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Independence Is Just a City in Missouri

Editor’s Note: In March 2005 David Dittman, associate editor of Canadian Edge, reviewed Murray Rothbard’s The Case against The Fed. The book was published in 1994, a year before Rothbard’s death and is arguably fresher and more newsworthy than when it was written--a must read for investors interested in what could be in store for the US economy down the line.

Both the book and Dittman’s review serve as a reminder that the long-term consequences of Alan Greenspan’s actions when he headed the Federal Reserve. Enchanted by the so-called maestro’s music, few listened to the critics and were surprised by the credit crisis. Don’t make the same mistake again.

Independence Is Just A City in Missouri

By David Dittman

In fall 1910, six men set forth from New Jersey, bound for Georgia on what turned out to be arguably the most bountiful “hunting trip” in the history of mankind. Traveling under assumed names ostensibly in search of ducks, Senator Nelson Aldrich (R-RI), Henry Davison, Paul Warburg, Frank Vanderlip, Charles Norton and Professor A. Piatt Andrew emerged from their one-week jaunt with the draft legislation that would become the Federal Reserve Act of 1913.

By the way, the sextet jammed out this foundation for a central bank at the plush Jekyll Island Club, owned by one J.P. Morgan.

The Fed is now widely regarded--by professors, politicians and the public--as an “independent” institution. But the story of its founding and the conduct of its business, as recounted by Murray Rothbard in The Case against the Fed, published by The Ludwig von Mises Institute, explodes that common conception.

Rothbard, who passed away in 1995, was dean of the Austrian school of economics. The Austrian school, founded by Ludwig von Mises, is anti-statist and pro-free market and advocates sound money. The establishment of the Federal Reserve and the consequences it spawned--an alliance of finance and government, fractional reserve banking, creation of money by fiat, debasement of the currency, ever-growing federal deficits, constant inflation--violate all three of these principles. 

In the interest of establishing a more “elastic currency,” competing titans J.P. Morgan and John D. Rockefeller established a united front on the central bank question at the end of the 19th century. Coincidentally, in Rothbard’s history this marked the end of robust ideological competition between Republicans and Democrats and the onset of financier domination of equally statist political parties.

What Morgan and Rockefeller, through their respective agents, angled for was the cartelization of banking with its foundation in a US central bank. While the first attempt failed (The Fowler Bill of 1902), the Morgan and Rockefeller forces had manufactured a “grass-roots” movement in their favor. Their lieutenants marshaled the support of key academics and non-financial businessmen to educate the public via carefully placed news articles, opinion pieces and speeches.

The events at Jekyll Island--drafting the legislation and creating the structure--represented step one in a two-step process to establish the banking cartel. Step two involved controlling the personnel who would implement and manage it. Those who crafted the legislation, by their professional associations, fell neatly into either the Rockefeller or Morgan camps: Aldrich, Warburg and Vanderlip (Rockefeller) and Davison and Norton (Morgan). Piatt had a foot in each camp.

The Federal Reserve Act, with only slight variation from the Jekyll Island draft, passed in December 1913 and took effect in November 1914. According to Rothbard,

The new Federal Reserve System had finally brought a central bank to America: the push of the big bankers had at last succeeded…the Fed was given a monopoly of the issue of all bank notes; national banks, as well as state banks, could now issue only deposits, and the deposits had to be redeemable in Federal Reserve Notes as well as, at least nominally, in gold…with the prestige, power and resources of the US Treasury solidly behind it, it could inflate more consistently than the Wall Street banks under the National Banking System, and above all, it could and did, inflate even during recessions…and it could try to keep the inflation going indefinitely.

The new rulers of this system came from the Morgan camp. Benjamin Strong, a protégé of Henry Davison, the number two partner of the Morgan Bank, filled the critical position of Governor of the New York Fed. Strong was the sole agent for all open market activity of the regional Federal Reserve Banks. When the US entered World War I, Strong further consolidated power as Secretary of the Treasury William Gibbs McAdoo (once a failing railroad man bailed out by Morgan) essentially appointed him the sole fiscal agent for the US Treasury by deviating from long-standing practice and depositing all US funds with the Fed.

In an April 1978 article in the Journal of Monetary Economics the late Robert Weintraub showed how the Fed fundamentally shifted its monetary policy course in 1953, 1961, 1969, 1974, and 1977--all years in which the presidency changed hands. These varying rates of monetary growth all occurred under the same Fed Chairman, William McChesney Martin. 

Once upon a time, the former jazzman now carrying out the work of the Jekyll Island sextet, Alan Greenspan, was a Misean (a “follower” of Ludwig von Mises). In 1966, Greenspan wrote:

[G]overnment deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which--through a complex series of steps--the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold…In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.

Oh what a difference a day makes.

David Dittman is Managing Editor of KCI Investing, Associate Editor of Canadian Edge and Co-editor of Maple Leaf Memo.

Disclosure: no positions