How do you regard the Federal Reserve?

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IT’S A PYRAMID SCHEME THAT COULD DESTROY AMERICA
Sunday, September 12th, 2010

“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”—Former Federal Reserve Chairman Alan Greenspan in a speech to the Economic Club of New York, 1988

by Ellen Brown

IF YOU’VE NEVER REALLY UNDERSTOOD THE FEDERAL RESERVE but were too embarrassed to ask, don’t worry. Hardly anybody understands it, and the Federal Reserve (or “Fed”) likes it that way. “Fed speak” is a term coined to describe its incomprehensible utterances. Why is the Fed so obscure? To conceal the fact that America’s banking system is largely sleight of hand. If you could see what was really going on, you might be reluctant to play the game. The Federal Reserve is not actually “federal,” and today it keeps nothing in “reserve” except government bonds, which are basically IOUs from our Treasury. The Fed’s Web site says it is a “public-private hybrid,” but not one share of its stock is owned by the public. Each of the 12 Federal Reserve branches is owned by its member banks, which get a guaranteed annual 6% dividend on their stock. The Fed is authorized under the Federal Reserve Act to print and lend its own Federal Reserve Notes (dollar bills) to the government in return for government bonds. Federal Reserve Notes are backed by nothing but “the full faith and credit of the United States.”

And that is where the sleight of hand comes in: The Fed is printing our money and lending it back to us. Acting as our government’s bank, the Federal Reserve gives us cash in exchange for government bonds. That means our money is backed by nothing but our own national debt!

A private bank deceptively called “the Federal Reserve” has been awarded the ultimate franchise: the ability to create our crucial medium of exchange, the oil that turns the wheels of production and allows goods to flow in trade. The ability to create also means the ability to restrict and control.

Congressman Charles Lindbergh Sr. (father of famed aviator Charles Lindbergh Jr.) opposed passage of the Federal Reserve Act in1913. He warned Congress: “[The Federal Reserve Board] can cause the pendulum of a rising and falling market to swing gently back and forth by slight changes in the discount rate, or cause violent fluctuations by greater rate variation, and in either case it will possess inside information as to financial conditions and advance knowledge of the coming change, either up or down. This is the strangest, most dangerous advantage ever placed in the hands of a special privilege class by any Government that ever existed. … The financial system has been turned over to…a purely profiteering group. The system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people’s money.”

Except for coins, which make up only about one ten-thousandth of the money supply, the entire U.S. money supply is now created as a debt to the private Federal Reserve and the private banks it backstops. The Fed, our government’s banker, plays the same game private retail banks play with us. The banks create money out of thin air, then say we owe it back to them with interest.

Modern banking is basically a shell game, in which “debt” is called “money.” The money is then moved from shell to shell. The Federal Reserve was instituted in 1913 to keep the shell game going by moving the elusive peas to whichever shells needed them at any one time. The shell game dates back to the 17th century, when goldsmiths started giving out paper receipts for the gold entrusted to them for safekeeping. Other customers wanted to borrow gold, but most customers preferred the paper receipts to the gold itself because they were easier and safer to carry around. The goldsmiths soon discovered that only about 10% of the customers would demand actual gold at any one time. That meant the goldsmiths-turned-bankers could safely lend up to ten times as many paper notes as they had gold.

Although nine of the ten notes were actually counterfeit, this dubious practice was sanctioned as “fractional reserve lending” and became the means by which money has been created by banks ever since.

The system was formalized in 1694, when a privately owned banking corporation called the Bank of England was allowed to lend its banknotes to the Crown. The bank was chartered by King William III, who never had to pay these loans off. He just paid the interest on them. Whenever he needed more money, the bank printed more cash, and the game continued. (This is how ballooning deficits are still created.) King William III and his successors got a ready source of money and a national money supply out of the deal, but it was at the cost of inextricable debt to a private banking cartel, which gained the power to manipulate and control the money supply for its own purposes.

Why would the king give the bankers so much power? Because they were the ones who made him king in the first place! Meanwhile, back in the American colonies, a competing paper money system was devised, in which paper notes called “scrip” were issued by local governments. These notes, too, were basically receipts. But rather than representing private gold, they were receipts for the labor of soldiers and civil servants and for goods delivered to the government. The receipts traded in the community as money.

The most efficient of these systems was in Benjamin Franklin’s colony of Pennsylvania. The provincial government owned a bank, which made loans to farmers at 5% interest. The government also spent some money directly into the economy. This money came back to the government as principal and interest and was recycled into more loans. During the quarter-century that this system was in place, the citizens paid no taxes(because the revenue that came back to the government loan office provided adequate funds), they had no government debt, and price inflation did not occur. If more money supply was needed to keep servicing the debt, the bank printed it.

But there were 13 different systems in the 13 colonies, and some of these paper currencies were inflated from overprinting. When British merchants complained that they were getting paid in money that wasn’t holding its value, the king issued an edict stating that the colonists could no longer issue their own money. They had to pay their taxes in the king’s money—gold, or Bank of England notes backed by gold. Since the colonists did not have this form of money, they had to borrow it from the British bankers, putting them heavily in debt. The farmers started losing their farms, the economy sank into a severe depression, and the colonists finally rebelled and set up their own nation.

But their paper scrip was so heavily counterfeited during the Revolutionary War that it lost its value, and the Founding Fathers became disillusioned with it. Rather than blaming the British, who had done the counterfeiting, they blamed paper money itself. They could not agree whether to give the new government the power to issue its own paper money, so they just left that key feature out of the Constitution.

For the next century, bankers largely funded from abroad tried to impose on the country a private central bank modeled on the Bank of England. It would have the power to issue its own banknotes and lend them to the government at interest. But astute politicians kept seeing through the ruse.

Thomas Jefferson, campaigning against Alexander Hamilton’s privately owned Festus. Bank, helped keep its charter from being renewed. President Jackson railed against the Second U.S. Bank and blocked renewal of the charter. President Lincoln defied the bankers who wanted 24% to 36% interest on loans to fund the Civil War and reverted to the government-created paper money of the American colonists, which allowed him to win the war. During the second half of the 19thcentury, Greenbackers, Populists and other money reformers fought vigorously for the people’s control over the money supply.

William Jennings Bryan, the Populist candidate for President in 1896 and 1900, said in his famous “cross of gold” speech: “We say in our platform that we believe that the right to coin money and issue money is a function of government. … Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson…and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business.”

Bryan lost his bid for the Presidency, but he continued to campaign in Congress for government-issued money. In 1907 a particularly bad bank panic convinced a gullible public that the country needed a central bank to stop future panics. Bank runs had occurred regularly during the 19th century, when people—realizing that there was not enough gold to back their notes—all rushed to claim their gold at the same time. Robert Owens, a coauthor of the Federal Reserve Act, later testified before Congress that the banking industry had conspired to create a series of financial panics in order to create a popular demand for “reforms” that served the interests of the financiers.

The bankers’ bill for a central bank had to overcome stiff opposition in Congress, led by William Jennings Bryan. He said he would not support any bill that resulted in private money issued by private banks. He insisted that Federal Reserve Notes must be Treasury currency, issued and guaranteed by the government. To get their bill passed, the Wall Street faction changed its name from the Aldrich Bill to the Federal Reserve Act and brought it three days before Christmas, when Congress was preoccupied with departure for the holidays.

In a spirit of apparent compromise, the legislators made a show of acquiescing to Bryan’s demands. The bill was so obscurely worded that no one really understood its provisions. Bryan bought it, saying happily, “The right of the government to issue money is not surrendered to the banks; the control over the money so issued is not relinquished by the government.” That was what Bryan thought, but while the national money supply would be printed by the U.S. Bureau of Engraving and Printing, it would be issued as an obligation or debt of the government, a debt owed back to the private Federal Reserve with interest. And while Congress and the President would have some input in appointing the Federal Reserve Board, the board would work behind closed doors with the regional bankers, without Congressional oversight or control.

The Wall Street faction succeeded the same year in passing the 16th Amendment, authorizing a federal income tax. The tax was to be paid directly to the Federal Reserve to cover the massive interest bill that would soon be incurred by the government for borrowing its own money, in the form of credit, from the privately owned Fed.

All in all, it was a huge coup for the bankers and their colleagues in Europe. In 1934, amid the throes of the Great Depression, House Banking and Currency Committee Chairman Louis McFadden charged on the Congressional Record: “Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory moneylenders. … These 12 private credit monopolies were deceitfully and disloyally foisted upon this Country by the bankers who came here from Europe and repaid us our hospitality by undermining our American institutions.”

If the purpose of the Fed was to backstop bankruns, it did not work very well, since the largest bankrun in history occurred in 1933. But that did not prompt Congress to disband this privately owned banking club with a monopoly on the right to create money. Instead, the dollar was taken off the gold standard, which had required that real gold be handed over to people demanding it. From then on, the Fed had the power to inflate its way out of bank crises just by printing the money its member banks needed to cover shortfalls at the teller’s window.

And inflate the Fed did. Since banks created the principal but not the interest needed to pay back their loans, debtors had to continually be found to take out new loans that the banks could charge interest on. It was the only way to keep the game going.

The banking scheme became not only a shell game but a pyramid scheme, which spread around the world until it ran out of creditworthy borrowers. It reached its mathematical limits in 2007, with the collapse of a housing bubble created by the Fed when it drastically lowered interest rates in 2001.The bubble burst when the Fed progressively raised rates after 2004. The Fed and the taxpayers have bailed out the Wall Street bankers, who are now extracting some of their biggest bonuses ever from market speculation. But Wall Street has largely shutoff the credit spigots to Main Street, forcing businesses to close and driving millions of homeowners into foreclosure and bankruptcy.

The banking scheme is a confidence game, and today confidence is wearing thin. Surveys show that75% to 80% of Americans are in favor of passing H.R. 1207 and S604, the House and Senate bills to audit and investigate the Fed. The jig is up. It’s time for a new game with new rules.

Ellen Brown is an attorney in Los Angeles and the author of 11 books. In Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free she shows how a private banking cartel has usurped the power to create money from the people themselves, and how We the People can get it back. Her Web site is WebOfDebt.com.

Greenspan ran the federal reserve for two decades. I don't know what basis you'd invalidate his work, other than the current recession.(which at worst, only would invalidate the last 5 years)

That being said, anti-fractional banking positions are uber-fringe. I mean, the simple issue is that a fractional reserve bank is simply one that allows you to store money with it, in exchange for you letting that bank lend your money. On the face of, there is really nothing wrong with this. It's not a special invention. You can easily create this kind of agreement.

The simple issue is that fractional banking is just a way to allow for unused resources to be allocated to larger investments, instead of frittered away on present consumption. It reduces the cost of investing. Additionally, there is no fraud. The Federal Reserve's actions are simply ways of increasing the money supply, which is to help lubricate the economy. If we had a gold standard, it would likely be deflationary and volatile, because the long-run growth in gold is not going to match the long-run growth of the economy, as the economy's growth is probably less bounded than the amount of gold, and because the amount of gold can fluctuate based upon changes in the supply(like better mining techniques or a gold rush) or just in changes in demand for gold(gold is a metal with relatively unique properties and a relatively unique societal position). By having fiat money, we avoid these issues. The real need in money is to have money tied to what the economy needs, which is a very complicated issue, but the gold standard will not help.

(Also, the author's criticism of the Federal Reserve in 1933 really is quite questionable. There's a huge debate on monetary issues of the time, but the simple issue is that most people think that if the federal reserve were looser, the economy would not have crashed so dramatically. Debates can get complicated on this issue though.)

Didn't he encourage people to take out second mortgages so that they could go shopping?

Thanks very much for the explanations. But, why doesn't the other side recognize the problems with the gold standard? Is it a matter of prefering an economy that is deflationary and volatile, over one where the government (or the Federal Reserve) might have excessive control over things?

Are you talking about something he said? I'd need a quote. He's just a guy who has authority over the interest rates in the economy. Nothing in his position entails advocating second mortgages.

Greenspan: Housing Market Bubble Bursting 'Most Unlikely'
Realty Times
by Broderick Perkins

WASHINGTON, D.C. - Most homeowners -- 75 percent of them -- have a 20 percent or greater equity stake in their homes and that's plenty to cover a significant drop in home prices.

However, the vast majority of homeowners needn't fear big price drops because such an event will likely occur only locally. Economic diversity holds sway over statistical models that predict a nationwide home price drop.

That's according to Federal Reserve Chairman Alan Greenspan who in a recent speech repeated a refrain that punches holes in theories that the housing market is an overinflated bubble about to burst.

"These concerns cannot be readily dismissed. Debt leverage of all types is often troublesome when one judges the stability of the economy. Should home prices fall, we would have reason to be concerned about mortgage debt; but measures of household financial stress do not, at least to date, appear overly worrisome," he said in a speech before the America's Community Bankers Annual Convention this week.

Greenspan said 75 percent of all outstanding first mortgages were originated with a loan-to-value ratios of 80 percent or less and when all mortgages are considered the loan-to-value ratio is about 45 percent, giving the nation, as a whole, a 55 percent equity stake in residential real estate.

"It would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity," he told conventioneers.

Greenspan said housing price bubble theories also assume there is too much speculation in the market and that home buyers are looking at homes as get-rich-quick investments, but in reality expensive buying and selling fees and the need to have a roof over one's head prevent such conditions.

He said investors accounted for only 11 percent of the total home mortgage originations in 2003 and represent a small fraction of the overall housing market.

"Overall, while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity," Greenspan said.

He did voice concerns about the rapid run up in household indebtedness which has outpaced income growth. And the chairman does agree that home price appreciation will slow down from its frenetic pace of recent years.

"Most analysts, even those who do not foresee a mounting bubble, anticipate a slowdown in both home sales and the rate of price increase...If house turnover and price increases both slow, and presumably mortgage debt extensions on new homes do as well, increases in home mortgage debt will slow. Outright declines in mortgage debt seem most unlikely. Home mortgage debt has increased every quarter since the end of World War II."

He also said:

One percent of the average annual growth of home mortgage debt comes from renters who have become homeowners since the early 1990s.
Information technology-driven lending improvements has enabled more underserved borrowers to buy homes without significantly increasing the number of households with over-extended indebtedness.
Recent higher debt-to-income ratios "some of which is more statistical than real" has only modestly increased the level of financial strain on households.
Persistently elevated levels of bankruptcy indicates pockets of distress in the household sector, but only to a minimum.
Most households are financially stable. The Federal Reserve's measures of financial stability, the debt-service ratio and the financial obligations ratio rose during the 1990s, but the debt-service ratio stabilized in the past three years and the financial obligations ratio has dropped since 2002. Much of that is due to low mortgage rates which allow homeowners with equity to buy more for less.
"Indeed, the surge in cash-out mortgage refinancings likely improved rather than worsened the financial condition of the average homeowner. Some of the equity extracted through mortgage refinancing was used to pay down more-expensive, non-tax-deductible consumer debt or to make purchases that would otherwise have been financed by more-expensive and less tax-favored credit," Greenspan said.

"In addition, a significant decline in consumer incomes or house prices could quickly alter the outlook; nonetheless, both scenarios appear unlikely in the quarters immediately ahead. If lenders, including community bankers, continue their prudent lending practices, household financial conditions should be all the more likely to weather future challenges," he concluded

My (limited) understanding is that there's nothing "federal" about the Federal Reserve. It's a giant private bank that is controlling our currency and manipulating interest rates. Doesn't sound good to me.

It seems like the Reserve is a private business doing the government's job. Private businesses only exist to make profits, not to look after the interests of the nation. Plus, by printing money and setting interest rates, the Reserve is controlling (financially) the government. That's too much power.

Well let's be clear, a great deal of economic activity takes place on the basis of creditworthy relationships.

If my promise to pay is good enough for the bank that holds my mortgage and issued my credit card, and if their assessment of my credit worthiness is good enough for the shareholders of that bank to continue their investment, then why is that any different for the federal reserve?

The investors of the world see the United States as a good bet. They believe that US government debt is a reliable investment vehicle, and they buy dollars as a result.

If the issuance of US currency was truly a matter of sleight of hand, as the doubters are so fond of trying to maintain, then why would anybody ever buy US dollars? Why wouldn't you just put your money in gold and commodities futures?

It's an old cliché that a thing is worth what people will pay for it. And people are clearly willing to pay for US dollars. So that suggests to me that the fed is not so unreliable as others would like to believe.

I have the same problem with the Federal Reserve that I have with most major unions today - ie the power to accountability ratio is completely out of whack.

The members of the Board of Governors are nominated by the President of the United States and confirmed by the U.S. Senate. By law, the appointments must yield a "fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country," and no two Governors may come from the same Federal Reserve District.

The full term of a Governor is 14 years; appointments are staggered so that one term expires on January 31 of each even-numbered year. A Governor who has served a full term may not be reappointed, but a Governor who was appointed to complete the balance of an unexpired term may be reappointed to a full 14-year term.

Once appointed, Governors may not be removed from office for their policy views. The lengthy terms and staggered appointments are intended to contribute to the insulation of the Board--and the Federal Reserve System as a whole--from day-to-day political pressures to which it might otherwise be subject.

In addition to serving as members of the Board, the Chairman and Vice Chairman of the Board serve terms of four years, and they may be reappointed to those roles and serve until their terms as Governors expire. The Chairman serves as public spokesperson and representative of the Board and manager of the Board's staff. The Chairman also presides at Board meetings. Affirming the apolitical nature of the Board, recent Presidents of both major political parties have selected the same person as Board Chairman.

The Congress sets the salaries of the Board members. For 2012, the Chairman's annual salary is $199,700. The annual salary of the other Board members (including the Vice Chairman) is $179,700.

I have the same problem with the Federal Reserve that I have with most major unions today - ie the power to accountability ratio is completely out of whack.