Originally presented as a program at an MCCA meeting.
Last meeting, we talked about human quirks that spawn central banks.
I claimed humans universally create institutions with power to curb the negatives of our nature, such as killing, theft, and fraud. In turn, that power often corrupts the Protectors to be worse than the Criminals. .
My third claim was that markets and their data are essential for human society to thrive. Unfortunately, Human Governments create misery by suppressing or distorting markets for short term gains.
We spoke of the two essentials of money. It must be a store of value, and be something most other people will accept. From there we reviewed the rise of banking and its interplay with governments.
When we finished, John Law was fleeing Paris in the 1720’s. His Mississippi Company stock bubble and central bank inflation had bankrupted France for eighty years to come.
What we did not discuss was that Briton had an identical South Seas Company stock fraud at the same time. When that collapsed, there was also widespread misery. However, the British did not inflate their money in response. They bore the pain, and growth resumed in a few years.
Two identical events, two different outcomes. Please hold that thought for our conclusion tonight.
The Constitution mentions money only two times. Section 8 permits Congress to coin money and regulate its value. Section 10 denies states the right to coin or to print their own money. The framers rejected a clause to give Congress authority to issue paper money.
At that time State banks printed notes of credit against gold & silver deposits. Most of them issued notes in excess of their metal holdings. This is called fractional reserve banking by its apologists, and criminal fraud by others.
These notes were often discounted and counterfeited. Bank failures were frequent. US Treasury deposits went to banks of Political Favorites.
Alexander Hamilton convinced President Washington and Congress to set up a federal bank based on power to tax, borrow money, and regulate commerce. This Bank of the United States got 20 year charter in 1791, modeled on the British central bank.
It was capitalized with Government debt, with power to regulate state banks, transfer reserves to prop up teetering banks, and be the depository of US Treasury funds.
State banks resented the regulations and competition. They fanned concern about the US Bank’s 70% foreign ownership. This resistance, plus constitutional questions, and suspicion of banking killed the US Bank in 1811.
State banks notes in circulation exploded. Blacksmiths, barbers and bartenders issued their own notes. By 1816, consensus emerged to charter the Second Bank of the U.S. It was plagued with poor management and fraud. Still, in 1819, the Supreme Court upheld the Second Bank as constitutional.
It gradually regained credibility. However, President Andrew Jackson vetoed the Bank’s charter’s renewal in 1836. Alas, we have not heeded insights he shared in his veto message. A couple of sentences – Experience should teach us wisdom. Most of the … dangers which impend over our Union have sprung from an abandonment of the legitimate objects of Government by our national legislation… We can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government, to the advancement of the few at the expense of the many.
From 1837 to 1862 the only banks in the U.S. were those chartered and regulated by the states.
In 1837, Michigan passed a banking act soon imitated by other states. It granted banking charters based on established criteria, rather than acts of the state legislature
It was called “free banking,” but a bank had to purchase state bonds as collateral. Banks also had to redeem their notes in gold or silver coin when requested. State bank examiners could close banks with inadequate coin reserves. However, here is one account of how that worked.
A group of Michigan banks pooled reserves. These were transferred from one bank …to the next in advance of the examiner as he made his rounds. Gold coins were given a more impressive height by a larger layer of ten-penny nails below.
Depositors got a proportional share of closed bank’s assets, but that was often worthless. A New England bank closed with $500,000 in notes and $86.48 of coin in hand.
A survey of 709 “free banks” from 1838-1863 shows an average bank lasted five years. Most failures stemmed from price declines of state bonds they had to hold. When bond prices fell, loans were called, the money supply sank, and bonds fell more. This volatility would be exploited to renew federal banking .
However, private initiatives were evolving to offer deposit insurance, clear funds between banks, and make short term loans to banks for seasonal surges. Large banks monitored reserves of small banks, and effectively created well-audited reserve requirements.
By 1863 as the Federal Government was in panic mode over the cost of the civil war. Borrowing money, raising taxes, and paying Troops with worthless paper “Greenbacks” had fallen short of war requirements.
There was no national currency to inflate, or Federal banks to be forced to buy Federal debt. The National Banking Acts of 1863 and 1864 got rid of those “problems.”
The Banking Acts allowed National banks if they held Federal Treasury debt as reserves. The Bureau of Engraving was established to print uniform banknotes. Banks got these notes according to the value of Treasury war debt they held.
To goose this printed money engine, a 10% tax was imposed on competing state bank notes. Eventually, the US Constitution was gutted by laws dictating US Government paper money could not be refused. Contracts requiring gold or silver payments were declared illegal.
Fluctuation of treasury debt value caused the same instability as state bonds had earlier. A 1907 Wall Street panic was the worst depression in the country’s history. Movement for banking reform swept Wall Street bankers and associated Politicians. These people were not popular, so they held a secret planning meeting on Georgia’s Jekyll Island in 1910.
Conspiracy Buffs overestimate the significance of the meeting. Wall Street wishes were well known. Their plan was rejected by Congress. However, a revised version would soon be implemented.
In 1913, American banks feasted on loans to England to finance war with Germany. Everyone knew the war would be won in a few months. Everyone was wrong. New war technology and the Spanish Flu epidemic decimated British troops. They lost 57,000 troops in one day of a failed offensive. Their war metastasized into a static nightmare of massive opposing entrenchments.
President Woodrow Wilson was an obscure option to become President. He had been cajoled, supported, and financed by Bankers. Wilson supported a new Federal Reserve Bank scheme to backstop overextended banks. This 1913 Federal Reserve system morphed into the one we have today.
With the Federal Reserve system at their back, Banks also made massive loans to finance American exports to Great Briton. Despite fabricated quotes, Wilson was proud of this creation. He campaigned for a second term on promise to keep America out of European war.
Shortly after the 1916 election, his Banker friends convinced him to break his pledge. Wilson realized war powers could override constitutional restrictions he loathed. His agencies seized control of American industry, and jailed anyone who criticized. He dreamed Federal Reserve money creation would finance victory, plus a new world government modeled on his vision of Elite social order.

The new Winged Liberty Head or “Mercury” dime symbolized this growing American duality. The obverse gives lip service to liberty. The reverse shows the Fascia. The bundle of rods created a mighty battleaxe superior to the strength of its parts. This was Rome’s symbol for subordination to the greater good of the state.
American troops were appalled by the squalor and near-certain death of trench warfare. One aspect was trip mines between opposing trenches. A path could be cleared at night by probing for mines with bayonets. To be useful for an attack, the path had to be marked. Rolling out chicken wire was the answer. It also kept boots from sinking into muddy soil. The next American innovation was 12 gauge shotguns firing buckshot. The shot pattern did not require precise aim while charging. When they reached a trench, buckshot was horribly effective. Thus, England, and Wilson’s bankers, were bailed out. Toward the end of the war, Germans claimed shotguns in battle to be a war crime.
The Federal Reserve Act created 12 regional banks. Originally, each regional bank was responsible for the economic needs of its area. Its stock was owned by Commercial banks in its district, and governed by a board of nine. Member banks elected three of their own, plus three non-bankers to the board. That board picked three more directors and appointed one chair.
Franklin Roosevelt’s thirst for money and control conflicted with Member bank interests. Federal Reserve authority was transferred to a twelve member Federal Open Market Committee. Politicians appoint seven members. The 12 regional bank Chairs are on the committee, but only five can vote. This insures control by Political appointees.
The Reserve Banks distribute currency, act as bankers’ banks, and peddle Federal government debt. Since 2009, they hold massive piles of Federal debt, paid for by bookkeeping entries. They loan Billions to foreign central banks. The Fed has around 19,000 employees, with average annual salary and benefits of $125,000, Their $2.5 Billion payroll is not controlled by any elected authority. Not included are congressionally mandated committees yielding hundreds more jobs for friends of Bankers, Washington insiders, and Political Loyalists.
The federal funds rate is the most publicized Federal Reserve tool. Like their Catholic counterparts selecting a Pope, Federal Reserve central planners believe they are supremely wise. The interest rates they arbitrate squelch market rates that would signal excessive government spending and faulty bank policy.
Their worst distortion is barely reported. That is, counterfeiting money to maintain an annual 2% inflation. Remember, inflating away Government over-promises and war expense with fake money is the core purpose of Central banks.
This is double-edged theft from America’s workforce. The only force keeping the Fed shell game alive is the awesome worldwide surge in market efficiency. Our Workers, managers, innovators, and risk-takers should be rewarded with falling prices for that achievement. Deflation is the normal state of a productive economy. What is the cost?
Assume a modest annual 2% natural deflation rate. That creates a 4% spread against Fed inflation of 2%. Based on the average American annual wage of $26,700, every American worker loses $170,700 over a 50 year work span. That is $3,408.00 per year. Robbing $3,408.00 from 125 million plus workers each year makes Politicians and their Cronies very, very happy.
Worse is the change in societal attitudes spurred by inflation and suppressed interest rates. It incentivizes borrowing instead of investment. Good for Banks, bad for consumers. Inflation promotes consumption over frugality. Inflation undermines long term financial planning and reserves. If you are concerned about CO2 emissions, a deflationary economy generates far less carbon.
There are two certainties about our Federal Reserve Bank. The first is, market forces will eventually overpower Federal Reserve distortions. The second certainty is that no one can predict what form that reckoning will be, or when it will happen.
It could be the long-predicated runaway inflation that eventually destroys our monetary holdings. That could set off war to distract public ire, or cause a breakdown in our social order.
Alternate options like blockchain technology could erode away the Fed’s ability to manipulate.
There could be a non-violent political reset away from government distortion like that enjoyed by Sweden, New Zealand, and Singapore.
The continuing accumulation of human ingenuity and resulting efficiencies could offset Fed destruction for decades to come.
Our only hope is to prepare for each of these possibilities and have a good life. There can be no finer resource on this journey than the knowledge and integrity of the people like those in this room tonight.