Federal Reserve notes the same value that was stamped on the gold they had turned in Americans at the time were still trusting of their government and for the most part complied but those that did not were labeled by their government to be hoarders not to mention those that did not comply faced the possibility of a 10-year jail sentence or a $10,000 fine to put that fine into perspective that equals about five hundred ounces of gold at the time or a $650,000 fine today that's a heck of a motivation in case anyone was wondering if they should or should not turn in their gold much of the nation's gold was turned into the government and as the saying goes he who has the gold makes the rules the next decree to come down was that gold was to be revalued from $20 an ounce to $35 an ounce so if the people were paid $20 an ounce for their gold and it was now worth $35 an ounce who gets the other $15 per ounce the answer was the US government in this roundabout way the government stole 43 percent of the nation's monetary wealth that was held in gold so the reason they did this necessary revaluation in this much more labor-intensive not to mention logistical nightmare fashion was so the government could gain access to a huge percentage of the American wealth they used this money as well as borrowed money to give Americans what they were desperate for work actually work for pay so they could sustain themselves this work again came in the form of public works projects government spending during a downturn was a page out of the New Economics play book written by Keynes the government gained the ability to give people what they desperately needed and thus the government gained additional power those with these government jobs were now dependent whenever a person company or government makes a person or people dependent on that entity that entities power naturally grows the other major change was in the banking system the government found a way to increase its power now the other major power in the country the bankers needed to increase theirs they came in the form of Deposit Insurance Deposit Insurance simply was the government backing the demand deposits at the banks up to a certain amount banks were failing by the hundreds in the early 30s people are losing money simply by holding it in the banking system depositors were losing the faith that is paramount in a fractional reserve banking system and something had to be done once again at the time the government was still trusted and with it backing banking deposits the doubts held by Americans were for the most part put at ease the money flows reversed and money started going back into the banks the final result was the American people were reassured by a guarantee that ultimately they were backing but the fact that the American people collectively backed their own accounts was covered by just enough steps people didn't appear to make the connection reserve requirements were replaced with capital requirements but this doesn't change the fact that we have a debt based monetary system I will still continue to use the term fractional reserve to describe our system since the change was not really material even with these patches put in place to help the people the real economy didn't recover and floundered during the 1930s perhaps these patches were not really put in place to help the people possibly it was just a power grab by those who already had a foothold so to recap the Federal Reserve was created in 1913 and supported the already established fractional reserve banking system to cause a rapid expansion in the money supply after World War one there was the predictable boom that would be expected after an expansion in the money supply the equally predictable crash after the boom happened toward the end of the 1920s the government after seizing a huge portion of the nation's wealth used that wealth as well as borrowed money to position itself as Savior increasing its power and control the banking system was also strengthened through a guarantee on deposits they were not on the hook for the American people were the banks put pressure on the government the government created the Fed the Fed and the banks created a boom and crash and after this failure both the banks and government came out stronger power is like a pie chart the pie can grow but the percentage is always equal 100 so if the banks and government took up a larger portion of that pie who lost the answer was the people and non-financial sectors of the economy lost power during this time