Transcript for:
The Establishment of the Federal Reserve on Jekyll Island

it was primarily a fishing village with a small but Lively port for cotton and lumber it had a population of only a few thousand people but by that time the sea Islands that sheltered the coast from South Carolina to Florida already had become popular as Winter Resorts for the very wealthy one such Island just off the coast of Brunswick had recently been purchased by J.P Morgan and several of his business associates and it was here that they came in the fall and winter to hunt ducks or deer and to escape the rigors of cold weather in the North it was called Jekyll Island when The Aldrich car was uncoupled onto a siding at the small Brunswick station it was indeed conspicuous word traveled quickly to the office of the town's weekly newspaper while the group was waiting to be transferred to the dock several people from the paper approached and began asking questions who were Mr aldrich's guests why were they here was there anything special happening Mr Davison who was one of the owners of Jekyll Island and who was well known to the local paper told them that these were merely personal friends and that they had come for the simple Amusement of duck hunting satisfied that there was no real news in the event the reporters returned to their office even after arrival at the remote island Lodge the secrecy continued for nine days the rule for first names only remained in effect full-time caretakers and servants had been given vacation and a new carefully screened staff was brought in for the occasion this was to ensure that none of the servants might recognize by sight the identities of these guests it is difficult to imagine any event in history including preparation for war that was shielded from public view with greater mystery and secrecy the purpose of this journey was not to hunt ducks simply stated it was to come to an agreement on the structure and operation of a banking cartel the goal as is true with all cartels was to maximize profits by minimizing competition between members to make it difficult for new competitors to enter the field and to utilize the police power of government to enforce the cartel agreement in more specific terms it was to create a blueprint for the Federal Reserve System the story is confirmed for many years after the event Educators commentators and historians denied that the Jekyll Island meeting ever took place even now the accepted view is that the meeting was relatively unimportant and only paranoid unsophisticates would try to make anything out of it Ron chernow writes the Jekyll Island meeting would be the Fountain of a thousand conspiracy theories little by little however the story has been pieced together in amazing detail and it has come directly or indirectly from those who actually were there furthermore if what they say about their own purposes and actions does not constitute a classic conspiracy then there is little meaning to that word the first leak regarding this meeting found its way into print in 1916. it appeared in Leslie's weekly and was written by a young Financial reporter by the name of BC Forbes who later founded Forbes Magazine the article was primarily In Praise of Paul Warburg and it is likely that Warburg let the story out during conversations with the writer at any rate the opening paragraph contained a dramatic but highly accurate summary of both the nature and purpose of the meeting picture a party of the nation's greatest Bankers stealing out of New York on a private railroad car under cover of Darkness stealthily highing hundreds of miles south embarking on a mysterious launch sneaking onto an Island deserted by all but a few servants living there a full week under such rigid secrecy that the names of not one of them was once mentioned lest the servants learned the identity and disclosed to the world this strangest most secret expedition in the history of American Finance I am not Romancing I am giving to the world for the first time the real story of how the famous Aldrich currency report the foundation of our new currency system was written in 1930 Paul Warburg wrote a massive book 750 pages in all entitled the Federal Reserve System its origin and growth in this Tome he explained the results of the conference were entirely confidential even the fact there had been a meeting was not permitted to become public then in a footnote he added though 18 years have since gone by I do not feel free to give a description of this most interesting conference concerning which Senator Aldrich pledged all participants to secrecy an interesting insight into warburg's attendance at the meeting came 34 years later in a book written by his son James had been appointed by FDR as director of the budget and during World War II as head of the office of War information in his book he described how his father who didn't know one end of a gun from the other borrowed a shotgun from a friend and carried it with him to the train to disguise himself as a duck hunter this part of the story was corroborated in the official biography of Senator Aldrich written by Nathaniel Wright Stephenson in the Autumn of 1910 six men went out to shoot ducks that is to say they told the world that was their purpose Mr Warburg who was of the number gives an amusing account of his feelings when he boarded a private car in Jersey City bringing with him all the accoutrements of a duck shooter the joke was in the fact that he had never shot a duck in his life and had no intention of shooting any the duck shoot was a blind Stephenson tells us that shortly after they arrived at Brunswick the station Master entered the private car and shocked them by his apparent knowledge of the identities of everyone on board to make matters worse he said that reporters were waiting outside Davison took charge come outside old man he said and I will tell you a story no one claims to know what story was told standing on the railroad ties that morning but a few moments later Davison returned with a broad smile on his face it's all right he said reassuringly they won't give us away Stephenson continues the reporters dispersed and the secret of the strange Journey was not divulged no one asked him how he managed it and he did not volunteer the information in the February 9 1935 issue of the Saturday evening post an article appeared written by Frank vanderlip in it he said despite my views about the value to Society of Greater publicity for the Affairs of Corporations there was an occasion near the close of 1910 when I was as secretive indeed as furtive as any conspirator I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual Inception of what eventually became the Federal Reserve System we were told to leave our last names behind us we were told further that we should avoid dining together on the night of our departure we were instructed to come one at a time and as unobtrusively as possible to the railroad terminal on the New Jersey literal of the Hudson where Senator aldrich's private car would be in Readiness attached to the rear end of a train for the South once aboard the private car we began to observe the taboo that had been fixed on last names we addressed one another as Ben Paul Nelson Abe it is Abraham Pyatt Andrew Davison and I adopted even deeper disguises abandoning our first names on the theory that we were always right he became Wilbur and I became Orville after those two Aviation Pioneers the Wright brothers the servants and train crew may have known the identities of one or two of us but they did not know all and it was the names of all printed together that would have made Our Mysterious Journey significant in Washington in Wall Street even in London Discovery we knew simply must not happen or else all our time and effort would be wasted if it were to be exposed publicly that our particular group had got together and written a banking bill that bill would have no chance whatever of Passage by Congress the structure was pure cartel the composition of the Jekyll Island meeting was a classic example of cartel structure a cartel is a group of independent businesses which join together to coordinate the production pricing or marketing of their members the purpose of a cartel is to reduce competition and thereby increase profitability this is accomplished through a shared Monopoly over their industry which forces the public to pay higher prices for their goods or services than would be otherwise required under free enterprise competition here were representatives of the world's leading banking consortia Morgan Rockefeller Rothschild Warburg and Loeb they were often competitors and there is little doubt that there was considerable distrust between them and skillful maneuvering for favored position in any agreement but they were driven together by one overriding desire to fight their common enemy the enemy was competition in 1910 the number of banks in the United States was growing at a phenomenal rate in fact it had more than doubled to over twenty thousand in just the previous 10 years furthermore most of them were springing up in the South and West causing the New York Banks to suffer a steady decline of market share almost all banks in the 1880s were National Banks which means they were chartered by the federal government generally they were located in the big cities and were allowed by law to issue their own currency in the form of banknotes even as early as 1896 however the number of non-national banks had grown to 61 percent and they already held 54 percent of the country's total banking deposits by 1913 when the Federal Reserve Act was passed those numbers were at 71 percent non-national Banks holding 57 of the deposits in the eyes of those duck hunters from New York this was a trend that simply had to be reversed competition also was coming from a new trend in Industry to finance future growth out of profits rather than from borrowed capital this was the outgrowth of free market interest rates which set a realistic balance between debt and Thrift rates were low enough to attract serious borrowers who were confident of the success of their business ventures and of their ability to repay but they were high enough to discourage loans for frivolous Ventures or those for which there were alternative sources of funding for example one's own capital that balance between debt and Thrift was the result of a limited money supply Banks could create loans in excess of their actual deposits as we shall see but there was a limit to that process and that limit was ultimately determined by the supply of gold they held consequently between 1900 and 1910 seventy percent of the funding for American corporate growth was generated internally making industry increasingly independent of the banks even the federal government was becoming Thrifty it had a growing stockpile of gold was systematically Redeeming the greenbacks which had been issued during the Civil War and was rapidly reducing the national debt here was another Trend that had to be halted what the bankers wanted and what many businessmen wanted also was to intervene in the free market and tip the balance of interest rates downward to favor debt over Thrift to accomplish this the money supply simply had to be disconnected from gold and made more plentiful or as they described it more elastic the Specter of bank failure the greatest threat however came not from rivals or private Capital formation but from the public at large in the form of what Bankers call a run on the bank this is because when banks accept a customer's Deposit they give in return a balance in his account this is the equivalent of a promise to pay back the deposit anytime he wants likewise when another customer borrows money from the bank he also is given an account balance which usually is withdrawn immediately to satisfy the purpose of the loan this creates a ticking Time Bomb because at that point the bank has issued more promises to pay on demand than it has money in the vault even though the depositing customer thinks he can get his money anytime he wants in reality it has been given to the borrowing customer and no longer is available at the bank the problem is compounded further by the fact that banks are allowed to lend even more money than they have received in deposit the mechanism for accomplishing this seemingly impossible feat will be described in a later chapter but it is a fact of modern banking that promises to pay often exceeds savings deposits by a factor of ten to one and because only about three percent of these accounts are actually retained in the vault in the form of cash the rest having been put into even more loans and Investments the bank's promises exceed its ability to keep those promises by a factor of over 300 to 1. as long as only a small percentage of depositors request their money at one time no one is the wiser but if public confidence is shaken and if more than a few percent attempt to withdraw their funds the scheme is finally exposed the bank cannot keep all its promises and is forced to close its doors bankruptcy usually follows in due course currency drains the same result could happen and prior to the Federal Reserve System often did happen even without depositors making a run on the bank instead of withdrawing their funds at the teller's window they simply wrote checks to purchase goods or services people receiving those checks took them to a bank for deposit if that bank happened to be the same one from which the check was drawn then all was well because it was not necessary to remove any real money from the vault but if the holder of the check took it to another bank it was quickly passed back to the issuing bank and settlement was demanded between Banks this is not a one-way Street however while the downtown bank is demanding payment from the Uptown Bank the Uptown bank is also clearing checks and demanding payment from the downtown Bank as long as the money flow in both directions is equal then everything can be handled with simple bookkeeping but if the flow is not equal then one of the banks will have to actually send money to the other to make up the difference if the amount of money required exceeds a few percentage points of the bank's total deposits the result is the same as a run on the bank by depositors this demand of money by other Banks rather than by depositors is called a currency drain in 1910 the most common cause of a bank having to declare bankruptcy due to a currency drain was that it followed a loan policy that was more Reckless than that of its competitors more money was demanded from it because more money was loaned by it it was dangerous enough to lend 90 percent of their customers savings keeping only one dollar in reserve out of every 10. but that had proven to be adequate most of the time some banks however were tempted to walk even closer to the precipice they pushed the ratio to 92 percent 95 99 percent after all the way a bank makes money is to collect interests and the only way to do that is to make loans the more loans the better and so there was a practice among some of the more Reckless Banks to loan up as they call it which was another way of saying to push down their Reserve ratios a banker's Utopia if all banks could be forced to issue loans in the same ratio to their reserves as other Banks did then regardless of how small that ratio was the amount of checks to be cleared between them would balance in the long run no major currency drains would ever occur the entire banking industry might collapse under such a system but not individual Banks at least not those that were part of the cartel all would walk the same distance from The Edge regardless of how close it was under such uniformity no individual Bank could be blamed for failure to meet its obligations the blame could be shifted instead to the economy or government policy or interest rates or trade deficits or the exchange value of the dollar or even to the capitalist system itself but in 1910 such a banker's Utopia had not yet been created if the downtown Bank began to lend at a greater ratio to its reserves than its competitors the amount of checks which would come back to it for payment also would be greater thus the bank which pursued a more Reckless lending policy had to draw against its reserves in order to make payments to the more conservative Banks and when those funds were exhausted it usually was forced into bankruptcy historian John Klein tells us that the financial panics of 1873 1884 1893 and 1907 were in large part an outgrowth of reserve pyramiding and excessive deposit creation by Reserve City Banks these panics were triggered by the currency drains that took place in periods of relative Prosperity when Banks were loaned up in other words the panics and resulting bank failures were caused not by negative factors in the economy but by currency drains on the banks which were loaned up to the point where they had practically no Reserves at all the banks did not fail because the system was weak the system failed because the banks were weak this was another common problem that brought these seven men over a thousand miles to a tiny island off the shore of Georgia each was a potentially Fierce competitor but uppermost in their minds were the so-called panics and the very real 1748 bank failures of the preceding two decades somehow they had to join forces a method had to be devised to enable them to continue to make more promises to pay on demand than they could keep to do this they had to find a way to force all banks to walk the same distance from The Edge and when the inevitable disasters happened to shift public blame away from themselves by making it appear to be a problem of the national economy rather than of private banking practice the door then could be opened for the use of tax money rather than their own funds or paying off the losses here then [Music] [Music] foreign [Music] were the main challenges that face that Tiny But powerful group assembled on Jekyll Island one how to stop the growing influence of small rival Banks and to ensure that control over the nation's Financial Resources would remain in the hands of those present two how to make the money supply more elastic in order to reverse the trend of private Capital formation and to recapture the industrial loan Market three how to pool the meager reserves of the nation's Banks into one large Reserve so that all banks will be motivated to follow the same loan to deposit ratios this would protect at least some of them from currency drains and Bank runs four should this lead eventually to the collapse of the whole banking system then how to shift the losses from the owners of the banks to the taxpayers the cartel adopts a name everyone knew that the solution to all these problems was a cartel mechanism that had been devised and already put into similar operation in Europe as with all cartels it had to be created by legislation and sustained by the power of government under the deception of protecting the consumer the most important task before them therefore can be stated as objective number five how to convince Congress that the scheme was a measure to protect the public the test was a delicate one the American people did not like the concept of a cartel the idea of business enterprises joining together to fix prices and prevent competition was alien to the free enterprise system it could never be sold to the voters but if the word cartel was not used if the Venture could be described with words which are emotionally neutral perhaps even alluring then half the battle would be won the first decision therefore was to follow the practice adopted in Europe henceforth the cartel would operate as a central bank and even that was to be but a generic expression for purposes of public relations and legislation they would devise a name that would avoid the word Bank altogether and which would conjure the image of the federal government itself furthermore to create the impression that there would be no concentration of power they would establish Regional branches of the cartel and make that a main selling point Stephenson tells us Aldrich entered this discussion at Jekyll Island an Ardent convert to the idea of a central bank his desire was to transplant the system of one of the great European Banks say the bank of England bodily to America but political expediency required that such plans be concealed from the public as John Kenneth Galbraith explained it it was his aldrich's thought to outflank the opposition by having not one Central Bank but many and the word bank would itself be avoided with the exception of Aldrich all of those present were Bankers but only one was an expert on the European model of a central bank because of this knowledge Paul Warburg became the dominant and guiding mind throughout all of the discussions even a casual perusal of the literature on the creation of the Federal Reserve System is sufficient to find that he was indeed the cartel's Mastermind Galbraith says Warburg has with some justice been called the father of the system Professor Edwin Seligman a member of the international banking family of jnw Seligman and head of the Department of Economics at Columbia University writes that in its fundamental features the Federal Reserve Act is the work of Mr Warburg more than any other man in the country the real Daddy Warbucks Paul Moritz Warburg was a leading member of the investment banking firm of M M Warburg and Company of Hamburg Germany and Amsterdam the Netherlands he had come to the United States only nine years prior to the Jekyll Island meeting soon after arrival however and with funding provided mostly by the Rothschild group he and his brother Felix had been able to buy Partnerships in the New York Investment Banking firm of Loeb and company while continuing as partners in Warburg of Hamburg within 20 years Paul would become one of the wealthiest men in America with an unchallenged domination over the country's railroad system at this distance in history it is difficult to appreciate the importance of this man but some understanding may be had from the fact that the legendary character Daddy Warbucks in the comic strip Little Orphan Annie was a contemporary commentary on the presumed benevolence of Paul Warburg and his almost magic ability to accomplish good through the power of His unlimited wealth a third brother Max Warburg was the financial advisor of the Kaiser who became director of the reichsbank in Germany this was of course a central bank and it was one of the models used in the construction of the Federal Reserve System incidentally a few years later the reichsbank would create the massive hyperinflation in Germany which wiped out the middle class and the entire economy as well Paul Warburg soon became well known on Wall Street as a persuasive advocate for a Central Bank in America three years before the Jekyll Island meeting he had published several pamphlets one was entitled defects and needs of our banking system and the other was a plan for a modified Central Bank these attracted wide attention in both financial and academic circles and set the intellectual climate for all future discussions regarding banking legislation in these treatises Warburg complained that the American monetary system was crippled by its dependency on gold and government bonds both of which were in limited Supply what America needed he argued was an elastic money supply that could be expanded and contracted to accommodate the fluctuating needs of Commerce the solution he said was to follow the German example whereby Banks could create currency solely on the basis of commercial paper which is Banker language for ious from corporations Warburg was tireless in his efforts he was a featured speaker before scores of influential audiences and wrote a steady stream of published articles on the subject in March of that year for example the New York Times published an 11 part series written by Warburg explaining and expounding what he called The Reserve Bank of the United States the message was plain for those who understood most of warburg's writing and lecturing on this topic was eyewash for the public to cover the fact that a central bank is merely a cartel which has been legalized its proponents had to lay down a Thick Smoke screen of technical jargon focusing always on how it would supposedly benefit Commerce the public and the nation how it would lower interest rates provide funding for needed industrial projects and prevent panics in the economy there was not the slightest glimmer that Underneath It All was a master plan which was designed from top to bottom to serve private interests at the expense of the public this was nevertheless the cold reality and the more perceptive Bankers were well aware of it in an address before the American Bankers Association the following year Aldrich laid it out for anyone who was really listening to the meaning of his words he said the organization proposed is not a bank but a Cooperative Union of all the banks of the country for definite purposes precisely a union of banks two years later in a speech before that same group of Bankers a Barton Hepburn of Chase National Bank was even more candid he said the measure recognizes and adopts the principles of a central bank indeed if it works out as the sponsors of the law hope it will make all Incorporated Banks together joint owners of a central dominating power and that is about as good a definition of a cartel as one is likely to find in 1914 one year after the Federal Reserve Act was passed into law Senator Aldridge could afford to be less guarded in his remarks in an article published in July of that year in a magazine called The Independent he boasted before the passage of this act the New York Bankers could only dominate the reserves of New York now we are able to dominate The Bank Reserves of the entire country myth accepted as history the accepted version of history is that the Federal Reserve was created to stabilize our economy one of the most widely used textbooks on this subject says it sprang from the Panic of 1907 with its alarming epidemic of bank failures the country was fed up once and for all with the Anarchy of unstable private banking even the most naive student must sense a grave contradiction between this cherished View and the system's actual performance since its Inception it has presided over the crashes of 1921 and 1929 the Great Depression of 29 to 39 recessions in 53 57 69 75 and 81 a stock market Black Monday in 87 and a one thousand percent inflation which has destroyed 90 percent of the dollars purchasing power let us be more specific on that last point by 1990 an annual income of ten thousand dollars was required to buy what took only one thousand dollars in 1914. that incredible loss in value was quietly transferred to the federal government in the form of hidden Taxation and the Federal Reserve System was the mechanism by which it was accomplished actions have consequences the consequences of wealth confiscation by the Federal Reserve mechanism are now upon us in the current decade corporate debt is soaring personal debt is greater than ever both business and personal bankruptcies are at an all-time high Banks and Savings and Loan associations are failing in larger numbers than ever before interest on the national debt is consuming more than half of our personal income tax heavy industry largely has been replaced by overseas competitors we are facing an international trade deficit for the first time in our history 75 of downtown Los Angeles and other metropolitan areas is owned by foreigners and the nation is in economic recession first reason to abolish the system that is the scorecard 80 years after the Federal Reserve was created supposedly to stabilize our economy there can be no argument that the system has failed in its stated objectives furthermore after all this time after repeated changes in Personnel after operating under both political parties after numerous experiments in monetary philosophy after almost a hundred revisions to its Charter and after the development of countless new formulas and techniques there has been more than ample opportunity to work out mere procedural flaws it is not unreasonable to conclude therefore that the system has failed not because it needs a new set of rules or more intelligent directors but because it is incapable of achieving its stated objectives if an institution is incapable of achieving its objectives there is no reason to preserve it unless it can be altered in some way to change its capability that leads to the question why is the system incapable of achieving its stated objectives the painful answer is those were never its true objectives when one realizes the circumstances under which it was created when one contemplates the identities of those who authored it and when one studies its actual performance over the years it becomes obvious that the system is merely a cartel with a government facade there is no doubt that those who run it are motivated to maintain Full Employment High productivity low inflation and a generally sound economy they are not interested in killing the goose that lays such beautiful golden eggs but when there is a conflict between the public interest and the private needs of the cartel a conflict that arises almost daily the public will be sacrificed that is the nature of the Beast it is foolish to expect a cartel to act in any other way this view is not encouraged by establishment institutions and publishers it has become their apparent mission to convince the American people that the system is not intrinsically flawed it merely has been in the hands of bumbling oafs for example William Grider was a former assistant managing editor for the Washington Post his book secrets of the temple was published in 1987 by Simon and Schuster it was critical of the Federal Reserve because of its failures but according to Grider these were not caused by any defect in the system itself but were merely the result of economic factors which are so complicated that the good men who have struggled to make the system work just haven't been able to figure it all out but don't worry folks they're working on it that is exactly the kind of powder puff criticism which is acceptable in our mainstream media yet grider's own research points to an entirely different interpretation speaking of the system's origin he says as new companies prospered without Wall Street so did the new Regional banks that handled their funds New York's concentrated share of Bank deposits was still huge about half the nation's total but it was declining steadily Wall Street was still the biggest kid on the Block but less and less able to bully the others this trend was a crucial fact of history a misunderstood reality that completely Alters the political meaning of the reform legislation that created the Federal Reserve at the time the conventional wisdom in Congress widely shared and sincerely espoused by progressive reformers was that a government institution would finally harness the money trust disarm its powers and establish broad Democratic control over money and credit the results were nearly the opposite the money reforms enacted in 1913 in fact helped to preserve the status quo to stabilize the old order Money Center Bankers would not only gain dominance over the new Central Bank but would also enjoy new insulation against instability and their own decline once the Fed was in operation the steady diffusion of financial power halted Wall Street maintained its dominant position and even enhanced it Anthony Sutton former research fellow at the Hoover Institution for war Revolution and peace and also former professor of Economics at California State University Los Angeles provides a somewhat deeper analysis he writes warburg's revolutionary plan to get American society to go to work for Wall Street was astonishingly simple even today academic theoreticians cover their blackboards with meaningless equations and the general public struggles in bewildered confusion with inflation and the coming credit collapse while the quite simple explanation of the problem goes undiscussed and almost entirely uncomprehended the Federal Reserve System is a legal private Monopoly of the money supply operated for the benefit of the few under the guise of protecting and promoting the public interest the real significance of the journey to Jekyll Island and the creature that was hatched there was inadvertently summarized by the words of Paul warburg's admiring biographer Harold kellock Paul M Warburg is probably the mildest mannered man that ever personally conducted a revolution it was a bloodless Revolution he did not attempt to Rouse the populace to Arms he stepped forth armed simply with an idea and he conquered that's the amazing thing a shy sensitive man he imposed his idea on a nation of a hundred million people summary the basic plan for the Federal Reserve System was drafted at a secret meeting held in November of 1910 at the private Resort of J.P Morgan on Jekyll Island off the coast of Georgia those who attended represented the great financial institutions of Wall Street and indirectly Europe as well the reason for secrecy was simple had it been known that rival factions of the banking Community had joined together the public would have been alerted to the possibility that the bankers were plotting an agreement in Restraint of trade which of course is exactly what they were doing what emerged was a cartel agreement with five objectives stopped the growing competition from the nation's newer Banks obtain a franchise to create money out of nothing for the purpose of Lending get control of the reserves of all banks so that the more Reckless ones would not be exposed to currency drains and Bank runs get the taxpayer to pick up the cartel's inevitable losses and convince Congress that the purpose was to protect the public it was realized that the bankers would have to become partners with the politicians and that the structure of the cartel would have to be a central bank the record shows that the FED has failed to achieve its stated objectives that is because those were never its true goals as a banking cartel and in terms of the five objectives stated above it has been an unqualified success chapter 2 the name of the game is bailout the analogy of a spectator sporting event as a means of explaining the rules by which taxpayers are required to pick up the cost of bailing out the banks when their loans go sour it was stated in the previous chapter that the Jekyll Island Group which conceived the Federal Reserve System actually created a national cartel which was dominated by the larger Banks it was also stated that a primary objective of that cartel was to involve the federal government as an agent for Shifting The Inevitable losses from the owners of those Banks to the taxpayers that of course is one of the more controversial assertions made in this book yet there is little room for any other interpretation when one confronts the massive evidence of history since the system was created let us therefore take another leap through time having jumped to the year 1910 to begin this story let us now return to the present era to understand how banking losses are shifted to the taxpayers it is first necessary to know a little bit about how the scheme was designed to work there are certain procedures and formulas which must be understood or else the entire process seems like chaos it is as though we had been isolated all our lives on a South Sea Island with no knowledge of the outside world imagine what it would then be like the first time we traveled to the mainland and witnessed a game of professional football we would stare with incredulity at men dressed like aliens from another planet throwing their bodies against each other tossing a funny-shaped object back and forth fighting over it as though it were of Great Value yet occasionally kicking it out of the area as though it were worthless and despised chasing each other knocking each other to the ground and then walking away to regroup for another surge all this with tens of thousands of Spectators riotously shouting in unison for no apparent reason at all without a basic understanding that this was a game and without knowledge of the rules of that game the event would appear as total chaos and Universal Madness the operation of our monetary system through the Federal Reserve has much in common with professional football first there are certain plays that are repeated over and over again with only minor variations to suit the special circumstances second there are definite rules which the players follow with great precision third there is a clear objective to the game which is uppermost in the minds of the players and fourth if the spectators are not familiar with that objective and if they do not understand the rules they will never comprehend what is going on which as far as monetary matters are concerned is the common state of the vast majority of Americans today let us therefore attempt to spell out in plain language what that objective is and how the players expect to achieve it to demystify the process we shall present an overview first after the concepts are clarified we then shall follow up with actual examples taken from the recent past the name of the game is bailout as stated previously the objective of this game is to shift the inevitable losses from the owners of the larger Banks to the taxpayers the procedure by which this is accomplished is as follows rules of the game the game begins when the Federal Reserve System allows commercial Banks to create checkbook money out of nothing details regarding how this incredible feat is accomplished are given in chapter 10 entitled The Mandrake mechanism the bank's derive profit from this easy money not by spending it but by lending it to others and collecting interest when such alone is placed on the bank's books it is shown as an asset because it is earning interest and presumably someday will be paid back at the same time an equal entry is made on the liability Side Of The Ledger that is because the newly created checkbook money now is in circulation and most of it will end up in other Banks which will return the canceled checks to the issuing bank for payment individuals may also bring some of this checkbook money back to the bank and request cash the issuing Bank therefore has a potential money payout liability equal to the amount of the loan asset when a borrower cannot repay and there are no assets which can be taken to compensate the bank must write off that loan as a loss however since most of the money originally was created out of nothing and cost the bank nothing except bookkeeping overhead there is little of tangible value that is actually lost it is primarily a bookkeeping entry a bookkeeping loss can still be undesirable to a bank because it causes the loan to be removed from The Ledger as an asset without a reduction in liabilities the difference must come from the equity of those who own the bank in other words the loan asset is removed but the money liability Remains the original checkbook money is still circulating out there even though the borrower cannot repay and the issuing Bank still has the obligation to redeem those checks the only way to do this and balance the books once again is to draw upon the capital which was invested by the bank's stockholders or to deduct the loss from the bank's current profits in either case the owners of the bank lose an amount equal to the value of the defaulted loan so to them the loss becomes very real if the bank is forced to write off a large amount of bad loans the amount could exceed the entire value of the owner's equity when that happens the game is over and the bank is insolvent this concern would be sufficient to motivate most Bankers to be very conservative in their loan policy and in fact most of them do act with great caution when dealing with individuals and small businesses but the Federal Reserve System the Federal Deposit Insurance Corporation and the Federal Deposit loan corporation now guarantee that massive loans made to large corporations and to other governments will not be allowed to fall entirely upon the bank's owners should those loans go into default this is done under the argument that if these corporations or banks are allowed to fail the nation would suffer from vast unemployment and economic disruption more on that in a moment the Perpetual debt play the end result of this policy is that the banks have little motive to be cautious and are protected against the effect of their own folly the larger the loan the better it is because it will produce the greatest amount of profit with the least amount of effort a single loan to a third world country netting hundreds of millions of dollars in annual interest is just as easy to process if not easier than a loan for fifty thousand dollars to a local Merchant on the shopping mall if the interest is paid it's gravy time if the loan defaults the federal government will protect the public and through various mechanisms described shortly we'll make sure that the banks continue to receive their interests the individual and the small businessmen find it increasingly difficult to borrow money at reasonable rates because the banks can make more money on loans to the corporate Giants and to foreign governments also the bigger loans are safer for the banks because the government will make them good even if they default there are no such guarantees for the small loans the public will not swallow the line that bailing out the little guy is necessary to save the system the dollar amounts are too small only when the figures become mind-boggling does the ploy become plausible it is important to remember that Banks do not really want to have their loans repaid except as evidence of the dependability of the borrower they make a profit from interest on the loan not repayment of the loan if a loan is paid off the bank merely has to find another borrower and that can be an expensive nuisance it is much better to have the existing borrower and pay only the interest and never make payments on the loan itself that process is called rolling over the debt one of the reasons Banks prefer to lend to governments is that they do not expect those loans ever to be repaid when Walter riston was chairman of the citicorp bank in 1982 he extolled the virtue of the action this way if we had a truth in Government Act comparable to the truth in advertising law every note issued by the treasury would be obliged to include a sentence stating this note will be redeemed with the proceeds from an identical note which will be sold to the public when this one comes due when this activity is carried out in the United States as it is weekly it is described as a treasury bill auction but when basically the same process is conducted abroad in a foreign language our news media usually speak of a country's rolling over its debts the perception remains that some form of disaster is inevitable it is not to see why it is only necessary to understand the basic facts of government borrowing the first is that there are few recorded instances in history of government any government actually getting out of debt certainly in an era of 100 billion dollar deficits No One Lending money to our government by buying a treasury bill expects that it will be paid at maturity in any way except by our governments selling the new bill of like amount the debt rollover play since the system makes it profitable for banks to make large unsound loans that is the kind of loans which banks will make furthermore it is predictable that most unsound loans eventually will go into default when the borrower finally declares that he cannot pay the bank responds by rolling over the loan this often is stage managed to appear as a concession on the part of the bank but in reality it is a significant forward move toward the objective of Perpetual interest eventually the borrower comes to the point where he can no longer pay even the interest now the play becomes more complex the bank does not want to lose the interest because that is its stream of income but it cannot afford to allow the borrower to go into default either because that would require a write-off which in turn could Wipe Out the owner's equity and put the bank out of business so the bank's next move is to create additional money out of nothing and lend that to the borrower so he will have enough to continue paying the interest which by now must be paid on the original loan plus the additional loan as well what looked like certain disaster suddenly is converted by a brilliant play into a major score this not only maintains the old loan on the books as an asset it actually increases the apparent size of that asset and also results in higher interest payments thus greater profit to the bank the up the ante play sooner or later the borrower becomes restless he is not interested in making interest payments with nothing left for himself he comes to realize that he is merely working for the bank and once again interest payments stop the opposing teams go into a huddle to plan the next move then rush to the scrimmage line where they hurl threatening innuendos at each other the borrower simply cannot will not pay collect if you can the lender threatens to blackball the borrower to see to it that he will never again be able to obtain alone finally a compromise is worked out as before the bank agrees to create still more money out of nothing and lend that to the borrower to cover the interest on both of the previous loans but this time they upped the ante to provide still additional money for the borrower to spend on something other than interest that is a perfect score the borrower suddenly has a fresh supply of money for his purposes plus enough to keep making those bother some interest payments the bank on the other hand now has still larger assets higher interest income and greater profits what an exciting game the rescheduling play the previous plays can be repeated several times until the reality finally Dawns on the borrower that he is sinking deeper and deeper into the debt pit with no prospects of climbing out this realization usually comes when the interest payments become so large they represent almost as much as the entire corporate earnings or the country's total tax base this time around rollovers with larger loans are rejected and default seems inevitable but wait what's this the players are back at the scrimmage line there is a great confrontation referees are called in two shrill blasts from the horn tell us a score has been made for both sides a voice over the public address system announces this loan has been rescheduled rescheduling usually means a combination of a lower interest rate and a longer period for repayment the effect is primarily cosmetic it reduces the monthly payment but extends the period further into the future this makes the current burden to the borrower a little easier to carry but it also makes repayment of the capital even more unlikely it postpones the Day of Reckoning but in the meantime you guessed it the loan remains as an asset and the interest payments continue that protect the public play eventually the Day of Reckoning arrives the borrower realizes he can never repay the capital and flatly refuses to pay interest on it it is time for the final maneuver according to the banking safety digest which specializes in rating the safety of America's Banks and snls most of the banks involved with problem loans are quite profitable businesses note that except for third world loans most of the large banks in the country are operating quite profitably in contrast with the continually worsening SNL crisis the bank's profitability has been the engine with which they have been working off albeit slowly their overseas debt at last year's profitability levels the banking industry could in theory buy out the entirety of their own Latin American Loans within two years the banks can absorb the losses of their bad loans to multinational corporations and foreign governments but that is not according to the rules it would be a major loss to the stockholders who would receive little or no dividends during the adjustment period and any chief executive officer who embarked upon such a course would soon be looking for a new job that this is not part of the game plan is evident by the fact that while a small portion of the Latin American debt has been absorbed the banks are continuing to make gigantic loans to governments in other parts of the world particularly Africa China Russia and Eastern European nations for reasons which will be analyzed in chapter 4 there is little hope that the performance of these loans will be different than those in Latin America but the most important reason for not absorbing the losses is that there is a standard play that can still breathe life back into those dead loans and reactivate the Bountiful income stream that flows from them here's how it works the captains of both teams approach the referee and the game commissioner to request that the game be extended the reason given is that this is in the interest of the public The Spectators who are having such a wonderful time and who will be sad to see the game ended they request also that while the spectators are in the stadium enjoying themselves the parking lot attendance be ordered to quietly remove the hubcaps from every car these can be sold to provide money for additional salaries for all the players including the referee and of course the commissioner himself that is only fair since they are now working overtime for the benefit of the spectators when the deal is finally struck the horn will blow three times and a roar of joyous relief will sweep across the stadium in a somewhat less recognizable form the same play may look like this the president of the lending bank and the finance officer of the defaulting Corporation or government will join together and approach Congress they will explain that the borrower has exhausted his ability to serve as the loan and without assistance from the federal government there will be dire consequences for the American people not only will there be unemployment and hardship at home there will be massive disruptions in world markets and since we are now so dependent on those markets our exports will drop foreign Capital will dry up and we will suffer greatly what is needed they will say is for Congress to provide money to the borrower either directly or indirectly to allow him to continue to pay interest on the loan and to initiate new spending programs which will be so profitable he will soon be able to pay everyone back as part of The Proposal the borrower will agree to accept the direction of a third-party referee in adopting an austerity program to make sure that none of the new money is wasted the bank also will agree to write off a small part of the loan as a gesture of its willingness to share the burden this move of course will have been foreseen from the very beginning of the game and is a small step backward to achieve a giant stride forward after all the amount to be lost through the write-off was created out of nothing in the first place and without this final maneuver the entirety would be written off furthermore this modest write down is dwarfed by the amount to be gained through restoration of the income stream the guaranteed payment play one of the standard variations of the final maneuver is for the government not always to directly provide the funds but to provide the credit for the funds that means to guarantee future payments should the borrower again default once Congress agrees to this the government becomes a co-signer to the loan and the inevitable losses are finally lifted from The Ledger of the bank and placed onto the backs of the American taxpayer money now begins to move into the banks through a complex system of federal agencies International agencies foreign aid and direct subsidies all of these mechanisms extract payments from the American people and channel them to the deadbeat borrowers who then send them to the banks to service their loans very little of this money actually comes from taxes almost all of it is generated by the Federal Reserve System when this newly created money returns to the banks it quickly moves out again into the economy but it mingles with and dilutes the value of the money already there the result is the appearance of rising prices but which in reality is a lowering of the value of the dollar the American people have no idea they are paying the bill they know that someone is stealing their hubcaps but they think it is the greedy businessman who raises prices or the selfish laborer who demands higher wages or the Unworthy farmer who demands too much for his crop or the wealthy Foreigner who bids up our prices they do not realize that these groups also are victimized by a monetary system which is constantly being eroded in value by and through the Federal Reserve System public ignorance of how the game is really played was dramatically displayed during a recent Phil Donahue TV show the topic was the Savings and Loan crisis and the billions of dollars that it would cost the taxpayer a man from the audience Rose and asked angrily why can't the government pay for these debts instead of the taxpayer and the audience of several hundred people actually cheered in enthusiastic approval Prosperity through insolvency since large corporate loans are often guaranteed by the federal government one would think that the banks which make those loans would never have a problem yet many of them still manage to bungle themselves into insolvency as we shall see in a later section of this study insolvency actually is inherent in the system itself a system called fractional Reserve banking nevertheless a bank can operate quite nicely in a state of insolvency so long as its customers don't know it money is brought into being and transmuted from one imaginary form to another by mere entries on a ledger and creative bookkeeping can always make the bottom line appear to balance the problem arises when depositors decide for whatever reason to withdraw their money lo and behold there isn't enough to go around and when that happens the cat is finally out of the bag the bank must close its doors and the depositors still waiting in line outside are well just that still waiting the proper solution to this problem is to require the banks like all other businesses to honor their contracts if they tell their customers that deposits are payable upon demand then they should hold enough cash to make good on that promise regardless of when the customers want it or how many of them want it in other words they should keep cash in the vault equal to one hundred percent of their depositors accounts when we give our hat to the Hat check girl and obtain a receipt for it we don't expect her to rent it out while we eat dinner hoping she'll get it back or one just like it in time for our departure we expect all the hats to remain there all the time so there will be no question of getting ours back precisely when we want it on the other hand if the bank tells us it is going to lend our deposit to others so we can earn a little interest on it then it should also tell us forthrightly that we cannot have our money back on demand why not because it is loaned out and not in the vault any longer customers who earn interest on their accounts should be told that they have time deposits not demand deposits because the bank will need a stated amount of time before it will be able to recover the money which was loaned out none of this is difficult to understand yet Bank customers are seldom informed of it they are told they can have their money anytime they want it and they are paid interests as well even if they do not receive interest the bank does and this is how so many customer services can be offered at little or known direct cost occasionally a 30-day or 60-day delay will be mentioned as a possibility but that is greatly inadequate for deposits which have been transformed into 10 20 or 30-year loans the banks are simply playing the odds that everything will work out most of the time we shall examine this issue in Greater detail in a later section but for now it is sufficient to know that total disclosure is not how the banking game is played the Federal Reserve System has legalized and institutionalized the dishonesty of issuing more hat checks than there are hats and it has devised complex methods of disguising this practice as a perfectly proper and normal feature of banking students of Finance are told that there simply is no other way for the system to function once that premise is accepted then all attention can be focused not on the inherent fraud but on ways and means to live with it and make it as painless as possible based on the assumption that only a small percentage of the depositors will ever want to withdraw their money at the same time the Federal Reserve allows the nation's commercial Banks to operate with an incredibly thin layer of cash to cover their promises to pay on demand when a bank runs out of money and is unable to keep that promise the system then acts as a lender of Last Resort that is Banker language meaning it stands ready to create money out of nothing and immediately lend it to any Bank in trouble details on how that is accomplished are in chapter eight but there are practical limits to just how far that process can work even the FED will not support a bank that has gotten itself so deeply in the whole it has no realistic chance of digging out When A bank's bookkeeping assets finally become less than its liabilities the rules of the game call for transferring the losses to the depositors themselves this means they pay twice once as taxpayers and again as depositors the mechanism by which this is accomplished is called the Federal Deposit Insurance Corporation the FDIC play the FDIC guarantees that every insured deposit will be paid back regardless of the financial condition of the bank the money to do this comes out of a special fund which is derived from assessments against participating Banks the banks of course do not pay this assessment as with all other expenses the bulk of the cost ultimately is passed on to their customers in the form of higher service fees and lower interest rates on deposits the FDIC is usually described as an insurance fund but that is deceptive advertising at its worst one of the primary conditions of insurance is that it must avoid what Underwriters call moral hazard that is a situation in which the policyholder has little incentive to avoid or prevent that which is being insured against when moral hazard is present it is normal for people to become careless and the likelihood increases that what is being insured against will actually happen an example would be a government program forcing everyone to pay an equal amount into a fund to protect them from the expense of parking fines one hesitates even to mention this absurd proposition lest some enterprising politicians should decide to put it on the ballot therefore let us hasten to point out that if such a numbskull plan were adopted two things would happen one just about everyone soon would be getting parking tickets and two since there now would be so many of them the taxes to pay for those tickets would greatly exceed the previous cost of paying them without the so-called protection the FDIC operates exactly in this fashion depositors are told their insured accounts are protected in the event their Bank should become insolvent to pay for this protection each bank is assessed a specified percentage of its total deposits that percentage is the same for all banks regardless of their previous record or how risky their loans under such conditions it does not pay to be cautious the banks making Reckless loans earn a higher rate of interest than those making conservative loans they also are far more likely to collect from the fund yet they pay not one cent more conservative banks are penalized and gradually become motivated to make more risky loans to keep up with their competitors than to get their fair share of the fund's protection moral hazard therefore is built right into the system as with protection against parking tickets the FDIC increases the likelihood that what is being insured against will actually happen it is not a solution to the problem it is part of the problem real insurance would be a blessing a true deposit insurance program which was totally voluntary and which geared its rates to the actual risks would be a blessing banks with solid loans on their books would be able to obtain protection for their depositors at reasonable rates because the chances of the insurance company having to pay would be small banks with unsound loans however would have to pay much higher rates or possibly would not be able to obtain coverage at any price depositors therefore would know instantly without need to investigate further that a bank without insurance is not a place where they want to put their money in order to attract deposits Banks would have to have insurance in order to have insurance at rates they could afford they would have to demonstrate to the insurance company that their financial affairs are in good order consequently Banks which failed to meet the minimum standards of Sound business practice would soon have no customers and would be forced out of business a voluntary private insurance program would act as a powerful regulator of the entire banking industry far more effectively and honestly than any political scheme ever could unfortunately such is not the banking world of today the FDIC protection is not Insurance in any sense of the word it is merely part of a political scheme to bail out the most influential members of the banking cartel when they get into financial difficulty as we have already seen the first line of defense in this scheme is to have large defaulted loans restored to Life by a congressional pledge of tax dollars if that should fail and the bank can no longer conceal its insolvency through creative bookkeeping it is almost certain that anxious depositors will soon line up to withdraw their money which the bank does not have the second line of defense therefore is to have the FDIC step in and make those payments for them Bankers of course do not want this to happen it is a last resort if the bank is rescued in this fashion management is fired and what is left of the business usually is absorbed by another bank furthermore the value of the stock will plummet but this will affect the small stockholders only those with controlling interests and those in management no long in advance of the pending catastrophe and are able to sell the bulk of their shares while the price is still high the people who create the problem seldom suffer The Economic Consequences of their actions the FDIC will never be adequately funded the FDIC never will have enough money to cover its potential liability for the entire banking system if that amount were in existence it could be held by the Banks themselves and an insurance fund would not even be necessary instead the FDIC operates on the same assumption as the banks that only a small percentage will ever need money at the same time so the amount held in reserve is never more than a few percentage points of the total liability typically the FDIC holds about a dollar twenty for every one hundred dollars of covered deposits at the time of this writing however that figure had slipped to only 70 cents and was still dropping that means that the financial exposure is about 99 times larger than the safety net which is supposed to catch it the failure of just one or two large banks in the system could completely Wipe Out the entire fund and it gets even worse although The Ledger may show that so many millions or billions are in the fund that also is but creative bookkeeping by law the money collected from Bank assessments must be invested in treasury bonds which means it is Lent to the government and spent immediately by Congress in the final stage of this process therefore the FDIC itself runs out of money and turns first to the treasury then to Congress for help this step of course is an act of final desperation but it is usually presented in the media as though it were a sign of the system's great strength U.S news and World Report blandly describes it this way should the agencies need more money yet Congress has pledged the full faith and credit of the federal government gosh gee whiz isn't that wonderful it sort of makes one feel Rosy all over to know that the fund is so well secured let's see what full faith and credit of the federal government actually means Congress already deeply in debt has no money either it doesn't dare openly raise taxes for the shortfall so it applies for an additional loan by offering still more treasury bonds for sale the public picks up a portion of these ious and the Federal Reserve buys the rest if there is a monetary crisis at hand and the size of the loan is great the FED will pick up the entire issue but the FED has no money either so it responds by creating out of nothing an amount of brand new money equal to the ious and through the magic of Central Banking the FDIC is finally funded this new money gushes into the banks where it is used to pay off the depositors from there it floods through the economy diluting the value of all money and causing prices to rise the old paycheck doesn't buy as much anymore so we learn to get along with a little bit less let's see the bank's doors are open again and all the depositors are happy until they return to their cars and discover the missing hubcaps that is what is meant by the full faith and credit of the federal government summary although National monetary events May appear mysterious and chaotic they are governed by well-established rules which bankers and politicians rigidly follow the central facts to understanding these events is that all the money in the banking system has been created out of nothing through the process of making loans a defaulted loan therefore costs the bank little of tangible value but it shows up on The Ledger as a reduction in assets without a corresponding reduction in liabilities if the bad loans exceed the size of the assets the bank becomes technically insolvent and must close its doors the first rule of survival therefore is to avoid writing off large bad loans and if possible to at least continue receiving interest payments on them to accomplish that the endangered loans are rolled over and increased in size this provides the borrower with money to continue paying interest plus fresh funds for new spending the basic problem is not solved but it is postponed for a little while and made worse the Final Solution on behalf of the banking cartel is to have the federal government guarantee payment of the loan should the borrower default in the future this is accomplished by convincing Congress that not to do so would result in great damage to the economy and hardship for the people from that point forward the burden of the loan is removed from the bank's Ledger and transferred to the taxpayer should this effort fail and the bank be forced into insolvency the last resort is to use the FDIC to pay off the depositors the FDIC is not Insurance because the presence of moral hazard makes the thing it supposedly protects against more likely to happen a portion of the FDIC funds is derived from assessments against the banks ultimately however they are paid by the depositors themselves when these funds run out the balance is provided by the Federal Reserve System in the form of freshly created new money this floods through the economy causing the appearance of rising prices but which in reality is the lowering of the value of the dollar the final cost of the bailout therefore is passed to the public in the form of a hidden tax called inflation so much for the rules of the game in the next chapter we shall look at the scorecard of the actual play itself chapter 3 Protectors of the public the bailout game as applied in real life to Penn Central Lockheed New York City Chrysler Commonwealth Bank of Detroit first Pennsylvania Bank Continental Illinois and beginning in 2008 literally all major Banks AIG automobile companies and even Banks of other nations in the previous chapter we offered the Whimsical analogy of a sporting event to clarify the maneuvers of monetary and political scientists to bail out those commercial banks that comprise the Federal Reserve cartel the danger in such an approach is that it could lead the impression the topic is frivolous so let us abandon the analogy and turn to reality now that we have studied the rules of the game it is time to check the scorecard of the actual play itself and it will become obvious that this is no trivial matter a good place to start is with the rescue of a Consortium of banks that were holding the endangered loans of Penn Central Railroad Penn Central Penn Central was the nation's largest railroad with 96 000 employees and a weekly payroll of 20 million dollars in 1970 it became the nation's biggest bankruptcy it was in depth to just about every Bank willing to lend it money including Chase Manhattan Morgan guarantee manufacturers Hanover First National City Chemical Bank and Continental Illinois officers of those Banks had been appointed to Penn Central's board of directors as a condition for obtaining funds and they had acquired control over the railroads management the banks also held large blocks of Penn Central stock in their trust departments Bankers sitting on the board of directors were privy to information long before the public received it that would affect the market price of Penn Central stock Chris wells in the last days of the club describes what happened on May 21st a month before the railroad went under David Bevin Penn Central's Chief Financial Officer privately informed representatives of the company's banking creditors that its Financial condition was so weak it would have to postpone an attempt to raise a hundred million dollars in desperately needed operating funds through a bond issue instead said Bevin the railroad would seek some kind of government loan guarantee in other words unless the railroad could manage a federal bailout it would have to close down the following day Chase Manhattan's trust Department sold 134 300 shares of its Penn Central Holdings before May 28th when the public was informed of the postponement of the bond issue Chase sold another 128 000 shares David Rockefeller the bank's chairman vigorously denied Chase had acted on the basis of inside information virtually all of the management decisions that led to Penn Central's demise were made by or with the concurrence of its board of directors which is to say by the banks that provided the loans the banks were not in trouble because of Penn Central's poor management they were Penn Central's poor management an investigation conducted in 1972 by Congressman Wright Patman chairman of the house Banking and currency committee revealed the following Banks provided large loans for disastrous expansion projects and then lent additional Millions so the railroad could pay dividends to stockholders this created the false appearance of prosperity and inflated the price of its stock long enough to dump it on the unsuspecting public thus the banker managers engineered a three-way Bonanza for themselves they won received dividends on worthless stock two earned interest on loans that funded those dividends and three were able to unload 1.8 million shares of stock after dividends of course at unrealistically high prices the company's top Executives disposed of their stock in this fashion at a personal gain of more than one million dollars the public be damned in his letter of transmittal accompanying the staff report Congressman Patman provided this summary it was as though everyone was a part of a close-knit club in which Penn Central and its officers could obtain with very few questions asked loans for almost everything they desired both for the company and for their own personal interests where the bankers sitting on the board asked practically no questions as to what was going on simply allowing management to destroy the company to invest in questionable activities and to engage in some cases in illegal activities these banks in return obtained most of the company's lucrative banking business the attitude of everyone seemed to be while the game was going on that all these dealings were of benefit to every member of the club and the railroad and the public be damned the company's cash crisis came to a head over a weekend and in order to avoid having the corporation forced to file for bankruptcy on Monday morning Arthur burns the FED chairman called the homes of the heads of the Federal Reserve Banks around the country and told them to get the word out immediately that the system was anxious to help on Sunday William triber who was the first vice president of the New York branch of the FED contacted the chief Executives of the 10 largest banks in New York and told them the fed's discount window would be wide open the next morning translated that means the Fed was prepared to create fresh money and lend it to commercial Banks so they in turn could multiply and re-lendid to Penn Central the interest rates for these funds were low enough to compensate for the risk speaking of what transpired on the following Monday Burns boasted I kept the board in session practically all day to change regulation Q so that money could flow into CDs at the banks looking back at the event Chris Wells approvingly describes it as what is by Common consent the fed's finest hour finest hour or not the banks were not interested unless they could be assured that the taxpayer would co-sign the loans and guarantee payment so the action inevitably shifted back to Congress Penn Central's Executives bankers and Union Representatives came in droves to explain how the railroad's existence was in the best interest of the public of The Working Man of the economic system itself the Navy Department spoke of protecting the nation's defense resources Congress of course could not callously ignore these pressing needs it ordered a retroactive 13 and a half percent pay raise for all Union employees after having added that burden to the railroad's cash drain and putting it even deeper into the hole it passed the emergency rail Services Act of 1970 authorizing 125 million dollars in Federal Loan guarantees none of this solved the basic problem nor was it intended to almost everyone knew that eventually the railroad would be nationalized which is a euphemism for becoming a black hole into which tax dollars disappear forever this came to pass with the creation of Amtrak in 1971 and Conrail in 1973. Amtrak took over the passenger Services of Penn Central and Conrail assumed operation of freight services Conrail is a private Corporation when it was created 85 percent of its stock was held by the government the rest was held by employees fortunately the government's stock was sold in a public offering in 1987. Amtrak continues under political control and operates at a loss by 1998 Congress had given it 21 billion dollars by 2002 it was consuming more than 200 million dollars of taxes per year by 2005 it requested an increase in subsidy to 1.8 billion dollars per year between 1990 and 2009 it had lost another 23 billion Conrail on the other hand since it was returned to the private sector has been running at a profit paying taxes instead of consuming them Lockheed in 1970 the Lockheed Corporation the nation's largest defense contractor was facing bankruptcy the Bank of America and several smaller Banks had lent 400 million dollars to the Goliath and did not want to lose the Bountiful income that flowed from that so they joined forces with lockheed's management stockholders and labor unions and descended on Washington sympathetic politicians were told that if Lockheed were allowed to fail 31 000 jobs would be lost hundreds of subcontractors would go down thousands of suppliers would be forced into bankruptcy and National Security would be seriously jeopardized what the company needed was to borrow more money and lots of it but because of its Current financial predicament no one was willing to lend a bailout plan was quickly engineered by treasury secretary John B Connolly that guaranteed payment on an additional 250 million dollars in loans an amount which would put Lockheed 60 percent deeper into the debt hole than it had been before but that made no difference now once the taxpayer had been made a co-signer to the account Banks had no qualms about advancing the funds the government now had a powerful motivation to make sure Lockheed would be awarded as many defense contracts as possible and that they would be as profitable as possible this was an indirect method of paying off the banks with tax dollars but doing so in such a way as not to arouse public indignation other defense contractors which had operated more efficiently would lose business but that could not be proven furthermore a slight increase in defense expenditures would hardly be noticed New York City in 1975 New York had reached the end of its credit rope and was unable to make payroll the cause was not mysterious it had become a mini welfare state and success in City politics was achieved by lavish Promises of benefits and subsidies for the poor whereas the average large city employed 31 people per thousand residents New York had 49 and their salaries outstripped those in Private Industry while an x-ray technician in a private Hospital earned 187 dollars a week a porter working for the city earned 203 dollars bank tellers earned 154 dollars per week but change makers on the city's Subway received 212 dollars Municipal fringe benefits were twice as generous as those in Private Industry on top of this were free college educations subsidized housing free medical care and endless varieties of welfare programs city taxes were greatly inadequate to cover the cost of this Utopia there now were only three options increased city taxes reduce expenses or go into debt the choice was never in serious doubt by 1975 New York had floated so many bonds and had saturated the market and could find no more lenders two billion dollars of this debt was held by a small group of banks dominated by Chase Manhattan and citicorp when the payment of interest on these loans finally came to a halt it was time to play the bailout game the bankers and City fathers traveled down the coast to Washington and put their case before Congress the largest city in the world could not be allowed to go bankrupt they said essential Services would be halted and millions of people would be without garbage removal without transportation even without police protection starvation disease and crime would run rampant through the city it would be a disgrace to America David Rockefeller at Chase Manhattan persuaded his friend Helmut Schmidt Chancellor of West Germany to make a statement to the media that the disastrous situation in New York could trigger an international financial crisis Congress did not want to bring Anarchy to New York nor to disgrace America nor to trigger a worldwide Financial panic so in December of 1975 it passed a bill authorizing the treasury to make Direct Loans to the city up to 2.3 billion dollars an amount which would more than double the size of its current debt to the banks interest payments on the old debt resumed immediately which is the object of the game New York City has continued to be a welfare Utopia and it is unlikely that it will ever get out of debt Chrysler by 1978 the Chrysler Corporation was on the verge of bankruptcy it had rolled over its debt many times and that phase of the game was nearing an end it was not interested in borrowing just enough to pay interest on its existing loans to make the game worth playing it wanted over a billion dollars in New Capital managers bankers and union leaders found common cause in Washington if one of the largest corporations in America was allowed to fold think of the hardship to thousands of employees and their families consider the damage to the economy as shock waves of unemployment move across the country tremble at the thought of lost competition in the automobile Market if there were only two major brands from which to choose instead of three could anyone blame Congress for not wanting to plunge innocent families into poverty nor to upend the National economy nor to deny anyone their constitutional right to freedom of choice so a bill was passed directing the treasury to guarantee up to 1.5 billion dollars in new loans to Chrysler the banks agreed to write down 600 million dollars of their old loans and to exchange an additional 700 million dollars for preferred stock both of these moves were advertised as evidence the banks were taking a terrible loss but were willing to yield in order to save the nation it should be noted however that the value of the stock which was exchanged for previously uncollectible debt Rose drastically after the settlement was announced to the public furthermore not only did interest payments resume on the balance of the old loans but the banks now replaced the written down portion with fresh loans and these were far superior in quality because they were fully guaranteed by the taxpayers Commonwealth Bank of Detroit the next bailout occurred in 1972 involving the 1.5 Billion Dollar Bank of the Commonwealth of Detroit Commonwealth had funded most of its phenomenal growth through loans from another bank Chase Manhattan in New York when Commonwealth went Belly Up largely due to security speculation and self-dealing on the part of its management Chase seized 39 percent of its common stock and actually took control of the bank in an attempt to find a way to get its money back FDIC director Sprague describes the inevitable sequel Chase officers suggested that Commonwealth was a public interest problem that the government agencies should resolve that unsettle hint was the way Chase phrased its requests for a bailout by the government their proposal would come down to bailing out the shareholders the largest of which was Chase the bankers argued that Commonwealth must not be allowed to fold because it provided essential banking services to the community that was Justified on two counts one it served many minority neighborhoods and two there were not enough other banks in the city to absorb its operation without creating an unhealthy concentration of banking power in the hands of a few the FDIC did not want to be accused of being indifferent to the needs of minorities or of destroying free enterprise competition so on January 17 1972 Commonwealth was bailed out with a 60 million dollar loan plus numerous Federal guarantees Chase absorbed some losses but those were minor compared to what would have been lost without FDIC intervention since continuation of the bank supposedly was necessary to prevent concentration of financial power FDIC engineered its sale to the first Arabian Corporation a Luxembourg firm funded by Saudi princes the bank continued to flounder and in 1983 what was left of it was resold to the former Detroit Bank and Trust Company now called Comerica thus the dreaded concentration of local power was realized after all but not until Chase was able to walk away from the deal with most of its losses covered first Pennsylvania Bank the 1980 bailout of first Pennsylvania Bank of Philadelphia was next with Assets in excess of nine billion dollars it was six times the size of Commonwealth it also was the nation's oldest bank dating back to the bank of North America which was created by the Continental Congress in 1781. the bank had experienced rapid growth and handsome profits due to the aggressive leadership of its CEO John bunting formerly an economist with the Federal Reserve he was the epitome of the era's Go-Go Bankers he vastly increased earnings by reducing safety margins making risky loans and speculating in the bond market as long as the economy expanded these gambles were profitable when the bond market turned sour however the bank plunged into a negative cash flow By 1979 first pen was forced to sell off several of its profitable subsidiaries to obtain operating funds and it was carrying 328 million dollars in bad loans that was 16 million dollars more than the total investment from stockholders the time had arrived to hit up the taxpayer for the loss the bankers went to Washington to present their case Not only was the bailout of first pen essential or the continuation of banking services in Philadelphia it was also critical to the preservation of world economic stability the bank was so large they said if it were allowed to fall it would act as the first Domino leading to an international financial crisis Sprague recalls there was strong pressure from the beginning not to let the bank fail besides hearing from the bank itself the other large Banks and the Comptroller we heard frequently from the Fed I recall at one session Fred Schultz the FED Deputy chairman argued in an Ever Rising voice that there were no Alternatives we had to save the bank he said quit wasting time talking about anything else the directors of the FDIC did not want to cross swords with the Federal Reserve System and they most assuredly did not want to be blamed for tumbling the entire world economic system by allowing the first Domino to fall so in due course a bailout package was put together which featured a 325 million dollar loan from FDIC interest free for the first year and at a subsidized rate thereafter about half the market rate Continental Illinois in the early 1980s Chicago's Continental Illinois was the nation's seventh largest bank with assets of 42 billion dollars and with 12 000 employees its loan portfolio had undergone spectacular growth its net income on loans had doubled in just five years and by 1981 had rocketed to an annual figure of 254 million dollars it had become the darling of the market analysts and had been named by duns review as one of the five best managed companies in the country these opinion leaders failed to perceive that the spectacular performance was due not to expertise in banking or investment but to financing shaky business enterprises and foreign governments that could not obtain loans elsewhere the gaudy fabric began to unravel during the 4th of July weekend of 1982 with the failure of the Penn Square Bank in Oklahoma that was the notorious shopping center bank that had booked a billion dollars in oil and gas loans and resold them to Continental just before the collapse of the energy Market other loans also began to sour at the same time the Mexican and Argentine debt crisis was coming to a head and a series of major corporate bankruptcies were receiving almost daily headlines Continental had placed large chunks of its easy money with all of them when these events caused the bank's credit rating to drop cautious depositors began to withdraw their funds and new funding dwindled to a trickle the bank became desperate for cash to meet its daily expenses in an effort to attract new money it began to offer unrealistically High rates of interest on its CDs loan officers were sent to scour the European and Japanese markets and to conduct a public relations campaign aimed at convincing Market managers that the bank was calm and steady David Taylor the bank's chairman at that time said we had the Continental Illinois reassurance Brigade and we fanned out all over the world by the end of 1983 the bank's burden of non-performing loans had reached unbearable proportions and was growing at an alarming rate by 1984 it was 2.7 billion dollars that same year the bank sold off its profitable credit card operation to make up for the loss of income and to pay stockholders their expected quarterly dividend the internal structure was near collapse but the external facade continued to look like business as usual the first crack in the facade appeared at 11 39 am on Tuesday May 8 Reuters the British news agency moved a story on its wire service stating that banks in the Netherlands West Germany Switzerland and Japan had increased their interest rate on loans to Continental and that some of them had begun to withdraw their funds the story also quoted the bank's official statement that rumors of pending bankruptcy were totally preposterous world's first electronic Bank Run as the sun rose the following morning foreign investors began to withdraw their deposits a billion dollars in Asian money moved out the first day the next day a little more than 24 hours following continental's assurance that bankruptcy was totally Preposterous its long-standing customer the Board of Trade Clearing Corporation withdrew 50 million dollars word of the defection spread through the financial wire services and the Panic was on it became the world's first Global electronic Bank Run by Friday the bank had been forced to borrow 3.6 billion dollars from the Federal Reserve in order to cover escaping deposits a Consortium of 16 Banks led by Morgan Guaranty offered a generous 30-day line of credit but all of this was Far short of the need within seven more days the outflow surged to over 6 billion dollars in the beginning almost all of this action was at the institutional level other Banks and professionally managed funds which closely monitor every minuscule detail of the financial markets the general public had no inkling of the catastrophe even as it unfolded chernow says the Continental run was like some modernistic fantasy there were no throngs of hysterical depositors just cool nightmare flashes on computer screens Sprague writes inside the bank all was calm the teller lines moved as always and Bank officials recall no visible sign of trouble except in The Wire room here the employees knew what was happening as withdrawal order after order moved on The Wire bleeding Continental to death some cried from the beginning there was only one serious question how to justify fleecing the taxpayer to save the bank the rules of the game require that the scam must be described as a heroic effort to protect the public in the case of Continental the shear size of the numbers made the ploy relatively easy there were so many depositors involved so many billions at risk so many other Banks interlocked it could be claimed that the economic fabric of the entire nation of the world itself was at stake and who could say that it was not so Sprague argues the case in familiar terms an early morning meeting was scheduled for Tuesday May 15th at the Fed we talked over the Alternatives they were few none really treasury secretary Regan and fed chairman volcker raised The Familiar concern about a national banking collapse that is a chain reaction if Continental should fail volcker was worried about an international crisis we all were acutely aware that never before had a bank even remotely approaching continental's size closed no one knew what might happen in the nation and in the world it was no time to find out just for the purpose of intellectual curiosity this was the golden moment for which the Federal Reserve and the FDIC were created without government intervention Continental would have collapsed its stockholders would have been wiped out depositors would have been badly damaged and the financial world would have learned that Banks not only have to talk about prudent management they actually have to do it future banking practices would have been severely altered and the long-term economic benefit to the nation and world would have been enormous but with government intervention the discipline of a free market is suspended and the cost of failure and fraud is passed to the taxpayers depositors continue to live in a dream world of false security and Banks can operate recklessly and fraudulently with the knowledge that their political Partners will come to their rescue when they get into trouble the final bailout package at the May 15 meeting treasury secretary Regan spoke eloquently about the value of a free market and the necessity of having the banks Mount their own rescue plan at least for a part of the money to work out that plan a summit meeting was arranged the next morning among the chairman of the seven largest banks Morgan guarantee Chase Manhattan Citibank Bank of America Chemical Bank Bankers Trust and manufacturers Hanover the meeting was perfunctory at best the bankers knew full well that the Reagan Administration would not risk the political embarrassment of a major bank failure that would make the president and the Congress look bad at re-election time but still some kind of tokenism was called for to preserve the administration's conservative image so with urging from the fed and the treasury the Consortium agreed to put up the sum of 500 million dollars an average of only 71 million dollars for each far short of the actual need sure now describes the plan as make-believe and says they pretended to mount a rescue Sprague supplies the details the bankers said they wanted to be in on any deal but they did not want to lose any money they kept asking for guarantees they wanted it to look as though they were putting money in but at the same time wanted to be absolutely sure they were not risking anything by 7 30 a.m We had made little progress we were certain the situation would be totally out of control in a few hours Continental would soon be exposing itself to a new business day and the stock market would open at 10 o'clock Isaac another FDIC director and I held a hallway conversation we agreed to go ahead without the banks we told Conover the third FDIC director the plan and he concurred later we got word from Bernie McKeon our regional director in New York that the bankers had agreed to be at risk actually the risk was remote since our announcement had promised 100 insurance the final bailout package was a Whopper basically the government took over Continental Illinois and assumed all of its losses the FDIC took 4.5 billion dollars in bad loans and paid Continental 3.5 billion dollars for them the difference was made up by the infusion of one billion dollars in fresh capital in the form of stock purchase the bank therefore now had the government as a stockholder controlling 80 percent of its shares and its bad loans had been dumped under the taxpayer in effect even though Continental retained the appearance of a private Institution it had been nationalized by 1984 the Federal Reserve and the treasury had given Continental the Staggering sum of eight billion dollars by early 1986 the figure had climbed to 9.24 billion dollars and was still Rising while explaining this fleecing of the taxpayer to the Senate Banking Committee fed chairman Paul volcker said the operation is the most basic function of the Federal Reserve it was why it was founded with those words he has confirmed one of the more controversial assertions of this book small Banks be damned it has been mentioned previously that large Banks receive a free ride on their FDIC coverage at the expense of small Banks there is no better example of this than the bailout of Continental Illinois in 1983 the bank paid 6.5 million dollars into the fund to ensure deposits of three billion dollars the actual liability however including its institutional and overseas deposits was 10 times that figure and the FDIC guaranteed payment on the whole amount as Sprague admitted small Banks pay proportionately far more for their insurance and have far less chance of a continental style bailout how true within the same week that the FDIC and the FED were providing billions for Continental Illinois it closed down the tiny Bledsoe County Bank of Pikeville Tennessee and the Planters trust and Savings Bank of Appaloosas Louisiana during the first half of that year 43 smaller banks failed without FDIC bailout in most cases a merger was arranged with a larger Bank the impact of this inequity is enormous it sends a message to bankers and depositors alike but small Banks if they get into trouble will be allowed to fold whereas large banks are safe regardless of how poorly or fraudulently they are managed as a New York investment analyst stated to news reporters Continental Illinois even though it had just failed was obviously the safest Bank in the country to have your money in nothing could be better calculated to drive the small independent Banks out of business or to force them to sell out to the Giants since 1984 while hundreds of small banks have been forced out of business the average size of the banks that remain has more than doubled it will be recalled that disadvantage of the big Banks over their smaller competitors was one of the objectives of the Jekyll Island plan the subprime Meltdown by 2008 the engine of Destruction was running at Full Throttle Decades of low interest rates had lured homeowners speculators and lending institutions into the real estate market where fortunes could be made by what appeared to be perpetually Rising values knowing that they would be bailed out by the FED if they got into trouble large Banks threw caution to the wind and offered loans to just about anyone who would sign the documents regardless of ability to make payments many of them crafted fraudulent documents overstating the value of underlying properties and the incomes of borrowers and then made loans that were greater than the value of the property the game was simple make as many subprime loans as possible package them into large blocks of similar loans give the packages impressive names such as Prime Diversified fund and then sell them to unsuspecting investors two of the largest conduits for this scam are Fannie Mae and Freddie Mac loan repackagers sponsored by the government the scheme worked for a while because the feds artificially low interest rates created a real estate boom with Rising home prices those who had been enticed into loans they could not afford were able to sell their properties at a profit and come out ahead even if they could not afford payments foreclosures were rare and the investment packages appeared to be solid however as with all booms caused by manipulation of Market forces the real estate boom came to an end when it did it was compounded by rampant inflation high taxes crippling regulation and loss of jobs to other countries all of which combined to create an economic recession as foreclosure rates began to climb Fannie Mae Freddie Mac large Banks and loan brokers were in trouble not only were their loans not performing they became defendants in hundreds of lawsuits from institutional buyers of their fraudulent investment packages it was time once again for the Federal Reserve to bail them out which it did with over a trillion dollars of newly created money Ambrose Evans Pritchard with the London Telegraph reports the emergency bailout gives the U.S treasury sweeping authority to inject Capital into the giant mortgage lenders Fannie Mae and Freddie Mac which together own or guarantee half the country's 12 trillion dollar stock of Home Loans the ceiling on the U.S national debt has been lifted by a further 800 billion dollars giving the treasury almost unlimited resources to prop up the two lenders in parallel the federal Housing Authority FHA is to guarantee up to 300 billion dollars of fresh mortgages for struggling homeowners trapped with soaring loan costs often the result of Honey Trap contracts the scheme aims to avoid an avalanche of fresh defaults as the housing market continues to deteriorate over 740 000 homes fell into foreclosure in the second quarter the share prices of Fanny and Freddie the world's two biggest financial institutions have dropped by almost 85 percent collapse of the House of Cards everything up to this point was but the Sleepy beginning of what rapidly became a mad rush of new financial disasters and mega bailouts it was at this point that the House of Cards began to collapse in September of 2008 the federal government took over Fannie Mae and Freddie Mac and pumped over 100 billion dollars into them in that same month the government loaned 85 billion dollars to AIG insurance company to keep it in business the money for both infusions was created by the Federal Reserve no one seriously expected repayment the cost was passed to consumers in the form of future inflation incidentally Fannie Mae and Freddie Mac previously had given 4.8 million dollars in campaign donations to congressmen shortly after the bailout AIG Executives came together for nine days to celebrate their good fortune and plan future strategies they did this at the Saint Regis in Monarch Beach California a 500 per night Resort one of their high priority strategies was how to pay bonuses to themselves without calling them that because taxpayers were upset over seeing their hard-earned money going to Executives as rewards for running their business into the ground AIG decided to describe these bonuses as retention payouts later when the public demanded a legislative limit to retention payouts the executives dropped the word games and simply increased their salaries and perks 700 billion dollar Bank bailout or was it five trillion dollars in October of 2008 Congress passed a 700 billion dollar bailout Bill to save the largest banks in the nation all of which were tottering on the edge of bankruptcy congressman who voted for this had received 54 percent more in donations from Banks than those who voted against it the White House urged news services to stop using the word bailout and say rescue instead they complied while the world was stunned by the sheer size of a 700 billion dollar bailout the reality was even worse credit sites and independent research firm in New York and London looked at the total commitment including deals made by the Federal Reserve and the FDIC that were not widely publicized and concluded that the real figure was five trillion dollars that represents an additional 16 500 in Lost savings and purchasing power for every American shortly thereafter American Express received 3.39 billion dollars Executives from the steel industry were lobbying for a similar deal GMAC the financial services division of General Motors was allowed to change its structure to a commercial bank so it also could be eligible for bailout just before Thanksgiving Day the government bailed out Citigroup to the tune of 45 billion dollars Goldman Sachs announced a 2.1 billion dollar loss and began negotiations for a bailout in November the Bank of America received 15 billion dollars and then invested seven billion dollars in China's construction Bank a few days later the treasury announced that the budget deficit would be one trillion dollars the highest in American history up to that point billions for the automakers it was a busy time in Washington Executives from the Auto industry were making weekly trips to the Capitol in private jets they wanted billions of dollars and they wanted them now they were having trouble making interest payments on those pesky bank loans and time was running out GM and Chrysler wanted cash Ford preferred credits because they wanted to continue borrowing from Banks not the government but the banks saw them as a bad risk and refused any new loans the solution was simple Ford asked the government to be a co-signer and guarantee repayment what bank wouldn't loan money on that kind of a deal taxpayers would be on the hook either way altogether the auto companies were given 17.4 billion dollars two months later Ford which already had plants in Mexico Germany and Spain began producing cars in China GM soon followed suit and announced that it also would build more cars overseas taxpayers pay to send their jobs overseas among bailout recipients it is common to see the money used in ways that destroy jobs for the same American taxpayers who pay the bill during the time when U.S banks were receiving more than 150 billion dollars from American workers they were requesting special visas to import 21 800 Personnel from other countries to replace Americans in Upper Echelon jobs including corporate lawyers investment analysts programmers and human resource specialists this disdain for the American Workforce is partly because of corporate pursuit of Maximum profit Above All Else and partly because decision makers consider themselves to be internationalists with no special interest in America except as a cash cow to be milked as regularly and thoroughly as possible as we'll be Illustrated in the following chapters of this book some of these people acting through organizations such as the CFR Council on Foreign Relations are consciously pursuing policies designed to lower the economic stature of America so it can be more comfortably merged into Global government taking money from American workers to build up the economies of foreign countries has done much to advance that goal by the end of 2008 bailout of just the financial services industry during the Bush Administration had reached over seven trillion dollars which was 10 times the amount originally estimated it was more than twice the cost of World War II although this was many times greater than anything like it in history it was considered to be a temporary solution leaving final decisions for the incoming Obama administration although many voters thought there would be a change under Obama the handwriting was already on the wall ninety percent of the donations to Obama's inauguration fund came from Wall Street firms that received billions in bailout and were anticipating more of the same they were not to be disappointed Merrill Lynch a gift to Bank of America in the fall of 2008 the giant brokerage house Merrill Lynch was out of money and on the verge of closing its doors Bank of America agreed to buy the ailing firm for 50 billion dollars a strange offer considering that the bank itself was in trouble and recently received 25 billion dollars in bailout when the Staggering fourth quarter losses of Merrill Lynch were finally known the bank decided to back out of the deal but this was not to be allowed according to the sworn testimony of Ken Lewis Bank of America's CEO treasury secretary Hank Paulson threatened to remove the bank's board of directors and its management if they didn't acquire Merrill as agreed this threat was made at the request of Ben Bernanke chairman of the Federal Reserve when Lewis asked if the government would cover the bank's inevitable losses Paulson said yes but was not willing to put it in writing because a written commitment he said would be a disclosable event and we do not want a disclosable event on December 30th the bank's board dutifully approved the merger two weeks later the treasury delivered to Bank of America an additional 20 billion dollars plus a 118 billion dollar guarantee to pick up further losses from Merrell's assets all of that was placed on the backs of the American people an icon for conflict of interest Henry Paulson CFR was the epitome of the fusion between the banking cartel and government as former CEO of Goldman Sachs he was instrumental in using the power of his office to destroy three of his old rivals he arranged the sale of bear Stearns to J.P Morgan Chase allowed Lehman Brothers to collapse and forced the absorption of Merrill Lynch by Bank of America all the while providing a generous bailout for his alma mater Goldman Sachs this left only Goldman and Morgan as major investment Banks documents obtained by a citizen Watchdog group Judicial Watch revealed that Paulson had told Bankers they must accept bailout money even if their Banks were in fair condition and didn't need it the reason was so as not to stigmatize the weaker banks by allowing a comparison to well-run Banks by March of 2009 Fannie Mae asked for an additional 15 billion dollars the government complied and then approved retention bonuses of one million or more to each of Fannie Mae's top executives in its final days of existence before being purchased by Bank of America with government funds Merrill Lynch paid 3.6 billion dollars in bonuses with the knowledge and approval of the Bank of America the bank on the other hand said it was considering raising the salaries of its own investment Executives by as much as 70 percent to avoid the bad publicity associated with bonuses bonuses become a distraction this incredible record of self-dealing and plunder of the public treasury was given full attention in the Press which led to a national outcry against greedy corporate executives scores of politicians made impassioned speeches about the need for new laws and regulations to tame this bonus monster it was the perfect decoy to divert public attention away from the greater issue to be sure million dollar bonuses for executives who led their companies into bankruptcy are worthy of attention but that issue is microscopically small compared to the fact that these companies were being bailed out in the first place but the process was unconstitutional and that the astronomical amount of money involved literally was killing the nation the media had framed the debate so that the really important issues were not even part of it all that was left for the public to think about was how much bailout should be given who should get it first and how to limit the bonuses to let the corrupt Banks fail and let the economy recover in the absence of fraud was not allowed in mainstream debate the repayment scam in December of 2009 Bank of America announced that it had repaid its 45 billion dollar loan from the treasury government officials boasted that their actions were Vindicated and the taxpayers even made a profit the media thought it was wonderful and accepted the announcement at face value the source of the money was said to be cash reserves and the sale of a new stock offering there was something very wrong with that picture cash reserves were not a likely Source because the bank reported a net outflow of cash and was still losing money its loans were continuing to go sour and defaults had more than tripled from the first quarter to the Third bad loans were up 15 percent the only way the bank could have sizable cash reserves was to receive a confidential infusion from the treasury what Mr Paulson would call a non-disclosable event in other words the government may have provided the money to pay itself back in which case it was an accounting trick a publicity stunt to fool the public into thinking that bailouts were acts of great statesmanship after all the sale of Bank stock had similar problems the general public was dumping Bank of America's stock at that time not buying it so who were the buyers could they be the treasury itself directly or indirectly could there be a few trusted institutional buyers who were given non-disclosable guarantees by the treasury to cover their losses we know that by March of 2010 the treasury was auctioning warrants given to it by various Banks as Securities against their loans could these have been the so-called stocks that were sold warrants are not stocks they are contracts that give buyers the future right to buy stock at a stated price warrants are derivatives and those who purchase them are speculating not investing could whoever bought them be privately assured by the government and the Federal Reserve that they will be bailed out if their gamble goes sour in view of the recent record of the treasury and the FED in similar matters these are not unreasonable questions but no one in mainstream media was asking them the Federal Reserve of New York reported that the assets acquired when AIG was bailed out were showing a paper profit that means if they were sold on the open market they would generate a profit over their purchase price if so one can only speculate why they did not sell them the plausible answer is that the Federal Reserve economists are like a man who bought a clunker automobile for nine hundred dollars then claimed a paper profit because he says he can sell it for a thousand dollars when in fact he would be lucky to sell it for one hundred dollars until these assets actually are sold any claims of paper profits should be viewed with great caution news that the Bank of America had repaid its loan had a tranquilizing effect on the public temper and so it wasn't long before other recipients announced that they too were repaying their loans even though they too were continuing to operate at a deficit ibank and General Motors said they would repay their loans by issuing new stock in April of 2010 General Motors announced it actually had paid back its loan but wait upon investigation we discover that it paid back its first bailout with money from the second bailout none of it came from car sales or even stock sales the whole thing was a con game to fool the public nationalization becomes a reality what the government funds it controls and what it controls it owns this point was made Crystal Clear when on April 1st 2009 treasury secretary Timothy Geithner Council on Foreign Relations announced he was prepared to oust the CEO of any bank that received a bailout if he doesn't run the bank correctly Geithner was not planning to fire anyone the purpose of his statement was to convince the public that the government was being conscientious and responsible with the handling of so much money but the significance of his statement is that the Secretary of the Treasury now holds the power to oust Bank CEOs without concern for the wishes of their Boards of directors that represents the ultimate privilege of ownership the new reality is that the financial industry and major chunks of the insurance and automobile Industries now have been nationalized which is a soft word for saying they are owned by the government in May 2009 the government pumped another 7.5 billion dollars into GMAC the finance arm of GM another 3.8 billion dollars in December and another 3.8 billion dollars in January 2010 for a total of 16.3 billion dollars this gave the government a controlling ownership of 56 percent by early 2010 the government had given a total of 57.6 billion dollars to General Motors itself and held controlling interest it now runs the company as it wishes by February of 2009 AIG broke again was 80 percent owned by the government in that same month Alan Greenspan former chairman of the Federal Reserve openly called for nationalization of all failing Banks which means most of them the new business model for America is clearly recognizable its dominant feature is the merger of government real estate and commerce into a single structure tightly controlled at the top it is the same model used in Soviet Russia Nazi Germany fascist Italy and communist China the system already is global one of the most revealing episodes in this drama was played out in a federal hearing room on March 3rd 2009 when fed chairman Bernanke testified before the Senate budget committee when Senator Bernie Sanders asked if he would provide the names of the financial institutions that received bailouts Bernanke paused for a moment and then said flatly no the excuse for this amazing refusal was that to reveal their names might cause the public to lose confidence in those Banks and withdraw their deposits which would cause further problems there may have been a less praiseworthy motive for the secrecy rumors were flying that billions of dollars had been sent overseas to Banks of other countries and such information would not have set well with American citizens were the rumors true subsequent events indicate they were two months later the IMF announced it was bailing out banks in Greece to the tune of 145 billion dollars twenty percent of which was provided by the U.S American citizens were giving 8 billion dollars to Greek Banks the following week the Federal Reserve announced it would bail out European Banks without Congressional approval bypassing Congress was not news because Congressional approval has never been a serious obstacle the newsworthy aspect was that the FED now admitted it had become a money machine for the world the new program is integrated with the central banks of Canada England the EU Switzerland and Japan money for future bailouts in other countries will be created by the Federal Reserve at the expense of American citizens without their knowledge or consent and moved to the central banks of those countries to be distributed to their commercial Banks that was big news but mainstream media treated it as a dry press release and said nothing about the popularization of American taxpayers the saga continues in August 2010 Freddie Mac was back at the payout window asking for another 1.8 billion dollars bringing the total to over 64 billion dollars on June 12 2010 President Obama asked Congress for 50 billion dollars to bail out American cities and states many states and local governments had run out of money and were asking Washington to pay the shortfall especially for welfare if welfare checks stop coming in the mail they said there will be riots in the streets no one wants that so federal funds are assured the next phase of this charade was to create the illusion of paying back the bailouts out of profits that don't exist using the same kind of accounting tricks that sent Jeffrey Skilling president of Enron Corporation to prison James Quinn senior director of strategic planning at Quinn advisors explained it this way it should warm your hearts to know that Financial profits have amazingly reached their pre-crash highs all it took was the Federal Reserve taking 1.3 trillion dollars of bad loans off their books overstating the value of their remaining loans by 40 percent borrowing money from the FED at zero percent relying on the Bernanke put so their trading operations could gamble without fear of losses and lastly by pretending their future losses will be lower and relieving their loan loss Reserves the banking industry didn't need to do any of that stodgy old school stuff like make loans to small businesses extending and pretending is much more profitable the cost of funding States and local governments in addition to the federal government in addition to the banks and insurance companies in addition to the auto companies in addition to the banks of Europe in addition to endless Wars and a global standing army will crush what is left of the American middle class how long it can continue is anyone's guess but we do know it is coming close to completion chapters 25 and 26 are devoted to where it is headed and how it may end second reason to abolish the Federal Reserve a sober evaluation of this record leads to the second reason for abolishing the Federal Reserve far from being a protector of the public it is a cartel operating against the public interest summary the game called bailout is not a Whimsical figment of the imagination it is real here are some of the big games of the past and their final scores in 1970 Penn Central Railroad became bankrupt the banks that lent money to it had taken over its board of directors and put it further into the hole all the while extending bigger loans to cover the losses directors concealed reality from stockholders and made additional loans so the company could pay dividends to keep up a false front directors and their Banks unloaded their stock at unrealistically high prices when the truth became public stockholders were left holding the empty bag when Congress was told that the collapse of Penn Central would be devastating to the public interest it responded by granting 125 million dollars in loan guarantees so Banks would not be at risk the railroad failed anyway but the banks were covered Penn Central was nationalized into Amtrak and continues to operate at a loss as Lockheed faced bankruptcy in 1970 Congress heard essentially the same story thousands would be unemployed subcontractors would go out of business and the public would suffer greatly so Congress guaranteed 250 million dollars in new loans which put Lockheed 60 percent deeper into debt than before now that government was guaranteeing the loans it made sure Lockheed became profitable by granting lucrative defense contracts at non-competitive bids the banks were paid back in 1975 New York City had reached the end of its credit rope it had borrowed heavily to maintain an extravagant bureaucracy and a mini welfare state when Congress was told that the public would be jeopardized if city services were curtailed and that America would be disgraced in the eyes of the world it authorized 2.3 billion dollars of additional loans which more than doubled the size of the current debt the banks continued to receive their interests in 1978 Chrysler was near bankruptcy Congress was told that the public would suffer if the company folded and that it would be a blow to the American way if Freedom of Choice were reduced from three to two makes of automobiles so Congress guaranteed up to 1.5 billion dollars in new loans the bank's previously uncollectible debt was converted into a taxpayer-backed interest-bearing asset in 1972 the Commonwealth Bank of Detroit with 1.5 billion dollars in assets became insolvent it had borrowed heavily from Chase Manhattan to invest in high risk and potentially High profit Ventures now that it was in trouble so was Chase the bankers went to Washington and told the FDIC the public must be protected from the great financial hardship that would follow if Commonwealth folded so the FDIC pumped in a 60 million dollar loan Plus Federal guarantees of repayment Chase took a minor write down but converted most of its potential loss into taxpayer-backed assets in 1979 the first Pennsylvania Bank of Philadelphia became insolvent with Assets in excess of nine billion dollars it was six times the size of Commonwealth it too had been an aggressive player in the 70s now the bankers and the Federal Reserve told the FDIC that the public must be protected from the Calamity of a bank failure of this size that the national economy was at stake perhaps even the entire world so the FDIC gave a 325 million dollar loan interest free for the first year and at half the market rate thereafter the FED offered money to other banks at a subsidized rate for the purpose of re-lending to First pin with that enticement they Advanced 175 million dollars in immediate loans plus a one billion dollar line of credit in 1982 Chicago's Continental Illinois became insolvent it was the nation's seventh largest bank with 42 billion dollars in assets the previous year its prophets had soared as a result of loans to high-risk business ventures and foreign governments although it had been the darling of Market analysts it quickly unraveled when its cash flow turned negative fed chairman volcker told the FDIC it would be Unthinkable to allow the world economy to be ruined by a bank failure of this magnitude so the FDIC assumed 4.5 billion dollars in bad loans and took 80 percent ownership of the bank in the form of stock in effect the bank was nationalized but no one called it that bailouts up to this point hail by comparison to the trillions of dollars pumped into Banks insurance companies automobile manufacturers and banks of other countries beginning in 2008. it started with what was called the subprime Meltdown caused by a calculated policy of the nation's largest banks to entice low-income families into accepting mortgages in excess of what they could afford the Assumption was that the value of houses would rise forever so people could pay off old loans by taking out larger new loans based on the increasing value of Real Estate these doomed mortgages were packaged together given fancy names and sold to naive investors and investment funds when the Day of Reckoning arrived millions of mortgage holders lost their mythical equity and their homes while millions of investors lost their money the banks that created this bubble were on the brink of collapse but they told Congress they were too big to fail because if they did so would America itself Congress dutifully approved virtually every request for taxpayer funding regardless of the amount this legalized plunder was coordinated by two secretaries of the treasury Henry Paulson and Timothy Geithner who came from the banking fraternity and used their positions of public trust to protect and enrich the cartel all of the money was provided by the Federal Reserve acting as the lender of Last Resort that was one of the purposes for which it had been designed we must not forget that the phrase lender of Last Resort means that the money is created out of nothing resulting in the confiscation of wealth through inflation chapter 4. home sweet loan the history of increasing government intervention in the Housing Industry the stifling of free market forces in residential real estate the resulting crisis in the SNL industry the bailout of that industry with money taken from the taxpayer as we have seen in previous chapters the Damage Done by the banking cartel is made possible by the fact that money can be created out of nothing it also destroys our purchasing power through the hidden tax called inflation the mechanism by which it works is hidden and subtle let us turn now from the Arcane world of Central Banking to the giddy world of savings and loan institutions by comparison the problem in the Savings and Loan industry is easy to comprehend it is simply that vast amounts of money are disappearing into the black hole of government mismanagement and the losses must eventually be paid by us the end result is the same in both cases socialism takes root in America it all began with a concept the concept took root in America largely as a result of the Great Depression of the 1930s American politicians were impressed at how radical marxists were able to attract popular support by blaming the capitalist system for the country's woes and by promising a socialist Utopia they admired and feared these radicals admired them for their skill at Mass psychology feared them lest they become so popular as to win a plurality at The Ballot Box it was not long before many political figures began to mimic the soapbox orders and the voters enthusiastically put them into office while the extreme and violent aspects of Communism generally were rejected the more genteel theories of socialism became popular among the educated Elite it was they who would naturally become the leaders in an American Socialist system someone had to look after the masses and tell them what to do for their own good and many with college degrees and those with great wealth became enamored by the thought of playing that role and so the concept became widely accepted at all levels of American Life the downtrodden masses as well as the educated Elite that it was desirable for the government to take care of its citizens and to protect them in their economic affairs and so when more than 1900 snls went Belly Up in the Great Depression Herbert Hoover and a most willing Congress created the Federal Home Loan Bank board to protect depositors in the future it began to issue charges to institutions that would submit to its regulations and the public was led to believe that government Regulators would be more wise prudent and honest than private managers a federal Charter became a kind of government seal of approval the public at last was being protected Hoover was succeeded by FDR in the White House who became the epitome of the New Breed earlier in his political career he had been the Paragon of free enterprise and individualism he spoke out against big government and for the free market but in midlife he reset his sale to catch the shifting political wind he went down in history as a pioneer of socialism in America it was FDR who took the next step toward government paternalism in the SNL industry as well as the banking industry by establishing the Federal Deposit Insurance Corporation FDIC and the Federal Saving and Loan Insurance Corporation fslic from that point forward neither the public nor the managers of the thrifts needed to worry about losses everything would be reimbursed by the government a house on every lot at about the same time loans on private homes became subsidized through the federal Housing Authority FHA which allowed snls to make loans at rates lower than would have been possible without the subsidy this was to make it easier for everyone to realize the dream of having their own home while the marxists were promising a chicken in every pot the new dealers were winning elections by pushing for a house on every lot in the beginning many people were able to purchase a home who otherwise might not have been able to do so or who would have had to wait longer to accumulate a higher down payment on the other hand the FHA induced easy credit began to push up the price of houses for the middle class and that quickly offset any real advantage of the subsidy the voters however were not perceptive enough to understand this canceling effect and continued to vote for politicians who promised to expand the system The Next Step was for the Federal Reserve board to require Banks to offer interest rates lower than those offered by snls the result was that funds moved from the banks into the snls and became abundantly available for home loans this was a deliberate National policy to favor the home industry at the expense of other industries that were competing for the same investment dollars it may not have been good for the economy as a whole but it was good politics abandonment of the free market these measures effectively removed real estate loans from the free market and placed them into the political Arena where they have remained ever since the damage to the public as a result of this intervention would be delayed a long time in coming but when it came it would be cataclysmic the reality of government disruption of the free market cannot be overemphasized for it is at the heart of our present and future crisis we have savings institutions that are controlled by government at every step of the way federal agencies provide protection against losses and lay down rigid guidelines for capitalization levels number of branches territories covered management policies services rendered and interest rates charged the additional cost to snls of compliance with this regulation has been estimated by the American Bankers Association at about 11 billion dollars per year which represents a whopping 60 percent of all their profits on top of that the healthy component of the industry must spend over a billion dollars each year for extra premiums into the so-called Insurance Fund to make up for the failures of the unhealthy component a form of penalty for success when some of the healthy institutions attempted to convert to Banks to escape this penalty The Regulators said no their cash flow was needed to support the bailout fund insurance or the Common Man the average private savings deposit is about six thousand dollars yet under the Carter Administration the level of FDI insurance was raised from forty thousand dollars to a hundred thousand dollars for each account those with more than that merely had to open several accounts so in reality the sky was the limit clearly this had nothing to do with protecting the Common Man the purpose was to prepare the way for brokerage houses to reinvest huge blocks of capital at high rates of Interest virtually without risk it was after all insured by the federal government in 1979 Federal Reserve policy had pushed up interest rates and the S L's had to keep Pace to attract deposits by December of 1980 they were paying 15.8 percent interest on their money market certificates yet the average rate they were charging for new mortgages was only 12.9 percent many of their older loans were still crunching away at seven or eight percent and to compound the problem some of those were in default which means they were really paying zero percent the thrifts were operating deep in the red and had to make up the difference somewhere the weakest snls paid the highest interest rates to attract depositors and they are the ones which obtained the large blocks of brokered funds Brokers no longer cared how weak the operation was because the funds were fully insured they just cared about the interest rate on the other hand the SNL managers reasoned that they had to make those funds work miracles for the short period they had them it was their only chance to dig out and they were willing to take big risks for them also the government's insurance program had removed any chance of loss to their depositors so many of them plunged into high profit high risk real estate developments deals began to go sour in 1979 was the first year since the Great Depression of the 1930s that the total net worth of federally insured snls became negative and that was despite expansion almost everywhere else in the economy the public began to worry full faith and credit the protectors in Washington responded in 1982 with a joint resolution of Congress declaring that the full faith and credit of the United States government stood behind the fslic that was a reassuring phrase but many people had the gnawing feeling that somehow we were going to pay for it ourselves and they were right Consumer Reports explained behind the troubled Banks and the increasingly troubled insurance agencies stands the full faith and credit of the government in effect a promise sure to be honored by Congress that all citizens will chip in through taxes or through inflation to make all depositors all the plight of the S L's was dramatically brought to light in Ohio in 1985 when the Home State Savings Bank of Cincinnati collapsed as a result of a potential 150 million dollar loss in a Florida Securities firm this triggered a run not only on the 33 branches of home state but on many of the other snls as well the news impacted International markets where overseas speculators dumped paper dollars for other currencies and some rushed to buy gold within a few days depositors demanding their money caused 60 million dollars to flow out of the state's 130 million dollar insurance fund which true to form for all government protection schemes was terribly inadequate if the Run had been allowed to continue the fund likely would have been obliterated the next day it was time for a political fix on March 15 Ohio governor Richard Celeste declared one of the few bank holidays since the Great Depression and closed all 71 of the state insured thrifts he assured the public there was nothing to worry about he said this was merely a cooling off period until we can convincingly demonstrate the soundness of our system then he flew to Washington and met with Paul volcker chairman of the Federal Reserve board and with Edwin gray chairman of the federal Home Loan Bank board to request federal assistance they assured him it was available a few days later depositors were authorized to withdraw up to seven hundred and fifty dollars from their accounts on March 21st President Reagan calmed the world money markets with assurances that the crisis was over furthermore he said the problem was limited to Ohio this was not the first time there had been a failure of state-sponsored insurance funds the one in Nebraska was pulled down in 1983 when the Commonwealth savings company of Lincoln failed it had over 60 million dollars in deposits but the insurance fund had less than two million dollars to cover not just Commonwealth but the whole system depositors were lucky to get 65 cents on the dollar and even that was expected to take up to 10 years an invitation to fraud in the early days of the Reagan Administration government regulations were changed so that the snls were no longer restricted to the issuance of home mortgages the sole reason for their Creation in the first place in fact they no longer even were required to obtain a down payment on their loans they could now Finance one hundred percent of a deal or even more Office Buildings and shopping centers sprang up everywhere regardless of the need developers Builders managers and appraisers made Millions the field soon became overbuilt and riddled with fraud billions of dollars disappeared into defunct projects in at least 22 of the failed snls there is evidence that the mafia and CIA were involved fraud is not necessarily against the law in fact most of the fraud in the SNL Saga was not only legal it was encouraged by the government the Garn Saint-Germain act allowed the thrifts to lend an amount of money equal to the appraised value of real estate rather than the market value it wasn't long before appraisers were receiving handsome fees for appraisals that were to say the least unrealistic but that was not fraud it was the intent of the regulators the amount by which the appraisal exceeded the market value was defined as appraised equity and was counted the same as capital since the S L's were required to have one dollar in capital or every 33 dollars held in deposits an appraisal that exceeded market value by one million dollars could be used to Pyramid 33 million dollars in deposits from Wall Street Brokerage houses and the anticipated profits from those funds was one of the ways in which the essendales were supposed to recoup their losses without the government having to cough up the money which it didn't have in effect the government was saying we can't make good on our protection scheme so go get the money yourself by putting the investors at risk not only will we back you up if you fail we'll show you exactly how to do it The Fallout begins in spite of the accounting gimmicks which were created to make The Walking Dead snells look healthy by 1984 The Fallout began the fslic closed one institution that year and arranged for the merger of 26 others which were insolvent in order to persuade healthy firms to absorb insolvent ones the government provides cash settlements to compensate for the liabilities by 1984 these subsidized mergers were costing the FDIC over 1 billion dollars per year yet that was just the small beginning between 1980 and 1986 a total of 664 insured snls failed government Regulators had promised to protect the public in the event of losses but the losses were already far beyond what they could handle they could not afford to close down all the insolvent thrifts because they simply didn't have enough money to cover the payout in March of 1986 the fslic had only three cents for every dollar of deposits by the end of that year the figure had dropped to two tenths of a penny for each dollar insured obviously they had to keep those thrifts in business which meant they had to invent even more accounting gimmicks to conceal the reality postponement of the inevitable made matters even worse keeping the snls in business was costing the fslic 6 million dollars per day by 1988 two years later the thrift industry as a whole was losing 9.8 million dollars per day and the unprofitable ones the corpses which were propped up by the fslic were losing 35.6 million dollars per day and still the game continued by 1989 the fslic no longer had even two tenths of a penny for each dollar insured its reserves had vanished altogether like the thrifts it supposedly protected it was itself insolvent and looking for loans it had tried offering Bond issues but these fell far short of its needs Congress had discussed the problem but it failed to provide new funding the collapse of Lincoln's savings brought the crisis to a head there was no money period the fed usurps the role of Congress in February an agreement was reached between Alan Greenspan chairman of the Federal Reserve board and M Danny wall chairman of the federal Home Loan Bank board to have 70 million dollars of bailout funding for Lincoln savings come directly from the Federal Reserve this was a major break in precedent historically the FED has served to create money only for the government or for banks if it were the will of the people to bail out a savings institution then it is up to Congress to approve the funding if Congress does not have the money or cannot borrow it from the public then the FED can create it out of nothing of course and give it to the government but in this instance the Fed was usurping the role of Congress and making political decisions entirely on its own there is no basis in the Federal Reserve Act for this action yet Congress remained silent apparently out of collective guilt for its own paralysis finally in August of that year Congress was visited by the ghost of FDR and sprang into action he passed the financial institution's reform and Recovery Act Feria and allocated a minimum of 66 billion dollars for the following 10 years 300 billion dollars over 30 years of this amount 225 billion dollars was to come from taxes or inflation and 75 billion dollars was to come from the healthy snls it was the biggest bailout ever bigger than the combined costs for Lockheed Chrysler Penn Central and New York City in the process the fslic was eliminated because it was hopelessly insolvent and replaced by the savings Association Insurance Fund also created was the banking Insurance Fund for the protection of commercial Banks and both are now administered by the FDIC as is often the case when previous government control fails to produce the desired result the response of Congress is to increase the controls four entirely new layers of bureaucracy were added to the existing Tangled mess the resolution trust oversight board to establish strategies for the RTC the resolution funding Corporation to raise money to operate the RTC the office of thrift supervision to supervise Thrift institution even more than they had been and the oversight board for the home loan Banks the purpose of which remains vague but probably is to make sure that the snls continue to serve the political directive of subsidizing the home industry when President Bush signed the bill he said this legislation will safeguard and stabilize America's Financial system and put in place permanent reforms so these problems will never happen again moreover it says to tens of millions of savings and loan depositors you will not be the victims of others mistakes we will see guarantee that your insured deposits are secure the estimates are slightly wrong by the middle of the following year it was clear that the 66 billion dollar funding would be greatly inadequate treasury spokesman were now quoting a hundred and thirty billion dollars about twice the original estimate how much is 130 billion dollars in 1990 it was 30 percent more than the salaries of all the school teachers in America it was more than the combined profits of all the Fortune 500 industrial companies it would send 1.6 million students through the best four-year colleges including room and board and the figure did not even include the cost of liquidating the huge backlog of thrifts already seized nor the interest that had to be paid on borrowed funds within only a few days of the announced increase the treasury again revised the figure upward from 130 billion dollars to a hundred and fifty billion dollars as treasury secretary Nicholas Brady told the Press no one should assume that the estimates won't change they will indeed the estimates continued to change with each passing week the government had sold or merged 223 insolvent thrifts during 1988 and had given grossly inadequate estimates of the cost financiers such as Ronald Pearlman and the Texas investment partnership called Temple Inland Incorporated picked up many of these at Fantastic Bargains especially considering that they were given cash subsidies and tax advantages to sweeten the deal at the time Danny wall who was then chairman of the federal Home Loan Bank board announced that these deals took care of the worst Thrift problems he said the cost of the bailout was 39 billion dollars The Wall Street Journal replied wrong again the new study a compilation of audits prepared by the Federal Deposit Insurance Corporation indicates that the total cost of the so-called class of 88 will be 90 billion dollars to 95 billion dollars including tax benefits granted the buyers and a huge amount of interest on government debt to help Finance this assistance but the 1988 Thrift rescue's most expensive flaw doesn't appear to be the enrichment of tycoons rather it's that none of the deals ended or even limited the government's exposure to mismanagements by the new owners hidden losses on real estate in the past or the vicissitudes of the real estate markets in the future and some of the deals appear to be sham transactions in which failing thrifts were sold to failing thrifts which are failing all over again although the thrifts proved to be in far worse shape than the bank board estimated Mr wall defends his strategy for rescuing them with open-ended assistance we didn't have the money to liquidate he says when Congress passed Furia the previous year to safeguard and stabilize America's Financial system The Staggering sum of 300 billion dollars was authorized to be taken from taxes and inflation over the following 30 years to do the job now Federal Reserve chairman Alan Greenspan was saying that the true long-term cost would stand at 500 billion dollars an amount even greater than the default of loans to all the third world countries combined the figure was still too low a non-biased private study released by veribank Incorporated showed that when all the hidden costs are included the bill presented to the American people will be about 532 billion dollars the problems that President Bush promised would never happen again were happening again bookkeeping sleight of hand long before this point the real estate market had begun to contract and many mortgages exceeded the actual price for which the property could be sold furthermore Market interest rates had risen far above the rates that were locked into most of the s l loans and that decreased the value of those mortgages the true value of a fifty thousand dollar mortgage that is paying seven percent interest is only half of a fifty thousand dollar mortgage that is earning 14 percent so the Protectors of the public devised a scheme whereby the snls were allowed to Value their assets according to the original loan value rather than their true market value that helped but much more was still needed The Next Step was to create bookkeeping assets out of thin air this was accomplished by authorizing the snls to place a monetary value on community Goodwill with the mere stroke of a pin the referees created 2.5 billion dollars in such assets and the players continued the game then the fslic began to issue certificates of net worth which were basically promises to bail out the ailing snls should they need it the government had already promised to do that but by printing it on pieces of paper and calling them certificates of net worth the snls were allowed to count them as assets on their books such promises are assets but since the thrifts would be obligated to pay back any money it received in a bailout those payback obligations should also have been put on the books as liabilities the net position would not change the only way they could count the certificates as assets without adding the offsetting liabilities would be for the bailout promises to be outright gifts with no obligation to ever repay that may be the eventual result but it is not the way the plan was set up in any event the thrifts were told they could count these pieces of paper as capital the same as if the owners had put up their own cash and the game continued the Moment of Truth arrives when the snls have to liquidate some of their Holdings such as in the sale of their mortgages or foreclosed homes to other snls commercial Banks or private parties that is when the inflated bookkeeping value is converted into the true market value and the difference has to be entered into the Ledger as a loss but not in the Never Never Land of socialism where government is the great protector Dennis Turner explains the fslic permits the SNL which sold the mortgage to take the loss over a 40-year period most companies selling an asset at a loss must take the loss immediately only s and L's can engage in this patent fraud two failing snls could conceivably sell their lowest yielding mortgages to one another and both would raise their net worth this dishonest Accounting in the banking system is approved by the highest regulatory authorities U.S news and World Report continues the commentary today scores of savings and loan associations kept alive mainly by accounting gimmicks continue to post big losses only a fraction of the industry's aggregate net worth comprises hard assets such as mortgage notes intangible assets which include bookkeeping entries such as Goodwill make up nearly all of the industry's estimated net worth of 37.6 billion dollars accounting gimmicks are not fraud we must keep in mind that a well-managed institution would never assume these kinds of risks or resort to fraudulent accounting if it wanted to stay in business for the Long Haul but with Washington setting guidelines and standing by to make up losses a manager would be fired if he didn't take advantage of the opportunity after all Congress specifically said it was okay when it passed the laws these were loopholes deliberately put there to be used Dr Edward Kane explains deception itself doesn't constitute illegal fraud when it's authorized by an accounting system such as the generally accepted accounting principles Gap system which allows institutions to forego recording assets at their true worth maintaining them instead at their inflated value the regulatory accounting principle system in 1982 added even new options to overstate Capital intense speculation such as we observed in these firms is not necessarily bad management at all in most of these cases it was clever management there were clever gambles that exploited not depositors or savers but taxpayers the Press has greatly exaggerated the role of illegal fraud in these matters with much time spent excoriating the likes of Donald Dixon at Vernon essendel and Charles Keating at Lincoln savings through these flops cost the taxpayer well over three billion dollars but all the illegal fraud put together amounts to only about one half of one percent of the total losses so far focusing on that minuscule component serves only to distract from the fact that the real problem is government regulation itself junk bonds are not junk another part of the distraction has been to make it appear that the thrifts got into trouble because they were heavily invested in junk bonds wait a minute what are junk bonds anyway this may come as a surprise but those held by the S L's were anything but junk in fact in terms of risk return ratios most of them were Superior grade Investments to bonds from The Fortune 500 companies so-called junk bonds are merely those that are offered by smaller companies which are not large enough to be counted among the nation's Giants the large reinvestors such as managers of mutual funds and retirement funds prefer to stay with well-known names like General Motors and IBM they need to invest truly huge blocks of money every day and the smaller companies don't have enough to offer to satisfy their needs consequently bonds from most smaller companies are not traded by the large brokerage houses or the bonds division of the New York Stock Exchange they are traded in smaller exchanges or directly between brokers in what is called over-the-counter because they do not have the advantage of being traded in the larger markets they have to pay a higher interest rate to attract investors and for that reason they are commonly called high-yield bonds bonds offered by these companies are derided by some Brokers as not being investment grade yet many of them are excellent performers in fact they have become an important part of the American economy because they are the backbone of new industry the most successful companies of the future will be found among their ranks during the last decade while the Fortune 500 companies were shrinking and eliminating 3.6 million jobs this segment of new industry has been growing and has created 18 million new jobs not all new companies are good Investments the same is true of older companies but the small company sector generally provides more jobs has greater profit margins and pays more dividends than the so-called investment grade companies from 1981 to 1991 the average return on 10-year treasury bills was 10.4 percent the Dow Jones Industrial Average was 12.9 and the average return on so-called junk bonds was 14.1 percent because of this higher yield they attracted more than 180 billion dollars from Savvy investors some of whom were snls it was basically a new market which was orchestrated by an upstart Michael Milken at the california-based Drexel Burnham Lambert brokerage house Capital Growth without bank loans or inflation one of the major concerns at Jekyll Island in 1910 was the trend to obtain business growth capital from sources other than bank loans here 70 years later the same Trend was developing again in a slightly different form Capital especially for small companies was now coming from bonds which Drexel had found a way to mass Market in fact Drexel was even able to use those bonds to engineer corporate takeovers an activity that previously had been reserved for the Mega investment houses by 1986 Drexel had become the most profitable Investment Bank in the country here was a hundred and eighty billion dollars that no longer was being channeled through Wall Street here was a hundred and eighty billion dollars that was coming from people's savings instead of being created out of nothing by the Banks in other words here was growth built upon real investment not inflation certain people were not happy about it Glenn Yago director of the economic research Bureau and associate professor of management at the State University of New York at Stony Brook explains the problem it was not until high yield Securities were applied to restructuring through deconglomeration and takeovers that hostilities against the junk bond market broke out high yield Market grew at the expense of Bank debt and high-yield companies grew at the expense of the hegemony of many established firms as Peter pasel noted in the New York Times the impact was first felt on Wall Street where sharp elbows and a working knowledge of computer spreadsheets suddenly counted more than a nose for dry sherry or membership in skull and bones the first line of attack on this new market of high-yield bombs was to call them junk the word itself was powerful the financial media picked it up and many investors were frightened away The Next Step was for compliant politicians to pass a law requiring snls to get rid of their junk supposedly to protect the public that this was a hoax is evident by the fact that only five percent ever held any of these bonds and their Holdings represented only 1.2 percent of the total s L's assets furthermore the bonds were performing satisfactorily and were a source of much needed Revenue nevertheless the financial institutions reform and Recovery Act which was discussed previously was passed in 1989. it forced snls to liquidate at once their junk bond Holdings that caused their prices to plummet and the thrifts were even further weakened as they took a loss on the sale Jane Ingraham comments overnight profitable snls were turned into government-owned basket cases in the hands of the resolution trust Corporation RTC to add to the disaster the RTC itself which became the country's largest owner of junk bonds flooded the market again with 1.6 billion dollars of its Holdings at the Market's bottom in 1990. so it was the government itself that crashed the junk bond market not Michael Milken although the jailed Milken and other former officials of Drexel Burnham Lambert have just agreed to a 1.3 billion dollar settlement of the hundreds of lawsuits brought against them by government Regulators aggrieved investors and others demanding Justice incidentally these bonds have since recovered and had the snls been allowed to keep them they would be in better Financial condition today and so would be the RTC with the California upstarts out of the way it was a simple matter to buy up the detested bonds at bargain prices and to bring control of the new market back to Wall Street the New York firm of Solomon Brothers for example one of Drexel's most severe critics during the 1980s went on to become a leading Trader in the market Drexel created real problem is government regulation so the real problem within the Savings and Loan industry is government regulation which has insulated it from the free market and encouraged it to Embark upon unsound business practices as the Wall Street Journal stated on March 10 1992 if you're going to wreck a business the size of the U.S Thrift industry you need a lot more power than Michael Milken ever had you need the power of national political Authority the kind of power possessed only by regulators and Congress whatever hold Milken or junk bonds may have had on the S L's it was nothing compared with the interventions of Congress at the time this book went to press the number of snls that operated during the 1980s had dropped to less than half as failures mergers and conversion into Banks continue the number will decline further those that remain fall into two groups those that have been taken over by the RTC and those that have not most of those that remain under private control and that is a relative term in view of the regulations they endure are slowly returning to a healthy State as a result of improved profitability asset quality and capitalization the RTC run organizations on the other hand continue to hemorrhage due to failure by Congress to provide funding to close them down and pay them off losses from this group are adding 6 billion dollars per year to the ultimate cost of bailout President Clinton was asking Congress for an additional 45 billion dollars and hinting that this should be the last bailout but no promises the game continues Congress is paralyzed with good reason Congress seems disinterested and paralyzed with inaction one would normally expect dozens of politicians to be calling for a large-scale investigation of the ongoing disaster but there is hardly a peep the reason becomes obvious when one realizes that Savings and Loan associations Banks and other federally regulated institutions are heavy contributors to the election campaigns of those who write the regulatory laws a thorough public investigation would undoubtedly turn up some cozy relationships that the legislators would just as soon keep confidential the second reason is that any honest inquiry would soon reveal the shocking truth but Congress itself is the primary cause of the problem by following the Socialist path and presuming to protect or benefit their constituency they have suspended and violated the natural laws that drive a free market economy in so doing they created a Frankenstein monster they could not control the more they tried to tame the thing the more destructive it became as Economist Hans senholz has observed the real cause of the disaster is the very Financial structure that was fashioned by the legislators and guided by Regulators they together created a cartel that like all other monopolistic concoctions is playing Mischief with its victims a cartel within a cartel senholtz has chosen exactly the right word cartel the Savings and Loan industry is really a cartel within a cartel it could not function without Congress standing by to push unlimited amounts of money into it and conquerors could not do that without the banking cartel called the Federal Reserve System standing by as the lender of Last Resort to create money out of nothing for Congress to borrow this comfortable Arrangement between political scientists and monetary scientists permits Congress to vote for any scheme it wants regardless of the cost if politicians try to raise that money through taxes they would be thrown out of office but being able to borrow it from the Federal Reserve System upon demand allows them to collect it through the hidden mechanism of inflation and not one voter in a hundred will complain the thrifts have become the illegitimate half-breed Children of the creature and that is why the Savings and Loan story is included in this study if America is to survive as a free Nation her citizens must become far more politically educated than they are at present as a people we must learn not to reach for every political carrot dangled in front of us as desirable as it may be for everyone to afford a home we must understand that government programs pretending to make that possible actually wreak havoc with our system and bring about just the opposite of what they promise after 60 years of subsidizing and regulating the Housing Industry how many young people today can afford a home tinkering with the laws of supply and demand plus the hidden tax called inflation to pay for the tinkering has driven prices beyond the reach of many and has wiped out the down payments of others without such costs common people would have much more money in purchasing power than they do today and homes would be well within their reach summary our present day problems within the Savings and Loan industry can be traced back to the Great Depression of the 1930s Americans were becoming impressed by the theories of socialism and soon embraced the concept that it was proper for government to provide benefits for its citizens and to protect them against economic hardship under the Hoover and Roosevelt administration's new government agencies were established which purported to protect deposits in the snls and to subsidize home mortgages for the middle class these measures distorted the laws of supply and demand and from that point forward the Housing Industry was moved out of the free market and into the political Arena once the pattern of government intervention had been established there began a long unbroken series of federal rules and regulations that were the source of windfall profits for managers appraisers Brokers developers and Builders they also weakened the industry by encouraging unsound business practices and high-risk Investments when these Ventures failed and when the value of real estate began to drop many snls became insolvent the federal Insurance Fund was soon depleted and the government was confronted with its own promise to bail out these companies but not having any money to do so the response of The Regulators was to create accounting gimmicks whereby insolvent thrifts could be made to appear solvent and thus continue in business this postponed the inevitable and made matters considerably worse the failed snls continued to lose billions of dollars each month and added greatly to the ultimate cost of bailout all of which would eventually have to be paid by the common man out of taxes and inflation the ultimate cost is estimated at over one trillion dollars Congress appears to be unable to act and is strangely silent this is understandable many representatives and senators are the beneficiaries of generous donations from the snls but perhaps the main reason is that Congress itself is the main culprit in this crime in either case the politicians would like to talk about something else in the larger view the SNL industry is a cartel within a cartel the Fiasco could never have happened without the cartel called the Federal Reserve System standing by to create the vast amounts of bailout money pledged by Congress chapter 5. nearer to the heart's desire the 1944 meeting in Bretton Woods New Hampshire at which the world's most prominent socialists established the international monetary fund and the World Bank as mechanisms for eliminating gold from World Finance the hidden agenda behind the IMF World Bank revealed as the building of world socialism the role of the Federal Reserve in bringing that about as we have seen the game called bailout has been played over and over again in the rescue of large corporations domestic Banks and Savings and Loan institutions the pretense has been that these measures were necessary to protect the public the result however has been just the opposite the public has been exploited as billions of dollars have been expropriated through taxes and inflation the money has been used to make up losses that should have been paid by the failing Banks and corporations as the penalty for mismanagement and fraud while this was happening in our hometown Stadium the same game was being played in the international Arena there are two primary differences one is that the amount of money at stake in the international game is much larger through a complex tangle of bank loans subsidies and grants the Federal Reserve is becoming the lender of Last Resort for virtually the entire planet the other difference is that instead of claiming to be Protectors of the public the players have emblazoned across the backs of their uniforms saviors of the world Bretton Woods an attack on gold the game began at an international meeting of financiers politicians and theoreticians held in July of 1944 at the Mount Washington hotel in Bretton Woods New Hampshire officially it was called the United Nations monetary and financial conference but is generally referred to today as simply the Bretton Woods conference two International agencies were created at that meeting the international monetary fund and its sister organization the International Bank for reconstruction and development commonly called the World Bank the announced purposes of these organizations were admirable the World Bank was to make loans to war-torn and underdeveloped Nations so they could build stronger economies the international monetary fund IMF was to promote monetary cooperation between nations by maintaining fixed exchange rates between their currencies but the method by which these goals were to be achieved was less admirable it was to terminate the use of gold as the basis of international currency exchange and replace it with a politically manipulated paper standard in other words it was to allow governments to escape the discipline of gold so they could create money out of nothing without paying the penalty of having their currencies drop in value on world markets prior to this conference currencies were exchanged in terms of their gold value and the arrangement was called the gold exchange standard this is not the same as a gold standard in which a currency is backed by gold it was merely that the exchange ratios of the various currencies most of which were not backed by gold were determined by how much gold they could buy in the open market their values therefore were set by supply and demand politicians and bankers hated the arrangement because it was beyond their ability to manipulate in the past it had served as a remarkably efficient mechanism but it was a strict disciplinarian as John Kenneth Galbraith observed the Bretton Woods Arrangements sought to recapture the advantages of the gold standard currencies that were exchangeable at stable and predictable rates into gold and thus at stable and predictable rates into each other and this it sought to accomplish while minimizing the pain imposed by the gold standard on countries that were buying too much selling too little and thus losing gold the method by which this was to be accomplished was exactly the method devised on Jekyll Island to allow American Banks to create money out of nothing without paying the penalty of having their currencies devalued by other Banks it was the establishment of a world Central Bank which would create a common Fiat money for all nations and then require them to inflate together at the same rate there was to be a kind of International Insurance Fund which would rush that Fiat money to Any Nation that temporarily needed it to face down a run on its currency it wasn't born with all these features fully developed just as the Federal Reserve wasn't fully developed when it was born that nevertheless was the plan and it was launched with all the structures in place the theoreticians who drafted this plan were the well-known Fabian socialist from England John Maynard Keynes and the assistant Secretary of the U.S treasury Harry Dexter White the Fabian Society the fabians originally were an elite group of intellectuals who formed a semi-secret society for the purpose of bringing socialism to the world whereas Communists wanted to establish socialism quickly through violence and Revolution the fabians preferred to do it slowly through propaganda and legislation the word socialism was not to be emphasized instead they would speak of benefits for the people such as welfare Medical Care higher wages and better working conditions in this way they planned to accomplish their objective without Bloodshed and even without serious opposition they scorned the Communists not because they disliked their goals but because they disagreed with their methods to emphasize the importance of gradualism they adopted the turtle as the symbol of their movement the three most prominent leaders in the early days were Sydney and Beatrice Webb and George Bernard Shaw a stained glass window in the Beatrice Webb house in Surrey England is especially enlightening across the top appears the last line from Omar kayam dear love Kutz thou and I with fate conspire to grasp this sorry scheme of things entire Would we not shatter it to bits and then re-mold it nearer to the heart's desire beneath the line re-molded nearer to the heart's desire the mural depicts Shaw and Webb striking the Earth with hammers across the bottom the masses kneel in worship of a stack of books advocating the theories of socialism summing his nose at the docile masses is H.G Wells who after quitting the fabians denounced them as the new machiavellians the most revealing component however is the Fabian Crest which appears between Shaw and Webb it is a wolf in sheep's clothing communist moles Harry Dexter white was America's Chief technical expert and the dominant Force at the conference he eventually became the first executive director for the United States at the IMF an interesting footnote to this story is that white was simultaneously a member of the Council on Foreign Relations CFR and a member of a communist Espionage ring in Washington while he served as assistant Secretary of the Treasury and even more interesting is that the White House was informed of that fact when President Truman appointed him to his post the FBI had transmitted to the White House detailed proof of White's activities on at least two separate occasions serving as the technical secretary at the Bretton Woods conference was virginius Frank Coe a member of the same Espionage ring to which white belonged KO later became the first Secretary of the IMF thus completely hidden from public view there was a complex drama taking place in which the intellectual guiding lights at the Bretton Woods conference were Fabian socialists and communists although they were in disagreement over method they were in Perfect Harmony on goal International socialism there were undoubtedly other reasons for Communists to be enthusiastic about the IMF and the World Bank despite the fact that the Soviet Union elected at the time not to become a member the goal of the organizations was to create a world currency a world Central Bank and a mechanism to control the economies of all nations in order for these things to happen the United States would of necessity have to surrender its dominant position in fact it would have to be reduced to just one part of the collective whole that fit in quite nicely with the Soviet plan furthermore the World Bank was seen as a vehicle for moving capital from the United States and other industrialized nations to the underdeveloped Nations the very ones over which marxists have always had the greatest control they looked forward to the day when we would pay their bills it has all come to pass IMF structure and funding the international monetary fund appears to be part of the United Nations much as the Federal Reserve System appears to be a part of the United States government but it is entirely independent it is funded on a quota basis by its member nations almost 200 in number the greatest share of capital however comes from the more highly industrialized nations such as Great Britain Japan France and Germany the United States contributes the most at about 20 percent of the total in reality that 20 percent represents about twice as much as the number indicates because most of the other nations contribute worthless currencies which no one wants the world prefers dollars one of the routine operations at the IMF is to exchange worthless currencies for dollars so the weaker countries can pay their International bills this is supposed to cover temporary cash flow problems it is a kind of international FDIC which rushes money to a country that has gone bankrupt so it can avoid devaluing its currency the transactions are seldom paid back although Escape From The Gold Exchange standard was the long-range goal of the IMF the only way to convince Nations to participate at the outset was to use gold itself as a backing for its own money supply at least as a temporary expedient as Keynes explained it I felt that the leading central banks would never voluntarily relinquish the then existing forms of the gold standard and I did not desire a catastrophe sufficiently violent to shake them off involuntarily the only practical hope lay therefore in a gradual evolution in the forms of a managed world currency taking the existing gold standard as a starting point it was illegal for American citizens to own gold at that time but everyone else in the world could exchange their paper dollars for gold at a fixed price of 35 dollars per ounce that made it the de facto International currency because unlike any other at the time its value was guaranteed so at the outset the IMF adopted the dollar as its own international monetary unit paper gold but the Fabian turtle was crawling inexorably toward its destination in 1970 the IMF created a new monetary unit called the SDR or special drawing right the media optimistically described it as paper gold but it was pure bookkeeping Wizardry with no relationship to gold or anything else of tangible value sdrs are based on credits which are provided by the member nations these credits are not money they are merely promises that the governments will get the money by taxing their own citizens should the need arise the IMF considers these to be assets which then become the reserves from which loans are made to other governments as we shall see in chapter 10 this is almost identical to the bookkeeping sleight of hand that is used to create money out of nothing at the Federal Reserve System Dennis Turner cuts through the garbage sdrs are turned into Loans To Third World Nations by the creation of checking accounts in the commercial or central banks of the member nations in the name of the debtor governments these bank accounts are created out of thin air the IMF creates dollars francs pounds or other hard currencies and gives them to a third world dictator with inflation resulting in the country where the currency originated inflation is caused in the industrialized nations while wealth is transferred from the general public to the debtor country and the debtor doesn't repay when the IMF was created it was the vision of Fabian socialist John Maynard Keynes that there would be a world Central Bank issuing a reserve currency called the bancor to free all governments from the discipline of gold with the creation of sdrs the IMF had finally begun to fulfill that dream gold is finally abandoned but there was still an obstacle as long as the dollar was the primary currency used by the IMF and as long as it was redeemable in gold at 35 dollars per ounce the amount of international money that could be created would be limited if the IMF were to function as a true World Central Bank with unlimited issue the dollar had to be broken away from its gold backing as a first step toward replacing it completely with a bancor an SDR or something else equally free from restraint on August 15 1971 President Nixon signed an executive order declaring that the United States would no longer redeem its paper dollars for gold so ended the first phase of the imf's metamorphosis it was not yet a true Central Bank because it could not create its own world currency it had to depend on the central banks of its member nations to provide cash and so-called credits but since these Banks themselves could create as much money as they wished from now on there would be no limit the original purpose had been to maintain fixed rates of exchange between currencies but the IMF has presided over more than 200 currency devaluations in Private Industry a failure of that magnitude might be cause for going out of business but not in the world of politics the greater the failure the greater the pressure to expand the program so when the dollar broke loose from gold and there was no longer a ready standard for measuring currency values the IMF merely changed its goal and continued to expand its operation the new goal was to overcome trade deficits trade deficits the topic of trade deficits is a favorite among politicians economists and talk show hosts everyone agrees they are bad but there is much disagreement over what causes them let's have a try at it a trade deficit is a condition that exists when a country Imports a greater value of goods than it exports in other words it spends more than it earns in international trade this is similar to the situation of an individual who spends more than he earns in both cases the process cannot be sustained unless one earnings are increased two money is taken out of savings three assets are sold four money is counterfeited or five money is borrowed unless one of these occurs the individual or the country has no choice but to decrease spending increasing one's earnings is the best solution in fact it is the only solution for the long haul all else is temporary at best an individual can increase his income by working harder or smarter or longer a country does it the same way but it cannot happen unless Private Industry is allowed to flourish in a system of free enterprise the problem with this option is that few politicians respect the dynamic power of the free enterprise system their world is built upon political programs in which the laws of the free market are manipulated to achieve politically popular goals they may desire the option of increasing the nation's income by increasing its productivity but their political agenda prevents that from happening the second option is to obtain extra money out of savings but there are virtually no governments in the world today that have any savings their debts and liabilities exceed assets by a large margin likewise most of their Industries and their citizens are in a similar position their savings already have been consumed by government the third option the selling of assets also is not available for most countries by assets we mean tangible items other than merchandise which is normally for sale although these two are assets in the broad meaning in accounting methodology they are classified as inventory the only government asset that is readily marketable is gold and few countries today have a stockpile from which to draw even in those cases what little they have is already owed to another government or a bank as for private assets Nations can for a while sell these to foreign buyers and offset their negative trade balances that is what has been happening in the United States for many years as Office Buildings stocks factories and entire companies have been sold to foreign investors but the fact remains that the nation is still spending more than it earns and that process cannot continue indefinitely foreign ownership and control over industry and commerce also create sociological and political problems underdeveloped countries do not have to worry about any of that however because they have few private assets to sell the counterfeit option the counterfeit option is available only if a country happens to be in the unique position of having its currency accepted as the medium of international trade as has been the case for the United States in that event it is possible to create money out of nothing and other nations have no choice but to accept it thus for years the United States has been able to spend more money than it earned in trade by having the Federal Reserve create whatever it needed when the dollar was separated entirely from gold in 1971 it ceased being the official IMF world currency and finally had to compete with other currencies primarily the mark and the Yen on the basis of its relative Merit from that point forward its value increasingly became discounted nevertheless it was still the preferred medium of exchange also the U.S was one of the safest places in the world to invest one's money but to do so one first had to convert his native currency into dollars these facts gave the U.S dollar greater value on International markets than it otherwise would have merited so in spite of the fact that the Federal Reserve was creating huge amounts of money during this time the demand for it by foreigners was seemingly Limitless the result is that America has continued to finance its trade deficit with Fiat money counterfeit if you will a feat which no other nation in the world could hope to accomplish we have been told that our nation's trade deficit is a terrible thing and that it would be better to weaken the dollar to bring it to an end weakening the dollar is a euphemism for increasing inflation in truth America is not hurt by a trade deficit at all in fact we are the benefactors while our trading partners are the victims we get the cars and TV sets while they get the Funny Money we get the hardware they get the paperware there is a dark side to the exchange however as long as the dollar remains in high esteem as a trade currency America can continue to spend more than it earns but when the day arrives as it certainly must when the dollar tumbles and foreigners no longer want it the free ride will be over when that happens hundreds of billions of dollars that are now resting in foreign countries will quickly come back to our shores as people everywhere in the world attempt to convert them into yet more real estate factories and tangible products and to do so as quickly as possible before they become even more worthless as this flood of dollars bids up prices we will finally experience the inflation that should have been caused in years past but which was postponed because foreigners were kind enough to take the dollars out of our economy in exchange for their products the chickens will come home to roost but when they do it will not be because of the trade deficit it will be because we were able to finance the trade deficit with Fiat money created by the Federal Reserve if it were not for that the trade deficit could not have happened back to the main topic which is the five methods by which a trade deficit can be paid through the process of elimination the fourth option of borrowing is where the action is today for most of the world and that is where the IMF positioned itself in 1970. its new mission was to provide loans so countries can continue to spend more than they earn but to do so in the name of overcoming trade deficits IMF loans doomed but sweet these loans do not go into private Enterprises where they have a chance of being turned for a profit they go into state-owned and state-operated industries which are constipated by bureaucracy and poisoned by corruption doomed to economic failure from the start they consume the loans with no possibility of repayment even the interest quickly becomes too much to handle which means the IMF Must Fall Back to the reserves back to the assets back to the credits and eventually back to the taxpayers to bail them out whereas the international monetary fund is evolving into a world Central Bank which eventually will issue a world currency based on nothing its sister organization the World Bank has become its lending agency acting as Savior of the world it seeks to Aid the underdeveloped Nations to feed the hungry and to bring a better life to all mankind in pursuit of these humanitarian goals it provides loans to governments at favorable terms usually at rates below Market or terms as long as 50 years and often with no payments due until after 10 years funding for these loans comes from member states in the form of a small amount of Cash Plus promises to deliver about 10 times more if the bank gets into trouble the promises described as callable capital constitute a kind of FDIC insurance program but with no pretense at maintaining a reserve fund in that sense it is more honest than the real FDIC which does maintain the pretense but in reality is based on nothing more than a similar promise based upon the small amount of seed money plus the far greater amount of credits and Promises from governments of the industrialized countries the World Bank is able to go into the commercial loan markets and borrow larger sums at extremely low interest rates after all the loans are backed by the most powerful governments in the world which have promised to force their taxpayers to make the payments if the bank should get into trouble it then takes These funds and re-lends them to the underdeveloped countries at slightly higher rates making a profit on the Arbitrage the Unseen aspect of this operation is that the money it processes is money which otherwise would have been available for investment in the private sector or as loans to Consumers it siphons off much needed development capital for Private Industry prevents new jobs from being created causes interest rates to rise and retards the economy at Large the hidden agenda World socialism although most of the policy statements of the World Bank deal with economic issues a close monitoring of its activities reveal a preoccupation with social and political issues this should not be surprising considering that the bank was perceived by its Founders as an instrument for social and political change the change which it was designed to bring about was the building of world socialism and that is exactly what it is accomplishing today this hidden agenda becomes crystal clear in the nature of what the bank calls sectoral loans and structural adjustment loans in the first category only part of the money is to be used for the costs of specific projects while the rest goes to support policy changes in the economic sector in the second group all of the money is for policy changes and none of it is for projects in recent years almost half of the loans to underdeveloped countries have been in that category what are the policy changes that are the object of these loans they add up to one thing the building of world socialism as the fabians had planned it the word socialism is not to be used instead the loans are issued for government hydroelectric projects government oil refineries government Lumber Mills government mining companies and government steel plants it is delivered from the hands of politicians and bureaucrats in the hands of other politicians and bureaucrats when the money comes from government goes to government and is administered by government the result will be the expansion of government here is an example one of the policy changes often required by the World Bank as a condition of granting a loan is that the recipient Country Must hold down its wages the assumption is that the government has the power and rightfully should have the power to set wages in other words one of the conditions of its loan is that the state must be omnipotent Paul Roberts holds the William E Simon chair of political economy at the center for strategic and international studies in Washington writing in business week he says the entire development process has been Guided by the belief that Reliance on private Enterprise and Equity investment is incompatible with economic and social progress in place of such proven Avenues of success development planning substituted loans and foreign aid so that governments of the ldcs less developed countries could control economic activity in keeping with plans drawn up by experts consequently economic life in the ldcs was politicized from the start by endowing governments with extensive control over their economies the U.S set up conditions exactly opposite to those required for economic growth Ken eward explains further that the conditions imposed by the fund are seldom free market oriented he says the fund concentrates on macro policies such as fiscal and monetary policies or exchange rates and pays little attention to fundamental issues like private property rights and freedom of enterprise implicit is the belief that with proper macro management any economic system is viable even more important it has allowed governments the world over to expropriate the wealth of their citizens more efficiently through the hidden tax of inflation while at the same time aggrandizing their own power there is little doubt that the IMF is an influence for worldwide socialism an important feature of the structural adjustment loans is that the money need not be applied to any specific development project it can be spent for anything the recipient wishes that includes interest payments on overdue bank loans thus the World Bank becomes yet one more conduit from the pockets of taxpayers to the assets of commercial Banks which have made risky loans to third world countries austerity measures and scapegoats not every measure advocated by the IMF and World Bank is socialistic some of them even appear to be in support of the private sector such as the reduction of government subsidies and Welfare they may include tax increases to reduce budget deficits these policy changes are often described in the press as austerity measures and they are seen as hard-nosed business decisions to salvage the failing economies of underdeveloped countries but as the wolf in sheep's clothing said to a Little Red Riding Hood all the better to fool you with my dear these austerity measures are mostly rhetoric the borrowing Nations usually ignore the conditions with impunity and the World Bank keeps the money coming anyway it's all part of the game nevertheless the structural adjustment conditions provide a scapegoat for local politicians who can now place the blame for their nation's misery on big bad capitalists from America and the IMF people who have been taught that it is government's role to provide for their welfare their health care their food and housing their jobs and retirement such people will not be happy when they hear that these rights are being threatened so they demonstrate in the streets in protest they riot in the commercial sections of town so they can steal goods from stores and they throng to the banner of politicians who promise to restore or increase their benefits as described by Insight magazine National strikes riots political upheavals and social unrest in Argentina Bolivia Brazil Ecuador Egypt Haiti Liberia Peru Sudan and elsewhere have at various times been attributed to IMF austerity programs some came to the fund with domestic trouble already brewing and seized on the fund as a convenient scapegoat quite true an honest reading of the record shows that the IMF far from being a force for austerity in these countries has been an engine of socialist waste and a fountain of abundance for the corrupt leaders who rule financing corruption and despotism nowhere is this pattern more blatant than in Africa Julius nierere the dictator of Tanzania is notorious for his villagization program in which the Army has driven The Peasants from their land burned their huts and loaded them like cattle into trucks for relocation into government villages the purpose is to eliminate opposition by bringing everyone into compounds where they can be watched and controlled meanwhile the economy staggers Farms have gone to weed and hunger is commonplace yet Tanzania has received more Aid per capita from the World Bank than any other Nation in Uganda government security forces have engaged in Mass detentions torture and killing of prisoners the same is true under the terrorist government in Zimbabwe yet both regimes continue to be the recipients of millions of dollars in World Bank funding Zimbabwe formerly Rhodesia is a classic case after its independence the leftist government nationalized confiscated many of the Farms previously owned by white settlers the most desirable of these lands became occupied by the government's senior ruling party officials and the rest were turned into state-run collectives they were such miserable failures that the workers on these farmlands were themselves soon begging for food not daunted by these failures the Socialist politicians announced in 1991 that they were going to nationalize half of the remaining Farms as well and they barred the courts from inquiring into how much compensation would be paid to their owners the IMF was represented in Zimbabwe at the time by Michelle condesu the governor of the Central Bank of France and a former Finance Minister in Francois miterran's socialist government after being informed of Zimbabwe's plan to confiscate additional land and to resettle people to work on those lands contessu agreed to a loan valued at 42 billion Rands with full knowledge that much of it would be used for the resettlement project perhaps the worst violations of human rights have occurred in Ethiopia under the Marxist regime of mengistu Haile Mariam the Famine of 1984 and 85 which threatened the lives of millions of people was the result of government nationalization and disruption of agriculture massive resettlement programs have torn hundreds of thousands of people from their privately owned land in the north and deported them to concentration camp villages in the South complete with guard towers a report by a French voluntary medical assistance group Doctors Without Borders reveals that the forced resettlement program may have killed as many people as the famine itself Dr Ronnie brauman director of the organization describes their experience armed militiamen burst into our compounds seized our equipment and menaced our volunteers some of our employees were beaten and our trucks medicines and food stores confiscated we left Ethiopia branded as enemies of the revolution the regime spoke the truth the atrocities committed in the name of mingistu's Master Plan did make us enemies of the revolution financing famine and genocide in the 1980s the world was saddened by photographs of starving children in Ethiopia but what the West did not realize was that this was a planned famine it was modeled after Stalin's starvation program in the Ukraine in the 1930s and Mao's starvation of the peasants in the 40s its purpose was to starve the population into total submission to the government for it is the government which decides who will eat and who will not yet right up to the time mingusu was overthrown the World Bank continued to send him hundreds of millions of dollars with much of it going specifically to the Ministry of Agriculture the very agency in charge of the resettlement program in the late 1970s the same story unfolded in communist Vietnam there were resettlement programs forced collectivization concentration camps atrocities and tens of thousands of dissidents escaping to the Sea only to drown in overcrowded leaky boats throughout it all the regime was generously funded by the World Bank Laos has jailed thousands of political prisoners Syria has massacred twenty thousand members of its opposition Indonesia has uprooted several million people from their homelands in Java the sandinistas in Nicaragua murdered their opposition and terrorized the nation into submission Poland while a puppet state of the Soviet Union brutally suppressed its Trade union movement China massacred its dissident students and imprisoned its religious leaders and the former Soviets slaughtered civilians in Afghanistan while conducting a Relentless Espionage war against the entire free world yet these regimes have been the recipient of literally billions of dollars from the World Bank how can the bank's managers continue in conscience to fund such genocidal regimes part of the answer is that they are not permitted to have a conscience David Dunn head of the bank's Ethiopia desk explained political distinctions are not something our Charter allows us to take into account the greater part of the answer however is that all socialist regimes have the potential for genocide and the bank is committed to socialism the brutalities of these countries are all in a day's work for serious socialists who view them as merely unfortunate Necessities for the building of their Utopia Lennon said you cannot make an omelet without cracking a few eggs George Bernard Shaw one of the early leaders of the Fabian socialist movement expressed it this way under socialism you would not be allowed to be poor you would be forcibly fed clothed lodged taught and employed whether you liked it or not if it were discovered that you had not character and Industry enough to be worth all this trouble you might possibly be executed in a kindly manner but whilst you were permitted to live you would have to live well reason to abolish the Federal Reserve the top Echelon at the World Bank are brothers Under the Skin to the Socialist dictators with whom they do Daily Business under the right circumstances they could easily switch roles what we have seen is merely a preview of what can be expected for the entire world if the envision's New World Order becomes operational the IMF World Bank is the Protege of the Federal Reserve it would not exist without the flow of American dollars and the benevolence of American leadership the FED has become an accomplice in the support of totalitarian regimes throughout the world as stated at the beginning of this study that is one of the reasons it should be abolished it is an instrument of totalitarianism getting rich fighting poverty while the top leaders and theoreticians at the IMF and World Bank dream of world socialism the middle managers and political rulers have more immediate goals in mind the bureaucracy enjoys a plush life administering the process and the politicians on the receiving end obtain wealth and power ideology is not their concern socialism capitalism fascism it makes no difference to them as long as the money flows Graham Hancock has been an astute Observer of the international Aid industry and has attended their plush conferences he knows many of the leading players personally in his book Lords of poverty he speaks of the imf's structural adjustment loans corrupt Ministers of finance and dictatorial presidents from Asia Africa and Latin America are tripping over their own expensive Footwear in their unseemly haste to get adjusted for such people money has probably never been easier to obtain than it is today with no complicated projects to administer and no messy accounts to keep the venal the cruel and the Ugly are laughing literally all the way to the bank for them structural adjustment is like a dream come true no sacrifices are demanded of them personally all they have to do amazing but true is screw the poor and they've already had plenty of practice at that in India the World Bank funded the construction of a dam that displaced two million people flooded 360 square miles and wiped out 81 000 Acres of forest cover in Brazil it spent a billion dollars to develop a part of the Amazon basin and to fund a series of hydroelectric projects it resulted in the deforestation of an area half the size of Great Britain and has caused Great human suffering because of resettlement in Kenya the bura irrigation scheme caused such desolation that a fifth of the native population abandoned the land the cost was fifty thousand dollars her family served in Indonesia the transmigration program mentioned previously has devastated tropical forests at the same time that the World Bank is funding reforestation projects the cost of resettling one family is seven thousand dollars which is about ten times the Indonesian per capita income livestock projects in Botswana led to the destruction of grazing land and the death of thousands of migratory animals this resulted in the inability of the natives to obtain food by hunting forcing them into dependence on the government for survival while Nigeria and Argentina are drowning in debt billions from the World Bank have gone into building lavish New Capital Cities to house government agencies and the ruling Elite in Zaire Mexico and the Philippines political leaders became billionaires while receiving World bank loans on behalf of their Nations in the Central African Republic IMF and World bank loans were used to Stage a coronation for its emperor the record of corruption and waste is endless but the real eye-opener is in the failure of socialist Ventures those magnificent projects which were to bring prosperity to the underdeveloped countries here are just a few examples converting money into failure before receiving loans from the World Bank Tanzania was not wealthy but it fed its own people and it had economic growth after receiving more than three billion dollars in loans it nationalized the nation's farms and industries and converted every business into a government agency it built a truck assembly plant a tire factory electronic factories highways ports Railways and dams tanzania's industrial production and agricultural output fell by almost one-third food was the main export in 1966 under socialism food had to be imported paid for by foreign aid and more loans from the World Bank the country is hopelessly in debt with no way to repay Argentina once had one of the highest standards of living in Latin America but then it became the recipient of massive loans from the World Bank as well as commercial banks in the United States since the money was given to politicians it was used to build the only system politicians know how to build socialism by 1982 the gross national product was in a nosedive manufacturing had fallen to less than half of capacity thousands of privately owned companies have been forced into bankruptcy unemployment was soaring and so was welfare by 1989 inflation was running at an average of five thousand percent and in the summer of that year topped one million percent Banks were offering interest rates of 600 percent per month in hopes of keeping deposits from being moved out of the country people were rioting in the streets for food and the government was blaming greedy shop owners for raising prices the nation was hopelessly in debt with no way to repay Brazil is run by the military and the state controls the economy government-owned companies consume 65 of all industrial investment which means that the private sector is limited to 35 and is shrinking the government used loans from U.S banks to create an oil company petroleo brasileiro sa which became Latin America's largest corporation despite huge oil deposits and record high oil prices the company operated at a loss and was not even able to produce enough gasoline for its own citizens by 1990 inflation was running at five thousand percent since 1960 its prices had risen to a hundred and sixty four thousand times their original level a new crime was invented called hedging against inflation and people were arrested for charging the free market price for their goods and for using dollars or gold as money led by communist organizers mobs roamed the streets shouting we're hungry steal what you will the nation was hopelessly in debt with no way to repay the experience in Mexico was a carbon copy of that in Brazil except that the amount of money was larger when the world's fourth largest oil reserves were discovered Mexican politicians reached for the brass ring with billions borrowed from U.S banks they launched petrolios Mexicanos hammocks and soon became the world's fifth largest oil producer they also built chemical plants and railroads and launched many other industrial projects these were run as welfare agencies instead of businesses too many people on the payroll too many managers excessive salaries too many holidays and unrealistic benefits the ventures floundered and lost money private businesses failed by the thousands and unemployment Rose the government increased the minimum wage causing more businesses to fail and more unemployment that led to more welfare and unemployment benefits to pay for that the government borrowed even more and began creating its own Fiat money inflation destroyed what was left of the economy price controls were next along with rent and food subsidies and doubling the minimum wage by 1982 Mexicans were trading their pesos for dollars and sending their savings out of the country as the peso became all but worthless in Commerce in 1981 the average wage for Mexican workers was 31 of the average wage for Americans by 1989 it had fallen to 10 percent Mexico once one of the major food exporters in the world was now required to import millions of dollars worth of food grains this required still more money and more loans all this occurred while oil prices were high and production was booming a few years later when oil prices fell the failures and shortfalls became even more dramatic in 1995 Mexico's bank loans were once again on the brink of default and once again U.S taxpayers were thrown into the breach by Congress to cover more than 30 billion dollars at risk although this loan was eventually repaid the money to do so was extracted from the Mexican people through another round of massive inflation which plunged their standard of living even lower the nation is now hopelessly mired in socialism the Communist Party promising reform and still more socialism is attracting a large following and could become a potent political force thus the saga continues after pouring billions of dollars into underdeveloped countries around the globe no development has taken place in fact we have seen just the opposite most countries are worse off than before the saviors of the world got to them summary the IMF and the World Bank were created at a meeting of global financiers and politicians held at Bretton Woods New Hampshire in 1944. their announced goals were to facilitate international trade and to stabilize the exchange rates of national currencies the unannounced goals were quite different they were the elimination of the gold exchange standard as the basis of currency valuation and the establishment of world socialism the method by which gold was to be eliminated in international trade was to replace it with a world currency which the IMF acting as a world Central Bank would create out of nothing the method by which World socialism was to be established was to use the World Bank to transfer money disguised as loans to the governments of the underdeveloped countries and to do so in such a way as to ensure the demise of free enterprise the money was to be delivered from the hands of politicians and bureaucrats into the hands of other politicians and bureaucrats when the money comes from government goes to government and is administered by government the result will be the expansion of government The theoreticians Who dominated the conference at Bretton Woods were the well-known Fabian socialists from England John Maynard Keynes and the assistant Secretary of the U.S treasury Harry Dexter White became the first executive director for the United States at the IMF the fabians are an elite group of intellectuals who agree with Communists as to the goal of socialism but disagreed over tactics whereas Communists Advocate Revolution by force and violence fabians advocate gradualism and the transformation of society through legislation it was learned in later years that Harry Dexter white was a member of a communist Espionage ring thus hidden from view there was a complex drama taking place in which the two intellectual founders of the Bretton Woods Accords were a Fabian socialist and a communist working together to bring about their Mutual goal World socialism capital for the IMF and the World Bank comes from the industrialized nations with the United States putting up the most currencies such as the dollar Yen Mark and Franc are augmented by many times that amount in the form of credits these are merely Promises by the member governments to get the money from their taxpayers if the bank gets into trouble with its loans the IMF gradually is evolving into a central bank for the world with the World Bank as its lending arm it has become the engine for transfer of wealth to underdeveloped countries this has lowered the economic level of the donating countries but it has not raised the level of the recipients the money has simply disappeared down the drain of political corruption and waste chapter 6. building the New World Order the game called bailout re-examined and shown to be far more than merely a means of getting taxpayers to foot the cost of bad loans the final play revealed as the merger of all Nations into World Government the unfolding of that strategy as applied to Panama Mexico Brazil Argentina China Eastern Europe and Russia Let Us return now to the game called bailout everything in the previous chapter has been merely background information to understand the game as it is played in the international Arena here finally are the rules one commercial banks in the industrialized nations backed by their respective central banks create money out of nothing and lend it to the governments of underdeveloped Nations they know that these are risky loans so they charge an interest rate that is high enough to compensate it is more than what they expect to receive in the long run 2. when the underdeveloped Nations cannot pay the interest on their loans the IMF and World Bank enter the game as both players and referees using additional money created out of nothing by the central banks of their member nations they Advance development loans to the governments which now have enough to pay the interest on the original loans with enough left over for their own political purposes three the recipient country quickly exhausts the new supply of money and the play returns to point number two this time however the new loans are guaranteed by the World Bank and the central banks of the industrialized nations now that the risk of default is removed the commercial Banks agree to reduce the interest to the point anticipated at the beginning the debtor governments resume payments the final play is well in this version of the game there appears to be no final play because the plan is to keep the game going forever to make that possible certain things must happen that are very final indeed they include the conversion of the IMF into a world Central Bank as Keynes had planned which then issues an international Fiat money once that bank of issue is in place the IMF can collect unlimited resources from the citizens of the world through the hidden tax called inflation the money stream then can be sustained indefinitely with or without the approval of the separate Nations because they will no longer have money of Their Own since this game results in a hemorrhage of wealth from the industrialized nations their economies are doomed to be brought down further and further a process that has been going on since Bretton Woods the result will be a severe lowering of their living standards and their demise as independent nations the hidden reality behind so-called development loans is that America and other industrialized nations are being subverted by that process that is not an accident it is the essence of the plan a strong nation is not likely to surrender its sovereignty Americans would not agree to turn over their monetary system their military or their courts to a world body made up of governments which have been despotic to their own people especially since most of those regimes have already revealed anti-American hostility but if Americans can be brought to the point where they are suffering from a collapse of their economy and from a breakdown in civil order things will be different when they stand in bread lines and face Anarchy in their streets they will be more willing to give up sovereignty in return for assistance from the World Bank and the U.N peacekeeping forces this will become even more acceptable if a structured demise of Communism can be arranged ahead of time to make it appear that the world's major political systems have converged into the common denominator of social democracy the final play the underdeveloped Nations on the other hand are not being raised up what is happening to them is that their political leaders are becoming addicted to the IMF cash flow and will be unable to break the habit these countries are being conquered by money instead of arms soon they will no longer be truly independent nations they are becoming mere components in the system of world socialism planned by Harry Dexter white and John Maynard Keynes their leaders are being groomed to become potentates in a new high-tech feudalism paying homage to their Lords in New York and they are eager to do it in return for privilege and power within the New World Order that is the final play the essence of socialism is the redistribution of wealth the goal is equality and that means taking from the rich and giving to the poor at least that's the theory unfortunately the poor are never benefited by this maneuver they either do not get the money in the first place too much is siphoned off by the bureaucracies which administer the programs or if they do get any of it they don't know what to do with it they merely spend it until it is gone and then no one has any money except of course those who administer the government programs nevertheless politicians know that promises to redistribute the wealth are popular among two groups the voters who naively believe it will help the poor and the Socialist managers who see it as job security supported by these two voting blocs election to office is assured one of the early American Advocates of socialism on a global scale including the draining of wealth away from the rich United States was John F Kennedy he undoubtedly learned the concept while attending the Fabian London School of economics in 1935 and 36 just prior to his father's appointment as ambassador to England when JFK became president his political views continued to carry the imprint of that training in September of 1963 he addressed the finance ministers on Central Bank Governors from 102 Nations at the annual meeting of the IMF World Bank he explained the concept of world socialism in glowing terms 20 years ago when The Architects of these institutions met to design an international banking structure the economic life of the world was polarized in overwhelming and even alarming measure on the United States sixty percent of the gold reserves of the world were here in the United States there was a need for redistribution of the financial resources of the world and there was an equal need to organize a flow of capital to the impoverished countries of the world all this has come about it did not come about by chance but by conscious and deliberate and responsible planning CFR sets strategy the brain trusts for implementing the Fabian plan in America is called the Council on Foreign Relations CFR we shall look at it closely in future chapters but it is important to know at this point that almost all of America's leadership has come from this small group that includes our presidents and their advisors cabinet members ambassadors board members of the Federal Reserve System directors of the largest banks and investment houses presidents of universities and heads of Metropolitan newspapers news services and TV networks it is not an exaggeration to describe this group as the hidden government of the United States CFR members have never been shy about calling for the weakening of America as a necessary step toward the greater good of building world government one of the CFR Founders was John Foster Dulles who later was appointed Secretary of State by CFR member Dwight Eisenhower in 1939 Dulles said some delusion or leveling off of the sovereignty system as it prevails in the world today must take place to the immediate disadvantage of those Nations which now possess the preponderance of power the establishment of a common money would deprive our government of exclusive control over a national money the United States must be prepared to make sacrifices afterward in setting up a world political economic order which would level off inequalities of Economic Opportunity with respect to Nations CFR member zvignif Brzezinski was the National Security adviser to CFR member Jimmy Carter in 1970 Brzezinski wrote some International cooperation has already been achieved but further progress will require greater American sacrifices more intensive efforts to shape a new World Monetary structure will have to be undertaken with some consequent risk to the present relatively favorable American position at the spring 1983 economic Summit in Williamsburg Virginia President Ronald Reagan declared National economies need monetary coordination mechanisms and that is why an integrated World economy needs a common monetary standard but no National currency will do only a world currency will work the CFR strategy for convergence of the world's monetary systems was spelled out by Harvard Professor Richard n Cooper a CFR member who had been the under Secretary of State for economic Affairs in the Carter Administration I suggest a radical alternative scheme for the next century the creation of a common currency for all of the industrial democracies with a common monetary policy and a joint bank of issue to determine that monetary policy how can independent states accomplish that they need to turn over the determination of monetary policy to a supranational body it is highly doubtful whether the American public to take just one example could ever accept that countries with oppressive autocratic regimes should vote on the monetary policy that would affect monetary conditions in the United States or such a bold step to work at all it presupposes a certain convergence of political values phrases such as monetary coordination mechanisms modern world economic order convergence of political values or New World Order are not very specific you're the average person they sound Pleasant and harmless yet to the Insiders of the club they are code phrases which have a specific meaning the termination of national sovereignty and the creation of world government CFR member Richard Gardner another advisor to President Carter explains the meaning of these phrases and also calls for the Fabian strategy of deception and gradualism in short the house of world order will have to be built from the bottom up an end run around National sovereignty eroding it piece by piece will accomplish much more than the old-fashioned frontal assault as for the programmed decline of the American economy CFR member Samuel Huntington argues that if higher education is considered to be desirable for the general population a program is then necessary to lower the job expectations of those who receive a college education CFR member Paul volcker former chairman of the Federal Reserve says the standard of living of the average American has to decline I don't think you can escape that by 1993 volcker had become the U.S chairman of the trilateral commission the TLC was created by David Rockefeller to coordinate the building of the New World Order In accordance with the Gardner strategy an end run around National sovereignty eroding it piece by piece the objective is to draw the United States Mexico Canada Japan and Western Europe into political and economic Union under slogans such as free trade and Environmental Protection each nation is to surrender its sovereignty piece by piece until a full-blown Regional government emerges from the process the new government will control each nation's working conditions wages and taxes once that has happened it will be a relatively simple step to merge The Regionals into Global government that is the reality behind the so-called trade treaties within the European Union EU the North American Free Trade Agreement NAFTA the asia-pacific economic cooperation agreement Apec and the general agreement on tariffs and trade gat they have little to do with trade in the trilateral commission's annual report for 1993 Volker explains interdependence is driving our countries toward convergence in areas once considered fully within the domestic purview some of these areas involve government regulatory policy such as environmental standards the fair treatment of workers and Taxation in 1992 the trilateral commission released a report co-authored by Toya guten chairman of the board of the bank of Tokyo and formerly Japan's Minister of Finance for international affairs Gilton had been a Fulbright scholar who was trained at Princeton and taught at Harvard Business School he also had been in charge of the Japan desk of the international monetary fund in short he represents the Japanese monetary interests within the New World Order in this report yoten explains that the real importance of trade agreements is not trade but the building of global government regional trade agreements should not be regarded as Inns in themselves but as supplements to Global liberalization Regional agreements provide models or building blocks for increased or strengthened globalism Western Europe the EU represents regionalism in its truest form the steps toward deepening increasing the number of Agreements are dramatic and designed to be irreversible a common currency Central Bank court and Parliament will have expanded powers after the Maastricht Summit the Dutch town where the meeting was held and Economist editorial pronounced the verdict call it what you will By Any Other Name it is federal government in some the regional integration process in Europe can be seen as akin to an exercise in nation building applying this same perspective to the NAFTA treaty former Secretary of State Henry Kissinger CFR said it is not a conventional trade agreement but the architecture of a new International System the vital first step for a new kind of community of Nations the newspaper article that contained this statement was appropriately entitled with NAFTA U.S finally creates a new world order David Rockefeller CFR was even more emphatic he said that it would be criminal not to pass the treaty because everything is in place after 500 years to build a true New World in the Western Hemisphere by early 1994 the drift toward the New World Order had become a rush on April 15th the government of Morocco placed a full-page ad in the New York Times celebrating the creation of the World Trade Organization which was formed by the signing of the general agreement on tariffs and trade Gat which took place in the Moroccan city of Marrakesh while Americans were still being told that Gat was merely a trade agreement the internationalists were celebrating a much larger concept the ads spelled it out in unmistakable terms 1944 Breton Woods the IMF and the World Bank 1945 San Francisco the United Nations 1994 Marrakesh the World Trade Organization history knows where it is going the World Trade Organization the third pillar of the New World Order along with the United Nations and the international monetary fund a rare glimpse into the inner workings so much for the final play Let Us return now to the game called bailout as it is actually played today on the international scene let us begin with a glimpse into the inner workings of the presidential cabinet James Watt was the Secretary of the Interior in the Reagan Administration in his Memoirs he described an incident at a cabinet meeting in the spring of 1982. the first items on the agenda were reports by treasury secretary Donald Regan and budget director David Stockman concerning problems the less developed countries were having with their bank loans watt said secretary Regan was explaining the inability of those destitute countries to pay even the interest on the loans that individual Banks such as Bank of America Chase Manhattan and Citibank had made the president was being told what actions the United States must take to salvage the situation after the Regan and Stockman briefings there were several minutes of discussion before I asked does anyone believe that these less developed countries will ever be able to pay back the principal on these loans when no one spoke up I asked if the loans are never going to be repaid why should we again bail out the countries and arrange payment for their interest the answer came from several voices at once if we don't arrange for their interest payments the loans will go into default and it could put our American banks in jeopardy would the customers lose their money no came the answer but the stockholders might lose dividends in amazement I leaned back in my large leather chair only two seats from the president of the United States I realized that nothing in the world could keep these high government officials from scrambling to protect and bail out a few very large and sorely troubled American Banks Panama the first major score in the game had been made under the Carter Administration when Panama fell in arrears on the payment of its loans a Consortium of banks including Chase Manhattan First National of Chicago and Citibank brought pressure to bear on Washington to give the canal to the Panamanian government so it could use the revenue to pay interest on its loans although there was massive opposition to this move among the American people the Senate yielded to Insider pressure and passed the giveaway treaty the Panamanian government inherited 120 million dollars in annual revenue and the interest payments to the banks were restored as Congressman Philip crane observed at the time of the torijos backed coup in 1968 Panama's total official overseas debt stood at a manageable and by World standards modest 167 million dollars under torijos indebtedness has skyrocketed nearly one thousand percent to a massive 1.5 billion dollars Debt Service ratio now consumes an estimated 39 percent of the entire Panamanian budget what it appears we really have here is not just Aid to a tin horn dictator in the form of new subsidies and Canal revenues the treaties would give to the torijos regime but a bailout of a number of banks which should have known better than to invest in Panama and in any event should not Escape responsibility for having done so the Panama bailout was a unique play in no other country did we have an income producing property to give away so from that point forward the bailout would have to be done with Mere Money to pave the way for that Congress passed the monetary Control Act of 1980 Which authorized the Federal Reserve to monetize foreign debt that is Banker language meaning that the Fed was now authorized to create money out of nothing for the purpose of lending to foreign governments it classifies those loans as assets and then uses them as collateral for the creation of even more money here in the United States that was truly a revolutionary expansion of the fed's power to inflate until then it was permitted to make money only for the American government now it was able to do it for any government since then it has been functioning as a central bank for the entire world Mexico by 1982 almost every third world government was running behind in payments Mexico led the way by announcing it could not send any more money that year on its 85 billion dollar debt Federal Reserve Governor Henry Wallach rushed to Switzerland to negotiate an IMF loan of 4.5 billion dollars through the bank of international settlements the central banks of Europe and Japan provided 1.85 billion dollars about 40 percent the rest came from the Federal Reserve commercial Banks postponed payments on the principal for two years but with the infusion of new loans payment on the interest was resumed that did not solve the problem within a few years Mexico was in arrears again and in 1985 the banks agreed to postpone 29 billion dollars in payments and rolled over another 20 billion which means they issued new loans to pay off the old in that same year Secretary of the Treasury James Baker announced the government's plan to solve the world's debt crisis it was a formal statement encouraging Banks to continue lending to Third World governments provided they promised to enact economic reforms favoring a free market it was more of a philosophy than a plan because there was no hope that it would be implemented by any of the Socialist governments receiving the loans behind the announcement was the implication that the federal government acting through the Federal Reserve System could be counted on to assist if the loans went sour Baker called for funneling 29 billion dollars over three years primarily to Latin American countries of which Mexico was a prime recipient currency swap shortly after the Mexican Government had loaned 55 million dollars to Fidel Castro it announced to the banks we will pay only what we have and no more whereupon Paul volcker head of the Federal Reserve rushed to meet with Mexico's Finance Minister Jesus Silva Herzog and offered to put the American taxpayer into the breach a 600 million dollar short-term loan was extended to get Mexico past its election date of July 4th it was called a currency swap because Mexico exchanged an equal number of pesos which it promised to redeem in U.S dollars pesos of course were worthless in international markets which is the reason Mexico wanted the dollars the importance of this loan was not its size nor even the question of repayment it was the manner in which it was made first it was made by the Federal Reserve directly acting as a central bank for Mexico not the U.S and secondly it was done almost in total secrecy William Grider gives the details the currency swaps had another Advantage they could be done secretly volcker discreetly informed both the administration and the key Congressional chairman and none objected but the public reporting of currency swaps was required only every quarter so the emergency loan from the FED would not be disclosed for three or four months by that time volcker hoped Mexico would be arranging more substantial new financing from the IMF the foreign assistance was done as discreetly as possible to avoid setting off a panic but also to avoid domestic political controversy bailing out Mexico it seemed was too grave to be controversial debt swap the currency swap did not solve the problem so in March of 1988 the players and referees agreed to introduce a new maneuver in the game an accounting trick called a debt swap a debt swap is similar to a currency swap in that the United States exchanges something of real value in return for something that is worthless but instead of currencies they exchange government bonds the transaction is Complicated by the time value of those bonds currencies are valued by their immediate worth what they will buy today but bonds are valued by their future worth what they will buy in the future after that differential factor is calculated the process is essentially the same here is how it worked Mexico using U.S dollars purchased 492 million dollars worth of American treasury bonds that pay no interest but which will pay 3.67 billion dollars when they mature in 20 years technically these are called zero coupon bonds then Mexico issued its own bonds with the U.S Securities tied to them as collateral this meant that the future value of Mexico's bonds previously considered worthless were now guaranteed by the United States government the banks eagerly swapped their old loans for these new Mexican bonds at a ratio of about 1.4 to 1. in other words they accepted 100 million dollars in Bonds in return for canceling 140 million dollars in old debt that reduced their interest income but they were happy to do it because they had swapped worthless loans for fully guaranteed bonds this maneuver was hailed in the press as true monetary magic it would save the Mexican Government more than 200 million dollars in annual interest charges it would restore cash flow to the banks and Miracle of Miracles it would cost nothing to American taxpayers the reasoning was that the treasury Bonds were sold at normal Market rates the Mexican Government paid as much for them as anyone else that part was true but what the commentators failed to notice was where Mexico got the American dollars with which to buy the bonds they came through the IMF in the form of foreign currency exchange Reserves in other words there were subsidies from the industrialized nations primarily the United States so the U.S treasury put up the Lion's Share of the money to buy its own bonds it went a half billion dollars deeper in debt and agreed to pay 3.7 billion dollars more in future payments so the Mexican Government could continue paying interest to the banks that is called bailout and it does fall on the American taxpayer IMF becomes final guarantor the following year Secretary of State James Baker CFR and treasury secretary Nicholas Brady CFR flew to Mexico to work out a new debt agreement that would begin to phase in the IMF as final guarantor the IMF gave Mexico a new loan of 3.5 billion dollars later increased to 7.5 billion dollars the World Bank gave another 1.5 billion dollars and the banks reduced their previous loan values by about a third the private Banks were quite willing to extend new loans and reschedule the old why not interest payments would now be guaranteed by the taxpayers of the United States and Japan that did not permanently solve the problem either because the Mexican economy was suffering from massive inflation caused by internal debt which was in addition to the external debt owed to the banks the phrase's internal debt and domestic borrowing are code for the fact that government has inflated its money supply by selling bonds the interest it must pay to entice people to purchase those bonds can be staggering and in fact interest on Mexico's domestic borrowing was draining three times as much from the economy as the foreign Debt Service had been siphoning off notwithstanding this reality citicorp chairman John S Reed CFR whose bank is one of Mexico's largest blenders said they were prepared to lend even more now why did it have anything to do with the fact that the Federal Reserve and the IMF would guarantee payments not so because we believe the Mexican economy is doing well he said at the end of 1994 the game was still going and the play was the same on December 21st the Mexican Government announced that it could no longer pay the fixed exchange rate between the peso and the dollar and that the peso would now have to float in the free market to find its true value the next day it plummeted 39 and the Mexican stock market tumbled once again Mexico could not pay the interest on its loans on January 11th President Clinton CFR urged Congress to approve U.S guarantees for new loans up to 40 billion dollars Secretary of the Treasury Robert Rubin CFR explained it is the Judgment of all including chairman Alan Greenspan CFR that the probability of the debts being paid by Mexico is exceedingly High but while Congress debated the issue the loan clock was ticking payment of 17 billion dollars in Mexican bonds was due within 60 days and four billion dollars of that was due on the 1st of February who was going to pay the banks this matter could not wait on January 31st acting independently of Congress President Clinton announced a bailout package of over 50 billion dollars in loan guarantees to Mexico 20 billion dollars from the U.S exchange stabilization fund 17.8 billion dollars from the IMF 10 billion dollars from the bank of international settlements and three billion dollars from commercial Banks Brazil Brazil became a major player in 1982 when it announced that it too was unable to make payments on its debt in response the U.S treasury made a direct loan of 1.23 billion dollars to keep those checks going to the banks while negotiations were underway for a more permanent solution through the IMF 20 days later it gave another 1.5 billion dollars the bank of international settlements Advanced 1.2 billion dollars the following month the IMF provided 5.5 billion dollars Western Banks extended 10 billion dollars in trade credits old loans were rescheduled and 4.4 billion dollars in new loans were made by a Morgan Bank syndication the temporary loans from the U.S treasury were extended with no repayment date established Ron Cherno comments the plan set a fateful president of curing the debt crisis by heaping on more debt in this charade Bankers would lend more to Brazil with one hand then take it back with the other this preserved the fictitious Book value of loans on bank balance sheets approaching the rescue as a grand new syndication the bankers piled on high interest rates and rescheduling fees by 1983 third world governments owed 300 billion dollars to Banks and 400 billion dollars to the industrialized governments 25 nations were behind in their payments Brazil was in default a second time and asked for rescheduling as did Romania Cuba and Zambia the IMF stepped in and made additional billions of dollars available to the delinquent countries the Department of Agriculture through its commodity Credit Corporation paid 431 million dollars to American Banks to cover payments on loans from Brazil Morocco Peru and Romania at the conclusion of these agreements the April 20th 1983 Wall Street Journal editorialized that the international debt crisis is for all practical purposes over not quite by 1987 Brazil was again in default on its monstrous 121 billion dollar debt this time for one and a half years in spite of the torrent of money that had passed through its hands it was now so broke it couldn't even buy gasoline for its police cars in 1989 as a new round of bailout was being organized President Bush Senior CFR announced that the only real solution to the third world debt problem was debt forgiveness thirteen years later President Bush Jr was continuing the tradition and calling for another 30 billion dollar IMF loan to Brazil backed by the U.S taxpayer at the risk of running this history into the ground through repetition here are just a few more examples before moving along Argentina by 1982 Argentina was unable to make a 2.3 billion dollar payment that was due in July and August the banks extended their loans while the IMF prepared a new infusion in the amount of 2.15 billion dollars this restored the interest payments and gave the Argentinian politicians a little extra spending money seven months later Argentina announced it could not make any more payments until the fall of 1983. the banks immediately began negotiations for rollovers guarantees and new IMF loans Argentina then signed an agreement with 350 creditor Banks to stretch out payments on nearly a fourth of its 13.4 billion dollar debt and the banks agreed to lend an extra 4.2 billion dollars to cover interest payments and political incentives the IMF gave 1.7 billion dollars the United States government gave an additional 500 million dollars directly Argentina then paid 850 million dollars in overdue interest charges to the banks by 1988 Argentina had again stopped payment on its loans and was falling hopelessly behind as bankers and politicians went into a huddle to call the next bailout play they came out of the huddle with yet another package of new loans rollovers and guarantees as summarized by Larry a showstud at the University of Chicago there isn't a U.S Bank that would not sell its entire Latin American portfolio for 40 cents on the dollar were it not for the possibility that skillful political lobbying might turn up a sucker willing to pay 50 or 60 or even 90 cents on the dollar and that sucker is the U.S taxpayer the IMF bailed out Argentina again for 40 billion dollars in 2001 and another eight billion dollars in 2002. this history can become repetitious and boring it would be counterproductive to cover the same sordid story as it has unfolded in each country suffice it to say that the identical game has been played with teams from Bolivia Peru Venezuela Costa Rica Morocco the Philippines the Dominican Republic and almost every other less developed country in the world the need for convergence this sets the stage for understanding the next phase of the game which is unfolding as these words are being written it is the inclusion of China and the former Soviet Bloc into the grand design for Global government as with all the other countries in the world the primary mechanism being used to accomplish this goal at least in the field of Economics is the IMF World Bank the process is one the transfer of money from the industrialized nations which drags them down economically to a suitable common denominator and two the acquisition of effective control over the political leaders of the recipient countries as they become dependent upon the money stream the thing that is new and which sets this stage apart from previous developments is that the apparent crumbling of Communism has created an acceptable rationale for the industrialized nations to now allow their lifeblood to flow into the veins of their former enemies it also creates the appearance of global political convergence a condition which CFR theoretician Richard Cooper said was necessary before Americans would accept having their own Destinies determined by governments other than their own China red China joined the IMF World Bank in 1980 and immediately began to receive billions of dollars in loans although it was well known that she was devoting a huge portion of her resources to military development by 1987 China was the imf's second largest borrower next to India and the transfusions have grown at a steady Pace ever since the bank has asserted that loans will encourage economic reforms in favor of the private sector yet none of the money has gone to the private sector all of it is funneled into the government bureaucracy which in turn wages war against the free market in 1989 after small businesses and farms in the private sector had begun to flourish and surpass the performance of similar government Enterprises red China's leaders clamped down on them with harsh controls and increased taxes Vice Premier Yao Yi Lin announced that there was too much needless construction too many private loans and too much spending on luxuries such as cars and banquets to stop these excesses he said it would be necessary to increase government controls over wages prices and business activities then there is the question of why China needs the money in the first place is it to develop her industry or natural resources is it to fight poverty and improve the living standard of her citizens James bovard answers the bank's defense of its China policy is especially puzzling because China itself is going on a foreign investment binge the World Bank gives China money at zero interest then China buys property in Hong Kong the United States Australia and elsewhere an economist with Citibank estimated that China's direct investment in property manufacturing and services in Hong Kong alone topped six billion dollars in 1984 China had a net outflow of capital of one billion dollars moreover China has its own foreign aid program which has given more than six billion dollars in recent decades largely to leftists governments the great deception it is the author's contention that the much heralded demise of Communism in the Soviet Bloc is a mixture of fact and fantasy it is fact at the bottom level of communist Society where the people in truth rejected it long ago the only reason they appeared to embrace it for so many years was that they had no choice as long as the Soviets held control of the weapons and the means of communication the people had to accept their fate but at the tip of the Pyramid of state power it is a different story the top communist leaders have never been as hostile to their counterparts in the west as the rhetoric suggests they are quite friendly to the world's leading financiers and have worked closely with them when it suits their purposes as we shall see in the following section the Bolshevik Revolution actually was financed by wealthy financiers in London and New York Lennon and Trotsky were on the closest of terms with these monied interests both Before and After the revolution those hidden Liaisons have continued to this day and occasionally popped to the surface when we discover a David Rockefeller holding confidential meetings with a Mikhail Gorbachev in the absence of government sponsorship or diplomatic purpose it is not unreasonable to imagine a scenario in which the leaders of the Communist Bloc come to realize they cannot hold themselves in power much longer there comes a point where even physical force is not enough especially when the loyalties of those who hold the weapons also begin to falter with economic gangrene creeping up the legs of their socialist systems they realize they must obtain outside financial assistance or perish in such a scenario quiet agreements can be worked out to the mutual advantage of all negotiators the plan could be as simple as a Statue of Liberty play in a college football game the appearance of doing one thing as a cover for accomplishing something else while Americans are prepared to accept such deception on a football field they cannot believe that world financiers and politicians are capable of it the concept is rejected out of hand as a conspiracy theory nevertheless in this scenario we theorize it has agreed among the negotiators that the Soviet Bloc needs financial support it is agreed that the Western Nations have the capacity to provide it it is agreed that the best way to move money from the industrialized nations into the Soviet Bloc is through International agencies such as the IMF World Bank it is agreed this cannot happen until hostility between World Systems is replaced by political convergence it is agreed that future conflict is wasteful and dangerous to all parties therefore it is finally agreed that the Soviet Bloc must abandon its posture of global aggression while the Western Nations continue to move towards socialism necessary steps for the long-range goal of merger into a world government but in doing so it must be ensured that the existing communist leaders retain control over their respective States Communists become social Democrats to that end they change their public identities to social Democrats they speak out against the brutal excesses of their predecessors and they offer greater freedom of expression in the media a few dispensable individuals among their ranks are publicly purged as examples of the demise of the old order states that once were held captive by the Soviet Union are allowed to break away and then return on a voluntary basis if any leaders of the newly emancipated States prefer a true Independence instead of alignment with Russia they are replaced no other changes are required socialism Remains the economic system of choice and although lip service may be given to free market Concepts the economy and all means of production remain under State Control the old Communists are now social Democrats and without exception they become the leaders in the new system the West rejoices and the money starts to move as an extra bonus the former Bolsheviks are now hailed by the world as great Statesmen who put an end to the Cold War brought freedom to their people and helped to forge a new world order when did communism depart we are not quite sure all we know is that one day we opened our newspapers and it was accomplished social Democrats were everywhere no one could find any Communists Russian leaders spoke as long-time enemies of the old regime perestroika was here communism was dead it was not killed by an enemy it voted itself out of existence it committed suicide does it not seem strange that communism fell without a struggle is it not curious that the system which was born out of class conflict and Revolution and which maintained Itself by force and violence for almost a century just went away on its own communism was not overthrown by people rising up with clubs and pitchforks to throw off their yoke of tyranny there was no Revolution or counter-revolution no long period of fragmentation no bloody surges between opposing forces hoof it just happened true there was blood in the streets in those areas where opposing groups vied for power but that was after Communism had departed not before such an event had never occurred in history until then it had been contrary to the way governments act contrary to the very nature of power which never surrenders without a life and death struggle this indeed is a great curiosity which should cause people to think our premise is that the so-called demise of Communism is a great deception not awfully different from many of the others that are the focus of this volume we see it as having been stage managed for the purposes outlined previously the transition to world government in our view that scenario is the only one that makes sense in terms of today's geopolitical realities and the only one consistent with the lessons of History we realize of course that such a view runs contrary to popular opinion and conventional wisdom for many it is shocking just to hear it spelled out it would not be possible to convince anyone of its truth without extensive evidence certainly such evidence abounds but it is not within the scope of this study so now that we have stated it we shall leave it behind merely as a clarification of the author's point of view so the reader can step around it if he wishes Eastern Europe American Aid to Eastern European governments while they were still puppet states of the Soviet Union has been justified by the same Theory Advanced on behalf of China it would improve their economies show their people a better way of life and wean them from communism Advocates of that theory now point to the demise of Communism as evidence of the soundness of their plan the truth however is that the money did not improve the economy and did not show the people a better way of life in fact it did not help the people in any way it went directly to their governments and was used for government priorities it strengthened the ruling parties and enabled them to solidify their control it is well known that one of the reasons Poland's economy was weak is that much of her productive output was shipped to the Soviet Union at concessionary prices primarily to support the military polish-built tanks fought in the Vietnam War 20 percent of the Soviet Merchant Marine was built in Poland seventy percent of Poland's computer and locomotive production and 80 percent of her Communications equipment was shipped to the Soviets American grain purchased by Poland with money borrowed from American Banks was sent to Cuba Poland was merely a middleman a conduit to Russia and her satellites the banks were really funding Russia it was in 1982 that Poland first defaulted on bank loans which had been guaranteed by the U.S government through the commodity Credit Corporation under the terms of the guarantee taxpayers would make payments on any bank loan that went into default that was what the banks were counting on when they made those loans but to classify them as in default would require the banks to remove them from their books as assets that was unacceptable because it would make their balance sheets look as bad as they really were so the treasury agreed to bend the rules and make payments without requiring the loans to be in default that was eventually stopped by an Irate Congress but not until the Reagan administration had stalled long enough to pay 400 million dollars directly to the banks on behalf of Poland in November 1988 the World Bank made its first loan to Poland in the amount of 17.9 million dollars three years later in a dramatic demonstration of what the president had meant when he advocated debt forgiveness the Bush Administration canceled a full 70 of the 3.8 billion dollars owed to the United States taxpayers picked up the bill the same story has been unfolding in all the former Soviet Bloc countries in 1980 for example just before Hungary was brought into the IMF World Bank her annual per capita GNP was 4180. this was a problem because the policy of the World Bank was to make development loans only to countries that had per capita gnps of less than two thousand six hundred fifty dollars not to worry in 1981 the Hungarian government simply revised its statistics downward from four thousand one hundred eighty dollars to two thousand one hundred dollars that was a drop of 50 percent in one year surely one of the sharpest depressions in world history everyone knew it was a lie but no one raised an eyebrow it was all part of the game by 1989 the Bush Administration had granted most favored nation trade status to the Hungarian government and established on its behalf a special 25 million dollar Development Fund Russia American Banks had always been willing to make loans to the Soviet Union except for short periods of expediency during the Cuban Missile Crisis the Vietnam War the Soviet invasion of Afghanistan and other minor business interruptions in 1985 after the public had lost interest in Afghanistan banks of the Free World reopened their loan windows to the Soviets a 400 million dollar package was put together by a Consortium of First National of Chicago Morgan guarantee Bankers Trust and Irving trust plus a London subsidiary of the Royal Bank of Canada the loan was offered at unusually low interest rates to buy American and Canadian grain public indignation is easily disarmed when the announced purpose of a loan to a totalitarian government is to purchase Commodities from the country where the loan originates especially if the commodity is green for the assumed purpose of making bread or feeding livestock who could possibly object to having the money come right back to our own Farmers and Merchants in the form of profits and who could fault a project that provided food for the hungry the deception is subtly appealing it is true that the money will be used in part at least to buy Grain or other locally produced Commodities but the borrowing nations are like a homeowner who increases the mortgage on his house to enlarge his living room he will probably make the addition but he borrows twice as much as he needs so he can also buy a new car since the government allows a tax deduction on mortgage interest in effect he now gets a tax deduction for the interest paid on his car as well likewise the borrowing Nations usually borrow more than they need for the announced purchase but they receive all the money at favorable rates yet this is not the most serious fault in the transaction in the case of Russia the grain was no small item on her list of needs after repeated failures of her socialist agriculture she was not able to feed her population hungry people are dangerous to a government Russia needed grain to head off internal Revolt far more than the homeowner needed to increase the size of his living room in other words Russia had to have the grain with or without the loan without it she would have had to curtail spending somewhere else to obtain the money most likely in her military by giving her the money to buy Grain we actually allowed her to spend more money on armaments but even that is not the primary flaw in making loans to Russia the bottom line is that most of those loans will never be repaid as we have seen the name of the game is bailout and it is as certain as the Setting Sun that somewhere down the line Russia will not be able to make her payments and the taxpayers of the industrialized nations will be put through the IMF ringer one more time to squeeze out the transferred purchasing power business ventures in Russia insured by U.S in 1990 the U.S export import Bank announced it would begin making Direct Loans to Russia meanwhile the U.S overseas private Investment corporation was providing free insurance to private companies that were willing to invest in the ex-soviet state in other words it was now doing for industrial corporations what it had been doing all along for banks guaranteeing that if their Investments turned sour the government make that taxpayers would compensate them for their losses the limit on that insurance had been 100 million dollars a generous figure indeed but to encourage an even greater flow of private Capital into Russia the Bush Administration authorized unlimited protection for sound American corporate Investments if these truly were sound Investments they would not need foreign aid subsidies or government guarantees what is really happening in this play is a triple score one International lending agencies provide the social Democrats with money to purchase goods and services from American firms no one really expects them to repay it is merely a clever method of redistributing the wealth from those who have it to those who don't without those who have it catching on two American firms do not need money to participate since their Ventures are guaranteed banks are anxious to loan whatever amount of money is required efficiency or competitiveness are not important factors contracts are awarded on the basis of political influence profits are generous and without risk three when the social Democrats eventually default in their contracts to the American firms or when the joint venture loses money because of socialist mismanagement the federal government provides funds to cover corporate profits and repayment of bank loans there you have it the social Democrats get the goodies the corporations get the profits and the banks get the interest on money created out of nothing you know what the taxpayers get by 1992 the worrisome pattern was clearly visible writing in the New York Times columnist Leslie H Gelb gave the numbers the ex-soviet states are now meeting only 30 percent of their interest payments and almost no principle on debts to the west of 70 billion dollars various forms of Western Aid to the ex-soviet states totaled about 50 billion dollars in the last 20 months and the money has virtually disappeared Without a Trace or a dent on the economic picture the interesting thing about this report is that Leslie Gelb has been a member of the CFR since 1973. why would a CFR spokesman blow the whistle on one of their most important Maneuvers toward the New World Order the answer is that he is doing just the opposite actually he is making a plea for more loans and more outright Aid on the basis that the need is so great he Advocates the prioritizing of funding with first attention to aiding Russia's nuclear power facilities Agriculture and Industrial capacity at the end of his article he writes the stakes could not be higher all the more reason for substantial practical and immediate aid not for Grand Illusions the excuse for all this is that if we do not keep the money flowing Russia may fall back into the hands of those bad Communists who are just waiting to unleash nuclear war against us Congress hears and obeys in spite of the fact that all the preceding billions have disappeared Without a Trace or a dent the transfusion continues in 1993 the World Bank Advanced another half billion dollar loan to Russia before leaving office President Bush arranged for another two billion dollar loan through the export import bank and Congress authorized hitting the voters with another 2.5 billion dollars in foreign aid specifically for Russia in July of that year at the meeting of the group of seven industrialized nations another 24 billion dollars was promised half of which was to come from the IMF in 1998 Russia defaulted on several billions of its debt so the IMF restructured the old loans and issued new ones in 1999 it was discovered that Russian officials had laundered stolen about 20 billion dollars of this funding the IMF publicly expressed shock and dismay but soon resumed negotiations to issue new loans as this book goes to print there is no end in sight The Conspiracy Theory a moment's reflection on these events leads us to a Crossroads of conscience we must choose between two paths either we conclude that Americans have lost control over their government or we reject this information as a mere Distortion of History in the first case we become Advocates of the conspiratorial view of history in the latter we endorse The Accidental View it is a difficult choice because we have been conditioned to laugh at conspiracy theories and few people will risk public ridicule by advocating them on the other hand to endorse The Accidental view is absurd almost all of history is an unbroken trail of one conspiracy after another conspiracies are the norm not the exception the industrialized nations of the world are being bled to death in a global transfer of their wealth to the less developed countries furthermore it is not being done to them by their enemies it is being done by their own leaders the process is well coordinated across National lines and perfectly dovetails with the actions of other leaders who are doing the same thing in their respective countries and these leaders regularly meet together to better coordinate their activities this could not happen without planning a spokesman from the IMF would answer yes there is a plan and it is to Aid the less developed countries but after 40 years and hundreds of billions of dollars they have totally failed to accomplish that goal would intelligent people believe that pursuing the same plan will produce different results in the future then why do they follow a plan that cannot work the answer is they are not following that plan they are following a different one one that has been very successful from their point of view otherwise we must conclude that the leaders of the industrialized nations are to a man just plain stupid we do not believe it these men and women are following a higher loyalty than to their respective countries in their hearts they may honestly believe that in the long run the world will be better for it including their fellow countrymen but for the present their goals are not shared by those who have placed them in office which is why they must conceal their plan from public View if they're fellow citizens knew what they were really doing they would be thrown out of office and in some cases might even be shot as traitors if all this is accidental then there is no plan no cooperation no goal and no deceit just the blind forces of History following the path of least resistance for some it is easier and more comfortable to accept that model but the evidence speaks against it not just the evidence in the previous chapters but everything that follows in this book by contrast the evidence for The Accidental theory of history is a blank page summary the international version of the game called bailout is similar to the domestic version in that the overall objectives to have the taxpayers cover the defaulted loans so that interest payments can continue going to the banks the differences are one instead of justifying this as protecting the American public the pretense is that it is to save the world from poverty and two the main money pipeline goes from the Federal Reserve through the IMF World Bank otherwise the rules are basically the same there is another dimension to the game however that involves more than mere profits and scam it is the conscious and deliberate evolution of the IMF World Bank into a world Central Bank with the power to issue a world fiat currency and that is an important step in an even larger plan to build a true World Government within the framework of the United Nations economically strong nations are not candidates for surrendering their sovereignty to a world government therefore through loans that will never be paid back the IMF World Bank directs the massive transfer of wealth from the industrialized nations to the less developed Nations this ongoing process eventually drains their economies to the point where they also will be in need of assistance no longer capable of independent action they will accept the loss of sovereignty in return for international Aid the less developed countries on the other hand are being brought into the New World Order along in entirely different route many of these countries are ruled by Petty tyrants who care little for their people except how to extract more taxes from them without causing a revolt loans from the IMF World Bank are used primarily to perpetuate themselves and their ruling parties in power and that is exactly what the IMF World Bank intends rhetoric about helping the poor notwithstanding the true goal of the transfer of wealth disguised as loans is to get control over the leaders of the less developed countries after these despots get used to the taste of such an unlimited supply of sweet cash they will never be able to break the habit they will be content already are content to become little gold-plated cogs in the giant Machinery of world government ideology means nothing to them capitalists communist socialist fascist what does it matter so long as the money keeps coming the IMF World Bank literally is buying these countries and using our money to do it the recent inclusion of red China and the former Soviet Bloc on the list of IMF World Bank recipient countries signals the final phase of the game now that Latin America and Africa have been purchased into the new world order this is the final frontier in a relatively short time span China Russia and the Eastern European countries have now become the biggest borrowers and already they are in arrears on their payments this is where the action will lie in the months ahead section two a crash course on money the eight chapters contained in this and the following section deal with material that is organized by topic not chronology several of them will jump ahead of events that are not covered until later furthermore the scope is such that the reader May wonder what if any is the connection with the Federal Reserve System please be patient the importance will eventually become clear it is the author's intent to cover Concepts and principles before looking at events without this background the history of the Federal Reserve is boring with it the story emerges as an exciting drama which profoundly affects our lives today so let us begin this adventure with a few discoveries about the nature of money itself chapter 7. the barbaric medal the history and evolution of money the emergence of gold as the universal money supply the attempts by governments to cheat their subjects by clipping or debasing gold coins the reality that any quantity of gold will suffice for a monetary system and that more money does not require more gold there is a great Mystique surrounding the nature of money it is generally regarded as beyond the understanding of mere mortals questions of the origin of money or the mechanism of its creation are seldom matters of public debate we accept them as Facts of Life which are beyond our sphere of control thus in a nation which is founded on the principle of government by the people and which assumes a high level of understanding among the electorate the people themselves have blocked out one of the most important factors affecting not only their government but their personal lives as well this attitude is not accidental nor was it always so there was a time in the fairly recent past when the humble voter even without formal education was well informed on Money Matters and vitally concerned about their political implementation in fact as we shall see in a later chapter major elections were won or lost depending on how candidates stood on the issue of a central bank it has been in the interest of the money mandarins however to convince the public that now these issues are too complicated for novices through the use of technical jargon and by hiding simple reality inside a maze of bewildering procedures they have caused an understanding of the nature of money to fade from the public consciousness what is money the first step in this maneuver was to scramble the definition of money itself for example the July 20th 1975 issue of the New York Times in an article entitled money supply a growing model begins with the question what is money nowadays The Wall Street Journal of August 29 1975 comments the men and women involved in this Arcane exercise of watching the money supply aren't exactly sure what the money supply consists of and in its September 24th 1971 issue the same paper said a pro-international monetary fund seminar of eminent economists couldn't agree on what money is or how Banks created even the government cannot Define money some years ago a Mr a-f Davis mailed a 10 Federal Reserve Note to the treasury Department in his letter of transmittal he called attention to the inscription on the bill which said that it was redeemable in lawful money and then requested that such money be sent to him in reply the treasury merely sent two five dollar bills from a different printing series bearing a similar promise to pay Mr Davis responded dear sir receipt is hereby acknowledged of two five dollar United States notes which we interpret from your letter are to be considered as lawful money are we to infer from this that the Federal Reserve notes are not lawful money I am enclosing one of the five dollar notes which you sent to me I note that it states on its face the United States of America will pay to the bearer on demand five dollars I am hereby demanding five dollars one week later Mr Davis received the following reply from acting Treasurer m e slindy Dear Mr Davis receipt is acknowledged of your letter of December 23rd transmitting one five dollar United States note with a demand for payment of five dollars you are advised that the term lawful money has not been defined in federal legislation the term lawful currency no longer has such special significance the five dollar United States note received with your letter of December 23rd is returned herewith the phrases will pay to the bearer on demand and is redeemable in lawful money we're deleted from our currency altogether in 1964. is money really so mysterious that it cannot be defined is it the coin and currency we have in our pockets is it numbers in a checking account or electronic impulses in a computer Does it include the balance in a savings account or the available credit on a charge card Does it include the value of stocks and bonds houses land or personal possessions or is money nothing more than purchasing power the main function of the Federal Reserve is to regulate the supply of money yet if no one is able to Define what money is how can we have an opinion about how the system is performing the answer of course is that we cannot and that is exactly the way the cartel wants it the reason the Federal Reserve appears to be a complicated subject is because most discussions start somewhere in the middle by the time we get into it definitions have been scrambled and basic concepts have been assumed under such conditions intellectual chaos is inevitable if we start at the beginning however and deal with each Concept in sequence from the general to the specific and if we agree on definitions as we go we shall find to our amazement that the issues are really quite simple furthermore the process is not only painless it is Believe It or Not intensely interesting the purpose of this and the next three chapters therefore is to provide what could be called a crash course on money it will not be complicated in fact you already know much of what follows all we shall attempt to do is tie it all together so that it will have continuity and relativity to our subject when you are through with these next few pages you will understand money that's a promise so let's get started with the basics what is money a working definition the dictionary is of little help if economists cannot agree on what money is it is partly due to the fact that there are so many definitions available that it is difficult to insist that any of them is the obvious choice for the purpose of our analysis however it will be necessary to establish one definition so we can at least know what is meant when the word is used within this text to that end we shall introduce our own definition which has been assembled from bits and dabs taken from numerous sources the structure is designed not to reflect what we think money ought to be or to support the view of any particular School of Economics but simply to reduce the concept to its most fundamental Essence and to reflect the reality of today's world it is not necessary to agree or disagree with this definition it is introduced solely for the purpose of providing an understanding of the word as it is used Within These pages this then shall be our working definition money is anything which is accepted as a medium of exchange and it may be classified into the following forms one commodity money two receipt money three Fiat money four fractional money understanding the difference between these forms of money is practically all we need to know to fully comprehend the Federal Reserve System and to come to a judgment regarding its value to our economy and to our nation let us therefore examine each of them in some detail barter free money before there was any kind of money however there was barter and it is important first to understand the link between the two barter is defined as that which is directly exchanged for something of like value Mr Jones swaps his restored Model T Ford or a Steinway grand piano this exchange is not monetary in nature because both items are valued for themselves rather than held as a medium of exchange to be used later for something else note however that both items have intrinsic value or they would not be accepted by the other parties labor Also may be exchanged as barter when it too is perceived to have intrinsic value to the person for whom the labor is performed the concept of intrinsic value is the key to an understanding of the various forms of money that evolved from the process of barter commodity money in the Natural Evolution of every society there always have been one or two items which became more commonly used in barter than all others this was because they had certain characteristics which made them useful or attractive to almost everyone eventually they were traded not for themselves but because they represented a storehouse of value which could be exchanged at a later time for something else at that point they ceased being barter and became true money they were according to our working definition a medium of Exchange and since that Medium was a commodity of intrinsic value it may be described as commodity money among primitive people the most usual item to become commodity money was some form of food either produce or livestock lingering testimony to this fact is our word pecuniary which means pertaining to money it is derived from the word pecunia which is the Latin word for cow but as Society progressed beyond the level of bare existence items other than food came into General demand ornaments were occasionally prized when the food supply was ample and there is evidence of some societies using colored seashells and unusual stones for this purpose but these never seriously challenged the use of cattle or sheep or corn or wheat because these staples possessed greater intrinsic value for themselves even if they were not used as money Metals has money eventually man learned how to refine crude oars and to craft them into tools or weapons the medals themselves became of value this was the dawning of the Bronze Age in which iron copper tin and bronze were traded between Craftsmen and Merchants along trade routes and at Major seaports the value of metal ingots was originally determined by weight then as it became customary for the merchants who cast them to stamp the uniform weights on the top they eventually were valued simply by counting their number although they were too large to carry in a pouch they were still small enough to be transported easily and in this form they became in effect primitive but functional coins the primary reason Metals became widely used as commodity money is that they meet all of the requirements for convenient Trading in addition to being of intrinsic value for uses other than money they are not perishable which is more than one can say for cows by melting and reforming they can be divided into smaller units and conveniently used for purchases of minor items which is not possible with diamonds for example and because they are not in great abundance small quantities carry high value which means they are more portable than such items as timber for example perhaps the most important monetary attribute of metals however is their ability to be precisely measured it is important to keep in mind that in its fundamental Form and Function money is both a storehouse and a measure of value it is the reference by which all other things in the economy can be compared it is essential therefore that the monetary unit itself be both measurable and constant the ability to precisely assay Metals in both Purity and weight makes them ideally suited for this function experts May haggle over the precise quality of a gemstone but an Ingot of metal is either 99 Pure or it isn't and it either weighs 100 ounces or it doesn't one's opinion has little to do with it it is not without reason therefore that on every continent and throughout history man has chosen Metals as the ideal Storehouse and measure of value the supremacy of gold there is one metal of course that has been selected by centuries of trial and error above all others even today in a world where money can no longer be defined the Common Man instinctively knows that gold will do just fine until something better comes along we shall leave it to the sociologists to debate why gold has been chosen as the universal money for our purposes it is only important to know that it has been but we should not Overlook the possibility that it was an excellent choice as for quantity there seems to be just the right amount to keep its value high enough for useful coinage it is less plentiful than silver which incidentally has run a close second in the monetary contest and more abundant than Platinum either could have served the purpose quite well but gold has provided what appears to be the perfect compromise furthermore it is a commodity in great demand for purposes other than money it is sought for both industry and ornament thus assuring its intrinsic value under all conditions and of course it's Purity and weight can be precisely measured the misleading theory of quantity it often is argued that gold is inappropriate as money because it is too Limited in Supply to satisfy the needs of modern Commerce on the surface that may sound logical after all we do need a lot of money out there to keep the wheels of the economy turning but upon examination this turns out to be one of the most childish ideas imaginable first of all it is estimated that approximately 45 percent of all the gold mined throughout the world since the discovery of America is now in government or banking stockpiles there undoubtedly is at least an additional 30 percent in jewelry ornaments and private hordes any commodity which exists to the extent of 75 percent of its total World production since Columbus discovered America can hardly be described as in short supply the deeper reality however is that the supply is not even important remember that the primary function of money is to measure the value of the items for which it is exchanged in this sense it serves as a yardstick or ruler of value it really makes no difference if we measure the length of our rug in inches feet yards or meters we could even manage it quite well in miles if we use decimals and express the results in millimoles we could even use multiple rulers but no matter what measurement we use the reality of what we are measuring does not change a rug does not become larger just because we have increased the quantity of measurement units by painting additional markers onto our rulers if the supply of gold in relation to the supply of available Goods is so small that a one ounce coin would be too valuable for minor transactions people simply would use half ounce coins or tenth ounce coins the amount of gold in the world does not affect its ability to serve as money it only affects the quantity that will be used to measure any given transaction let us illustrate the point by imagining that we are playing a game of Monopoly each person has been given a starting supply of play money with which to transact business it doesn't take long before we all begin to feel the shortage of cash if we just had more money we could really wheel and deal let us suppose further that someone discovers another game box of Monopoly sitting in the closet and proposes that the currency from that be added to the game under progress by General agreement the little bills are distributed equally among all players what would happen the money supply has now been doubled we all have twice as much money as we did a moment before but would we be any better off there is no corresponding increase in the quantity of property so everyone would bid up the prices of existing pieces until they became twice as expensive in other words the law of supply and demand would rapidly seek exactly the same equilibrium as existed with the more limited money supply when the quantity of money expands without a corresponding increase in Goods the effect is a reduction in the purchasing power of each monetary unit in other words nothing really changes except that the quoted price of everything goes up but that is merely the quoted price the price as expressed in terms of the monetary unit in truth the real price in terms of its relationship to all other prices Remains the Same it's merely that the relative value of the money supply has gone down this of course is the classic mechanism of inflation prices do not go up the value of the money goes down if Santa Claus were to visit everyone on Earth next Christmas and leave in our stockings an amount of money exactly equal to the amount we already had there is no doubt that many would Rejoice over the sudden increase in wealth by New Year's day however prices would have doubled for everything and the net result on the world's standard of living would be exactly zero the reason so many people fall for the appealing argument that the economy needs a larger money supply is that they zero in only on the need to increase their supply if they paused for a moment to reflect on the consequences of the total Supply increasing the nonsense of The Proposal becomes immediately apparent Murray rothbard professor of Economics at the University of Nevada at Las Vegas says we come to the startling truth that it doesn't matter what the supply of money is any Supply will do as well as any other Supply the free market will simply adjust by changing the purchasing power or effectiveness of its gold unit there is no need whatever for any planned increase in the money supply for the supply to rise to offset any condition or to follow any artificial criteria more money does not supply more capital is not more productive does not permit economic growth gold guarantees price stability the Federal Reserve claims that one of its primary objectives is to stabilize prices in this of course it has failed miserably the irony however is that maintaining stable prices is the easiest thing in the world all we have to do is stop tinkering with the money supply and let the free market do its job prices become automatically stable under a commodity money system and this is particularly true under a gold standard economists like to illustrate the workings of the marketplace by creating hypothetical micro and macro economies in which everything is reduced to only a few factors and a few people in that Spirit therefore let us create a hypothetical economy consisting of only two classes of people gold miners and tailors let us suppose that the law of supply and demand has settled on the value of one ounce of gold to be equal to a fine custom tailored suit of clothes that means that the labor tools materials and talent required to mine and refine one ounce of gold are equally traded for the labor tools and talent required to weave and tailor the suit up until now the number of ounces of gold produced each year have been roughly equal to the number of Fine Suits made each year so prices have remained stable the price of a suit is one ounce of gold and the value of one ounce of gold is equal to one finely tailored suit let us now suppose that the miners in their quest for a better standard of living work extra hours and produce more gold this year than previously or that they discover a new load of gold which greatly increases the available Supply with little extra effort now things are no longer in Balance there are more ounces of gold than there are suits the result of this expansion of the money supply over and above the supply of available Goods is the same as in our game of Monopoly the quoted prices of the suits go up because the relative value of the gold has gone down the process does not end there however when the miners see that they are no better off than before in spite of the extra work and especially when they see the tailors making a greater profit for no increase in labor some of them decide to put down their picks and turn to the trait of Tailoring in other words they are responding to the law of supply and demand in labor when this happens the annual production of gold goes down while the production of Suits goes up and an equilibrium is reached once again in which suits and gold are traded as before the free market if unfettered by politicians and money mechanics will always maintain a stable price structure which is automatically regulated by the underlying factor of human effort the human effort required to extract one ounce of gold from the earth will always be approximately equal to the amount of human effort required to provide the goods and services for which it is freely exchanged cigarettes as money a perfect example of how Commodities tend to self-regulate their value occurred in Germany at the end of World War II the German Mark had become useless and barter was common but one item of exchange namely cigarettes actually became a commodity money and they served quite well some cigarettes were smuggled into the country but most of them were brought in by U.S servicemen in either case the quantity was limited and the demand was high a single cigarette was considered small change a package of 20 and a carton of 200 served as larger units of currency if the exchange rate began to fall too low in other words if the quantity of cigarettes tended to expand at a rate faster than the expansion of other Goods the holders of the currency more than likely would smoke some of it rather than spend it the supply would diminish and the value would return to its previous equilibrium that is not Theory it actually happened with gold as the monetary base we would expect that improvements in manufacturing technology would gradually reduce the cost of production causing not stability but a downward movement of all prices that downward pressure however is partially offset by an increase in the cost of the more sophisticated tools that are required furthermore similar technological efficiencies are being applied in the field of mining so everything tends to balance out history has shown that changes in this natural equilibrium are minimal and occur only gradually over a long period of time for example in 1913 the year the Federal Reserve was enacted into law the average annual wage in America was 633 dollars The Exchange value of gold that year was 20.67 that means that the average worker earned the equivalent of 30.6 ounces of gold per year in 1990 the average annual wage had risen to 20 468 dollars that is a whopping increase of 3233 percent an average rise of 42 percent each year for 77 years but the exchange value of gold in 1990 had also risen it was at 386.90 per ounce the average worker therefore was earning the equivalent of 52.9 ounces of gold per year that is an increase of only 73 percent a rise of less than one percent per year over that same period it is obvious that the dramatic increase in the size of the paycheck was meaningless to the average American the reality has been a small but steady increase in purchasing power about one percent per year that has resulted from the gradual Improvement in technology this and only this has improved the standard of living and brought down real prices as revealed by the relative value of gold in areas where personal service is the primary factor and where technology is less important the stability of gold as a measure of value is even more striking at the Savoy Hotel in London one gold Sovereign will still buy dinner for three exactly as it did in 1913. and in ancient Rome the cost of a finely made toga belt and pair of sandals was one ounce of gold that is almost exactly the same cost today two thousand years later for a handcrafted suit belt and a pair of dress shoes there are no central banks or other human institutions which could even come close to providing that kind of price stability and yet it is totally automatic under a gold standard in any event before leaving the subject of gold we should acknowledge that there is nothing mystical about it it is merely a commodity which because it has intrinsic value and possesses certain qualities has become accepted throughout history as a medium of Exchange Hitler waged a campaign against gold as a tool of the Jewish bankers but the Nazis traded heavily in gold and largely financed their war machine with it Lenin claimed that gold was used only to keep the workers in bondage and that After the Revolution it would be used to cover the floors of public Laboratories the Soviet Union under communism became one of the world's biggest producers and users of gold economist John Maynard Keynes once dismissed gold as a barbaric metal many followers of Keynes today are heavily invested in gold it is entirely possible of course that something other than gold would be better as the basis for money it's just that in over two thousand years no one has been able to find it natural law number one the amazing stability of gold as a measure of value is simply the result of human nature reacting to the forces of supply and demand the process therefore may be stated as a natural law of human behavior lesson when gold or silver is used as money and when the forces of supply and demand are not thwarted by government intervention the amount of new metal added to the money supply will always be closely proportional to the expanding services and goods which can be purchased with it long-term stability of prices is the Dependable result of these forces this process is automatic and impartial any attempt by politicians to intervene will destroy the benefit for all therefore law term price stability is Possible only when the money supply is based upon the gold or silver Supply without government interference as the concept of money was slowly developing in the mind of ancient men it became obvious that one of the advantages of using gold or silver as the medium of exchange was that because of their Rarity as compared to Copper or iron Great Value could be represented by a small size tiny ingots could be carried in a pouch or fastened to a belt or ease of Transportation and of course they could be more readily hidden for safe keeping goldsmiths then began to Fashion them into round discs and to put their stamps on them to attest to Purity and weight in this way the world's first coins began to make their appearance It is believed that the first precious metal coins were minted by the lydians in Asia Minor now Northwest turkey in about 600 BC the Chinese used gold cubes as early as 2100 BC but it wasn't until the Kings stepped into the picture that true coinage became a reality it was only when the State Certified the tiny disks that they became widely accepted and it is to the Greeks more than anyone that we owe this development grows close describes the result these light shining discs adorned with curious new emblems and a variety of vigorous striking images made a deep impression on both Greek and Barbarian and to the more practical-minded the abundance of uniform pieces of metal each of a standard weight certified by the authority of the state meant a release from the cumbersomeness of barter and new and dazzling opportunities in every direction all classes of men succumbed to money and those who had formerly been content to produce only for their needs and the necessities of the household found themselves going to the marketplace with their handicraft or the fruits of their toil to exchange them for the coins they might obtain expanding the money supply by coin clipping from the very beginning the desire for a larger money supply led to practices which were destructive to the economy unscrupulous Merchants began to shave off a tiny portion of each coin they handled a process known as coin clipping and then having the shavings melted down into new coins before long the king's treasury began to do the same thing to the coins it received in taxes in this way the money supply was increased but the supply of gold was not the result was exactly what we now know always happens when the money supply is artificially expanded there was inflation whereas one coin previously would buy 12 sheep now it would only be accepted for 10. the total amount of gold needed for 12 sheep never really changed it's just that everyone knew that one coin no longer contained it as governments became more Brazen in their debasement of the currency even to the extent of diluting the gold or silver content the population adapted quite well by simply discounting the new coins that is to say they accepted them at a realistic value which was lower than what the government had intended this was as always reflected in a general rise in prices quoted in terms of those coins real prices in terms of Labor or other Goods or even of gold itself remained unchanged governments do not like to be thwarted in their plans to exploit their subjects so a way had to be found to force people to accept these slugs as real money this led to the first legal tender laws by Royal Decree the coin of the realm was declared legal for the settlement of all debts anyone who refused it at face value was subject to fine imprisonment or in some cases even death the result was that the good coins disappeared from circulation and went into private hordes after all if the government forces you to accept junk at the same rate of exchange as gold wouldn't you keep the gold and spend the junk that is what happened in America in the 60s when the mints began to issue cheap metal tokens to replace the silver dimes quarters and half dollars within a few months the silver coins were in dresser drawers and safe deposit boxes the same thing has happened repeatedly throughout antiquity in economics that is called gresham's law bad money drives out good the final move in this game of legal plunder was for the government to fix prices so that even if everyone is only using junk as money they can no longer compensate for the continually expanding supply of it now the people were caught they had no Escape except to become criminals which most of them incidentally chose to do the history of artificially expanding money is the history of great dissatisfaction with government much lawlessness and a massive underground economy gold is the enemy of the welfare state in more modern times rulers of Nations have become more sophisticated in the methods by which they debase the currency instead of clipping coins it is done through the banking system the consequences of that process were summarized in 1966 by Alan Greenspan who a few years later would become chairman of the board of governors of the Federal Reserve Greenspan wrote 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 the law of supply and demand is not to be conned as the supply of money of claims increases relative to the supply of tangible Assets in the economy prices must eventually rise thus the earnings saved by the productive members of the society lose value in terms of goods when the economy's books are finally balanced one finds that this loss in value represents the goods purchased by the government for welfare or other purposes 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 if there were the government would have to make its holding illegal as was done in the case of gold the financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves this is the shabby secret of the welfare statists tirades against gold deficit spending is simply a scheme for the hidden confiscation of wealth gold stands in the way of this Insidious process it stands as a protector of property rights unfortunately when Greenspan was appointed as chairman of the Federal Reserve System he became silent on the issue of gold once he was seated at the control panel which holds the levers of power he served the statists well as they continued to confiscate the people's wealth through the hidden tax of inflation even the wisest of men can be corrupted by power and wealth real commodity money in history returning to the topic of debasing the currency in ancient times it must be stated that such practices were by no means Universal there are many examples throughout history of Regents and kingdoms which used great restraint in money creation ancient Greece where coinage was first developed is one of them the drakma became the de facto monetary unit of the Civilized world because of the dependability of its gold content within its borders cities flourished and trade abounded even after the fall of Athens in the Peloponnesian War her coinage remained for centuries as the standard by which all others were measured perhaps the greatest example of a Nation with sound money however was the Byzantine Empire building on the sound monetary tradition of Greece the emperor Constantine ordered the creation of a new gold piece called the solidus and a silver piece called the meliorensei the gold weight of the solidus soon became fixed at 65 grains and was minted at that standard for the next 800 years its quality was so dependable that it was freely accepted under the name bezant from China to Brittany from the Baltic Sea to Ethiopia Byzantine laws regarding money were strict before being admitted to the profession of banking the candidate had to have sponsors who would attest to his or chip either the solid eye or the meliorencia and that he would not issue false coin violation of these rules called for cutting off a hand it is an amazing fact of history that the Byzantine Empire flourished as the center of world Commerce for 800 years without falling into bankruptcy nor for that matter even into debt not once during this period did it devalue its money neither the ancient nor the modern world says Heinrich gelser can offer a complete parallel to this phenomenon this prodigious stability secured the bezunt as universal currency on account of its full weight it passed with all the neighboring Nations as a valid medium of Exchange by her money Byzantium controlled both the civilized and the Barbarian worlds bad commodity money in history the experience of the Romans was quite different basically a militaristic people they had little patience for the niceties of monetary restraint especially in the later Empire debasement of the coinage became a deliberate State policy every imaginable means for plundering the people was devised in addition to taxation coins were clipped reduced diluted and plated favored groups were given franchises for state-endorsed monopolies the origin of our present day Corporation and amidst constantly Rising prices in terms of constantly expanding money speculation and dishonesty became rampant by the year 301 A.D Mutiny was developing in the Army remote regions were displaying disloyalty the treasury was empty agriculture depressed and trade almost at a standstill it was then that Diocletian issued his famous price fixing Proclamation as the last measure of a desperate emperor we are struck by the similarity to such proclamations in our own time most of the chaos can be traced directly to government policy yet the politicians point the accusing finger at everyone else for their greed and disregard for the common good Diocletian declared who is of so hardened a heart and so Untouched by a feeling of humanity that he can be unaware nay that he has not noticed that in the sale of Wares which are exchanged in the market or dealt with in the Daily Business of the Cities an exorbitant tendency in prices has spread to such an extent that the unbridled desire of plundering is held in check neither by abundance nor by seasons of plenty inasmuch as there is seen only a mad desire without control to pay no heed to the needs of the many it seems good to us as we look into the future to us who are the fathers of the people that Justice intervene to settle matters impartially What followed was an incredibly detailed list of mandated prices for everything from a serving of beer or a bunch of watercress to a lawyer's fee and a bar of gold the result conditions became even worse and the Royal Decree was rescinded five years later the Roman Empire never recovered from the crisis by the 4th Century all coins were weighed and the economy was slipping back into barter again by the 7th Century the weights themselves had been so frequently changed that it was no longer possible to affect an exchange in money at all for all practical purposes money became extinct and the Roman Empire was no more receipt money when new civilizations Rose from the ruins of Rome they reclaimed the Lost discovery of money and used it to Great advantage The Invention was truly a giant step forward for mankind but there were many problems yet to be solved and much experimentation lay ahead the development of paper money was a case in point when a man accumulated more coins than he required for daily purchases he needed a safe place to store them The goldsmiths Who handled large amounts of precious metals in their trades had already built sturdy vaults to protect their own inventory so it was natural for them to offer Vault space to their customers or a fee the Goldsmith could be trusted to guard the coins well because he also would be guarding his own wealth when the coins were placed into the Vault the warehouse men would give the owner a written receipt which entitled him to withdraw at any time at first the only way the coins could be taken from the Vault was for the owner to personally present the receipt eventually however it became customary for the owner to merely endorse his receipt to a third party who upon presentation could make the withdrawal these endorsed receipts were the forerunners of today's checks the final stage in this development was the custom of issuing not just one receipt for the entire deposit but a series of smaller receipts adding up to the same total and each having printed across the top pay to the bearer on demand as the population learned from experience that these paper receipts were truly backed by good coin in the Goldsmith's warehouse and that the coin really would be given out in exchange for the receipts it became increasingly common to use the paper instead of the coin thus receipt money came into existence the paper itself was useless but what it represented was quite valuable as long as the coin was held in safe keeping as promised there was no difference in value between the receipt and the coin which backed it and as we shall see in the next chapter there were notable examples of the honest use of receipt money at the very beginning of the development of banking when the receipt was scrupulously honored the economy moved forward when it was used as a gimmick for the artificial expansion of the money supply the economy convulsed and stagnated natural law number two this is not a textbook on the history of money so we cannot afford the luxury of lingering among the fascinating details for our purposes it is sufficient to recognize that human behavior in these matters is predictable and because of that predictability it is possible to formulate another principle that is so Universal that it too may be considered a natural law drawing from the vast experience of this early period it can be stated as follows lesson whenever government sets out to manipulate the money supply regardless of the intelligence or good intentions of those who attempt to direct the process the result is inflation economic chaos and political upheaval by contrast whenever government is limited in its monetary power to only the maintenance of honest weights and measures of precious metals the result is price stability economic prosperity and political tranquility therefore law for a nation to enjoy economic prosperity and political Tranquility the monetary power of its politicians must be limited solely to the maintenance of honest weights and measures of precious metals as we shall see in the following chapters the centuries of monetary upheaval that followed that early period contain no evidence that this law has been repealed by Modern Man summary knowledge of the nature of money is essential to an understanding of the Federal Reserve contrary to Common belief the topic is neither mysterious nor complicated for the purposes of this study money is defined as anything which is accepted as a medium of Exchange building on that we find there are four kinds of money commodity receipt Fiat and fractional precious metals were the first commodity money to appear in history and ever since have been proven by actual experience to be the only reliable base for an honest monetary system gold as the basis of money can take several forms bullion coins and fully backed paper receipts man has been plagued throughout history with the false theory that the quantity of money is important specifically that more money is better than less this has led to Perpetual manipulation and expansion of the money supply through such practices as coin clipping debasement of the coin content and in later centuries the issuance of more paper receipts than there was gold to back them in every case these practices have led to economic and political disaster in those rare instances where man has refrained from manipulating the money supply and has allowed it to be determined by free market production of the gold Supply the result has been prosperity and tranquility chapter 8. Fool's Gold the history of paper money without precious metal backing forced on the public by government decree the emergence of our present day fractional Reserve banking system based on the issuance of a greater amount of receipts for gold than the bank has in Gold to back them up we previously have broken down the concept of money into four categories commodity receipt Fiat and fractional in the last chapter We examined commodity and receipt money in some detail in doing so we also established certain monetary principles which apply regardless of their form we shall now turn to the remaining two categories both of which are represented by paper and which are at the root of almost all of modern man's economic woes Fiat money the American Heritage dictionary defines Fiat money as paper money decreed legal tender not backed by gold or silver the two characteristics of Fiat money therefore are one it does not represent anything of intrinsic value and two it is decreed legal tender legal tender simply means that there is a law requiring everyone to accept the currency in Commerce the two always go together because since the money really is worthless it soon would be rejected by the public in favor of a more reliable medium of exchange such as gold or silver coin thus when governments issue Fiat money they always declare it to be legal tender under pain of fine or imprisonment the only way a government can exchange its worthless paper money for tangible goods and services is to give its citizens no choice the first notable use of this practice was recorded by Marco Polo during his travels to China in the 13th century the famous explorer gives us this account the emperor's mint then is in this same city of cambelik and the way it is wrought is such that you might say he hath The Secret of alchemy in Perfection and you would be right what they take is a certain fine white bass store skin which lies between the wood of the tree and the thick outer bark and this they make into something resembling sheets of paper but black when these sheets have been prepared they are cut up into pieces of different sizes the smallest of these sizes is worth a half tornocell there is also a kind worth one peasant of gold and others of three byzants and so up to ten all these pieces of paper are issued with as much solemnity and Authority as if they were of pure gold or silver and on every piece a variety of officials whose Duty it is have to write their names and put their seals and when all is prepared duly the chief officer deputed by the Khan smears the seal entrusted to him with Vermilion and impresses it on the paper so that the form of the seal remains stamped upon it in red the money is then authentic anyone forging it would be punished with death and the con causes every year to be made such a vast quantity of this money which costs him nothing that it must equal an amount all the treasures in the world with these pieces of paper made as I have described he causes all payments on his own account to be made and he makes them to pass current universally over all his kingdoms and nobody however important he may think himself dares to refuse them on pain of death and indeed everybody takes them readily one is tempted to Marvel at the Khan's audacious power and the subservience of his subjects who endured such an outrage but our smugness rapidly vanishes when we consider the similarity to our own Federal Reserve notes they are adorned with signatures and seals counterfeiters are severely punished the government pays its expenses with them the population is forced to accept them they and the invisible checkbook money into which they can be converted are made in such vast quantity that it must equal an amount all the Treasures of the world and yet they cost nothing to make in truth our present monetary system is an almost exact replica of that which supported the Warlords of seven centuries ago the colonial experience unfortunately the present situation is not unique to our history in fact after China the next place in the world to adopt the use of Fiat money was America specifically the Massachusetts Bay Colony this event has been described as not only the origin of paper money in America but also in the British Empire and almost in the Christian world in 1690 Massachusetts launched a military raid against the French colony in Quebec she had done this before and each time had brought back sufficient plunder to more than pay for the expedition this time however the foray was a dismal failure and the men returned empty-handed when the soldiers demanded their pay Massachusetts found its coffers empty disgruntled soldiers have a way of becoming unruly so the officials scrambled for some way to raise the funds additional taxes would have been extremely unpopular so they decided simply to print paper money in order to convince the soldiers and the citizenry to accept it the government made two solemn promises one it would redeem the paper for gold or silver coin just as soon as there was sufficient tax revenue to do so and two absolutely no additional paper notes would ever be issued both pledges were promptly broken only a few months later it was announced that the original issue was insufficient to discharge the government's debt and a new issue almost six times greater was put into circulation the currency wasn't redeemed for nearly 40 years long after those who had made the pledge that faded from the scene a classic pattern most of the other colonies were quick to learn the magic of the printing press and the history that followed is a classic example of cause and effect governments artificially expanded the money supply through the issuance of fiat currency this was followed by legal tender laws to force its acceptance next came The Disappearance of gold or silver coins which went instead into private hordes or to foreign traders who insisted on the real thing for their Wares many of the colonies repudiated their previous money by issuing new bills valued at multiples of the old then came political discontent and civil disobedience and at the end of each cycle there was rampant inflation and economic chaos in 1703 South Carolina declared that its money was a good payment and tender in law and then added that should anyone refuse to honor it as such they would be fined an amount equal to double the value of the bills so refused by 1716 the penalty had been increased to treble the value the printing press and inflation Benjamin Franklin was an Ardent proponent of Fiat money during those years and used his great influence to sell the idea to the public we can get some idea of the ferment of the Times by noting that in 1736 writing in his Pennsylvania Gazette Franklin apologized for its irregular publication and explained that the printer was with the press laboring for the public good to make money more plentiful the printing of money was apparently a major time-consuming operation in 1737 Massachusetts devalued its fiat currency by 66 percent offering one dollar of new currency for three of the old the promise was made that after five years the new money would be fully redeemed in silver or gold the promise was not kept by the late 1750s Connecticut had prices inflated by 800 percent the Carolinas had inflated 900 percent Massachusetts a thousand percent Rhode Island 2300 percent naturally these inflations all had to come to an end and when they did they turned into equally massive deflations and depressions it has been shown that even in colonial times the classic booms and busts which modern economists are fond of blaming on an unbridled free market actually were direct manifestations of the expansion and contraction of Fiat money which no longer was governed by the laws of supply and demand by this time coins had completely disappeared from the scene some were in private Hoards but most of them had been exported to other countries leaving the colonies with little choice but to use Fiat money or barter Merchants from abroad were interested in neither of those however and international trade ground almost to a halt a blessing in disguise the experiment with Fiat money was a Calamity to the colonists but it was also a thorn in the sight of the bank of England the bank had used its influence with the crown to forbid the colonies to Mint their own coins or to establish local banks this meant that if the colonists wanted the convenience of paper money they would be forced to use the notes issued by the bank of England no one had anticipated that the colonial governments would be so inventive as to create their own paper money so in 1751 Great Britain began to pressure the colonies to redeem all of their currency and withdraw it from circulation this they eventually did and at bargain prices by then their Fiat money was heavily discounted in the marketplace and the governments were able to buy back their own currency for pennies on the dollar the decree from the British Parliament although heavily resented by the colonists turned out to be a blessing in disguise the paper notes of the bank of England never did become a primary medium of Exchange probably because of their recent bad experience with paper money the colonists merely brought what few gold and silver coins they had out of hiding and returned to a true commodity money system at first the doomsayers predicted this would spell further ruin for the Colonial economy there isn't enough money was the all too familiar cry but there was indeed quite enough or as we have already seen any amount is sufficient tobacco becomes money there was in fact a period in which other Commodities became accepted as a secondary medium of Exchange such items As Nails Lumber rice and whiskey filled the monetary void but tobacco was the most common here was a commodity which was in great demand both within the colonies and for overseas Commerce it had intrinsic value it could not be counterfeited it could be divided into almost any denominational quantity and its Supply could not be increased except by the exertion of Labor in other words it was regulated by the law of supply and demand which gave it great stability and value in many ways it was an ideal money it was officially adopted as such by Virginia in 1642 and a few years later by Maryland but it was used unofficially in all the other colonies as well so close was the identity of tobacco with money that the previous fiat currency of New Jersey not a tobacco-growing state displayed a picture of a tobacco leaf on its face it also carried the inscription to counterfeit his death tobacco was used in early America as a secondary medium of exchange for about 200 years until the new constitution declared that money was henceforth the sole prerogative of the federal government the primary currency at that juncture however was still gold and silver coin or species as it is called and the immediate result of returning to a sound monetary unit was a rapid recovery from the economic stagnation previously inflicted by the booms and busts of Fiat money trade and production Rose dramatically and this in turn attracted an inflow of gold and silver coin from around the world filling the void that had been created by years of worthless paper the law of supply and demand was visibly at work for a while Massachusetts had returned to specie while Rhode Island remained on Fiat money the result was that Newport which had been the Trade Center for the West Indies lost its trade to Boston and became an empty port after the colonies had returned to coin prices quickly found their natural equilibrium and then stayed at that point even during the Seven Years War and the disruption of trade that occurred immediately prior to the revolution there is no better example of the fact that economic systems in distress can and do recover rapidly if government does not interfere with the natural healing process War brings a return of Fiat money the war for independence brought all of this to a sudden halt Wars are seldom funded out of the existing treasury nor are they even done so out of increased taxes if governments were to Levy taxes on their citizens fully adequate to finance the conflict the amount would be so great that many of even its most Ardent supporters would lose enthusiasm by artificially increasing the money supply however the real cost is hidden from View it is still paid of course but through inflation a process that few people understand the American Revolution was no exception in order to pay the bill for Independence both the Confederation and the individual states went heavily into the printing business at the beginning of the war in 1775 the total money supply stood at 12 million dollars in June of that year the Continental Congress issued another 2 million dollars before the notes were even put into circulation another one million dollars was authorized by the end of the year another three million dollars in 1776 another 19 million dollars 13 million dollars in 1777 64 million dollars in 1778 125 million dollars in 1779 and still more the Continental Army issued its own certificates for the purchase of supplies totaling 200 million dollars a total of 425 million dollars in five years on top of a base of 12 million dollars is an increase of over 3 500 percent and in addition to this massive expansion of the money supply on the part of the central government it must be remembered that the states were doing exactly the same thing it is estimated that in just five years from 1775 to the end of 1779 the total money supply expanded by five thousand percent by contrast the amount raised in taxes over the five-year period was inconsequential amounting to only a few million dollars and a massive inflation the first exhilarating effect of this flood of new money was the flush of apparent prosperity but that was quickly followed by inflation as the self-destruct mechanism began to operate in 1775 paper Continentals were traded for one dollar in gold in 1777 they were exchanged for 25 cents by 1779 just four years from their issue they were worth less than a penny the phrase not worth a continental has its origin in this dismal period choose sold for five thousand dollars a pair a suit of clothes cost a million it was in that year that George Washington wrote a wagon load of money will scarcely purchase a wagon load of provisions even Benjamin Franklin began to see the light in a mood of sarcasm he wrote this currency as we manage it is a wonderful machine it performs its office when we issue it it pays and clothes troops and provides vitals and ammunition and when we are obliged to issue a quantity excessive it pays itself off by depreciation when speaking of deficit spending it is common to hear the complaint that we are saddling future generations with the bill for what we enjoy today why not let those in the future help pay for what will benefit them also don't be deceived that is a misconception encouraged by politicians to calm the public when money is Fiat as the colonists discovered every government building public work and Canon of war is paid out of current labor and current wealth these things must be built today with today's labor and the man who performs that labor must also be paid today it is true that interest payments fall partly to Future Generations but the initial cost is paid by those in the present it is paid by loss of value in the monetary unit and loss of purchasing power for one's wages inflation is a hidden tax Fiat money is the means by which governments obtain instant purchasing power without taxation but where does that purchasing power come from since Fiat money has nothing of tangible value to offset it the government's Fiat purchasing power can be obtained only by subtracting it from somewhere else it is in fact collected from us all through a decline in our purchasing power it is therefore exactly the same as a tax but one that is hidden from view silent in operation and little understood by the taxpayer in 1786 Thomas Jefferson provided a clear explanation of this process when he wrote everyone through whose hands a bill passed lost on that bill but it lost in value during the time it was in his hands this was a real tax on him and in this way the people of the United States actually contributed those millions of dollars during the war and by a mode of Taxation the most oppressive of all because the most unequal of all enter price controls and legal tender laws as prices skyrocketed the colonies enacted wage and price controls which was like plugging up the whistle on a tea kettle in hopes of keeping the steam from escaping when that failed there followed a series of harsh legal tender laws one law even invoked the Specter of treason it said if any person shall Hereafter be so lost to all virtue and regard for his country as to refuse to receive said bills in payment he shall be deemed published and treated as an enemy in this country and precluded from all trade or intercourse with the inhabitants of these colonies Rhode Island not only levied a heavy fine for non-acceptance of its notes but upon a second offense an individual was stripped of citizenship when a court declared the ACT unconstitutional the legislature called the judges before it and summarily dismissed the offenders from office enter economic chaos and insurrection if the ravages of War were a harsh burden for the colonies to Bear the Havoc of Fiat money was equally so after the war inflation was followed by deflation as reality returned to the marketplace prices fell drastically which was wonderful for those who were buying but for the merchants who were selling or the farmers who had borrowed heavily to acquire property had inflated wartime prices it was a disaster the new lower prices were not adequate to sustain their fixed inflated mortgages and many hard-working families were ruined by foreclosure furthermore most people still did not understand the inflation process and there were many who continued to Advocate the paper money cure several of the states were receptive to the pressure and their printing presses continued to roll historian Andrew McLaughlin recalls a typical scene in Rhode Island at that time as witnessed by a visiting Frenchman a French traveler who passed through Newport about this time gives a dismal picture of the place Idol men standing with folded arms at the corners of the streets houses falling to ruins miserable shops offering for sale nothing but a few coarse stuffs grass growing in the streets Windows stuffed with Rags everywhere announcing Misery the Triumph of paper money and the influence of bad government the merchants had closed their stores rather than take payment in paper Farmers from neighboring states did not care to bring their produce idleness and economic depression also led to outbursts of rebellion and insurrection in 1786 George Washington wrote to James Warren the wheels of government are clogged and we are descending into the veil of confusion and darkness two years later in a letter to Henry Knox he said if any person had told me that there would have been such formidable Rebellion as exists I would have thought him a bedlamite a fit subject for a madhouse fortunately there is a happy ending to that part of the story as we shall see in a subsequent chapter when the state delegates assembled to draft the Constitution the effects of Fiat money were so fresh in their minds they decided to put an end to it once and for all then the new Republic not only rapidly recovered but went on to become the economic Envy of the world for a while at least until the lesson had been forgotten by following Generations but that is getting ahead of our story for now we are dealing with the topic of Fiat money and the experience of the American colonies is a classic example of what always happens when men succumb to its siren Call natural law number three let us pause at this point and observe another of those lessons derived from centuries of experience that lesson is so clear and so Universal and so widely seen throughout history that it may be stated as a natural law of human behavior lesson Fiat money is paper money without precious metal backing and which people are required by law to accept it allows politicians to increase spending without raising taxes Fiat money is the cause of inflation and the amount which people lose in purchasing power is exactly the amount which was taken from them and transferred to their governments by this process inflation therefore is a hidden tax this tax is the most unfair of all because it falls most heavily on those who are least able to pay the small wage earner and those on fixed incomes it also punishes the Thrifty by eroding the value of their savings this creates resentment among the people leading always to political unrest and National disunity therefore law a nation that resorts to the use of Fiat money has doomed itself to economic hardship and political disunity fractional money let us turn now to the fourth and final possible form of money a most intriguing concept called fractional money and to understand how this functions we must return to Europe and the practice of the early goldsmiths who stored the precious metal coins of their customers for a fee in addition to the goldsmiths who stored coins there was another class of merchants called scriveners who lent coins the goldsmiths reasoned that they too could act as scriveners but do so with other people's money they said it was a pity for all that coin to just sit idle in their vaults why not lend it out and earn a profit which could then be split between themselves and their depositors put it to work instead of merely Gathering dust they had learned from experience that very few of their depositors ever wanted to remove their coins at the same time in fact net withdrawals seldom exceeded 10 or 15 percent of their stockpile it seemed perfectly safe to lend up to 80 or even 85 of their coins and so the warehouse men began to act as loan brokers on behalf of their depositors and the concept of banking as we know it today was born that's the way many history books describe it but there is more involved here than merely putting idle money to work first of all sharing the interest income with the owners of the deposits was not part of the original concept that only became general practice many years later after the depositors became outraged and needed to be reassured that these loans were in their interest as well in the beginning they didn't even know that their coins were being lent out they naively thought that the goldsmiths were lending their own money deposits are not available for Lending in the second place we need to consider whether the coin in the vault was even available for Lending regardless of whether or not the depositors received a part of the profit let us suppose that we are playing a game of poker at the home of Charlie Smith each of us has given twenty dollars to Charlie Who acting as the banker has put our money into a shoebox and given us in return 20 poker chips it is the understanding that anytime we want to go home we can get back a dollar for each chip we have at that time now let us suppose that Charlie's brother-in-law Larry shows up not to play poker but to borrow some money since six of us are playing and each has put in twenty dollars there is a total of a hundred and twenty dollars in the shoebox and that turns out to be perfect for Larry's needs you can imagine what would happen if Charlie decided to lend out the idle money it is not available for Lending neither Charlie nor any of the players have the right to lend those dollars because they are being held in escrow so to speak pending completion of the contract between Charlie and his guests those dollars no longer even exist as money they have been replaced in concept at least by the poker chips if any of us are so touched by Larry's story that we decide to lend him the money ourselves we would have to do it with other dollars or cash in our chips for the dollars in the shoebox in that case of course we could no longer stay in the game we cannot spend lend or give away the deposit and also consider the chips to be worth anything if you are a member of an organization and have given your proxy to a friend to vote in your absence at the annual meeting you cannot then show up and cast your own vote in addition to your proxy likewise in the beginning of banking the certificates which were circulated as money were in effect proxies for the coins consequently those coins were not available for Lending their monetary value had been assigned to the certificates if the certificate holders had wanted to lend out their coins they should have retired the certificates first they were not entitled to hold spendable paper money and also authorize their Banker to lend that same money as coins one cannot spend lend or give away the coins and also consider the certificates to be worth anything all of this is just common sense but there is another dimension to the problem which has to do with honesty and business contracts when the bankers used those coins as the basis for loans they were putting themselves in a position of not having enough coin in the vault to make good on their contracts when it came time for depositors to take their money home in other words the new contracts were made with the full knowledge that under certain circumstances they would have to be broken but the bankers never bothered to explain that the general public was led to believe that if they approved of putting these supposedly idle funds to work they would be helping the economy and earning a little profit besides it was an appealing proposal and the idea caught on like wildfire fractional Reserve banking most borrowers wanted paper money of course not bulky coins so when they received their loans they usually put the coins right back into the Vault for safe keeping they were then given receipts for these deposits which as we have observed were readily accepted in Commerce as money at this point things began to get complicated the original depositors had been given receipts for all of the bank's coins but the bank now issued loans in the amount of 85 percent of its deposits and the borrowers were given receipts for that same amount these were in addition to the original receipts that made 85 percent more receipts than coins thus the banks created 85 more money and placed it into circulation through their Borrowers in other words by issuing phony receipts they artificially expanded the money supply at this point the certificates were no longer one hundred percent backed by gold they now had a backing of only 54 percent but they were accepted by the unsuspecting public as equal in value to the old receipts the goals behind all of them however now represented only a fraction of their face value thus the receipts became what may be called fractional money and the process by which they were created is called fractional Reserve banking none of this shortfall unfortunately was ever explained the bankers decided that it would be better not to discuss reality where the public could hear these facts became the Arcane secrets of the profession the depositors were never encouraged to question how the banks could lend out their money and still have it on hand to pay back on an instance notice instead Bankers put on great errors of respectability stability and accountability dressed and acted serious if not Stern erected great edifices resembling government buildings and temples all to bolster The False Image of being able to honor their contracts to pay on demand it was John Maynard Keynes who observed a sound Banker alas is not one who foresees danger and avoids it but one who when he is ruined is ruined in a conventional and Orthodox way along with his fellows so that no one can readily blame him it is necessarily part of the business of a banker to maintain appearances and to confess a conventional respectability which is more than human lifelong practices of this kind make them the most romantic and least realistic of men creating money out of debt let us step back for a moment and analyze in the beginning Banks served as warehouses for the safekeeping of their customers coins when they issued paper receipts for those coins they converted commodity money into receipt money this was a great convenience but it did not alter the money supply people had a choice of using either coin or paper but they could not use both if they used coin the receipt was never issued if they used the receipt the coin remained in the vault and did not circulate when the banks abandoned this practice and began to issue receipts to borrowers they became magicians some have said they created money out of nothing but that is not quite true what they did was even more amazing they created money out of debt obviously it is easier for people to go into debt than to mine gold consequently money no longer was limited by the natural forces of supply and demand from that point in history forward it was to be limited only by the degree to which Bankers have been able to push down the gold Reserve fraction of their deposits from this perspective we can now look back on fractional money and recognize that it really is a transitional form between receipt money and Fiat money it has some of the characteristics of both as the fraction becomes smaller the less it resembles receipt money and the more closely it comes to Fiat money when the fraction finally reaches zero then it has made the complete transition and becomes pure Fiat furthermore there is no example in history where men once they had accepted the concept of fractional money didn't reduce the fraction lower and lower until eventually it became zero no Bank can stay in business for very long with a zero Reserve the only way to make people accept such a worthless currency is by government Force that's what legal tender laws are all about the transition from fractional Reserve money to Fiat money therefore requires the participation of government through a mechanism which is called a central bank most of the balance of this book will be devoted to a study of that creature but for now suffice it to say that the Euphoria of being able to create money without human effort is so great that once such a narcotic is taken there is no politician or Banker who can kick the habit as William Sumner observed a man might as well jump off a precipice intending to stop halfway down natural law number four and so once again we come to one of those natural laws that emerge from centuries of Human Experience it can be stated as follows lesson fractional money is paper money which is backed by precious metals up to only a portion of the face amount it is a hybrid being part receipt money and part Fiat money generally the public is unaware of this fact and believes that fractional money can be redeemed in full at any time when the truth is discovered as periodically happens there are runs on the bank and only the first few depositors in line can be paid since fractional money earns just as much interest for the bankers as does gold or silver the Temptation is great for them to create as much of it as possible as this happens the fraction which represents the reserve becomes smaller and smaller until eventually it is reduced to zero therefore law fractional money will always degenerate into Fiat money it is but Fiat money in transition so much for the overview and generalities in the next chapter we shall see what history has to say on this process and what a history it is summary Fiat money is paper money without precious metal backing which people are required by law to accept the first recorded appearance of Fiat money was in 13th century China but its use on a major scale did not occur until colonial America the experience was disastrous leading to massive inflation unemployment loss of property and political unrest during one period when the bank of England forced the colonies to abandon their Fiat money General Prosperity quickly returned the Revolutionary War brought Fiat money back to the colonies with a Vengeance the economic chaos that resulted led the colonial governments to impose price controls and harsh legal tender laws neither of which was effective fractional money is defined as paper money with precious metal backing for part not all of its stated value it was introduced in Europe when goldsmiths began to issue receipts for gold which they did not have thus only a fraction of their receipts was redeemable fractional money always degenerates into pure Fiat money chapter 9 the secret science the condensed history of fractional Reserve banking The Unbroken record of fraud booms busts and economic chaos the formation of the bank of England the World's First Central Bank which became the model for the Federal Reserve System Banks of deposit first appeared in early Greece concurrent with the development of coinage itself they were known in India at the time of Alexander the Great they also operated in Egypt as part of the public Granary system they appeared in Damascus in 1200 and in Barcelona in 1401 it was the city-state of Venice however which is considered the cradle of banking as we know it today the bank of Venice by the year 1361 there already had been sufficient abuse in banking that the Venetian Senate passed a law forbidding Bankers to engage in any other commercial Pursuit thus removing the temptation to use their depositors funds to finance their own Enterprises they were also required to open their books for public inspection and to keep their stockpile of coins available for viewing at all reasonable times in 1524 a board of Bank examiners was created and two years later all Bankers were required to settle accounts between themselves in coin rather than by check in spite of these precautions however the largest bank at that time the house of Pizano and tiepolo had been active in lending against its reserves and in 1584 was forced to close its doors because of inability to refund depositors the government picked up the pieces at that point and a state bank was established the Banco de La Piazza del Rialto Having learned from the recent experience with bankruptcy the new bank was not allowed to make any loans there could be no profit from the issuance of credit the bank was required to sustain itself solely from fees for coin storage exchanging currencies handling the transfer of payments between customers and notary services the formula for honest banking had been found the bank prospered and soon became the center of Venetian Commerce its paper receipts were widely accepted far beyond the country's borders and in fact instead of being discounted in exchange for gold coin as was the usual practice they actually carried a premium over coins this was because there were so many kinds of coin in circulation and such a wide variance of quality within the same type of coin that one had to be an expert to evaluate their worth the bank performed this service automatically when it took the coins into its Vault each was evaluated and the receipt given for it was an accurate reflection of its intrinsic worth the public therefore was far more certain of the value of the paper receipts than of many of the coins and consequently was willing to exchange a little bit more for them unfortunately with the passage of time and the fading from memory of previous banking abuses the Venetian Senate eventually succumbed to the temptation of credit strapped for funds and not willing to face the voters with a tax increase the politicians decided they would authorize a new bank without restrictions against loans have the bank create the money they needed and then borrow it so in 1619 the Banco delgiro was formed which like its bankrupt predecessor began immediately to create money out of nothing for the purpose of lending it to the government 18 years later the Banco de La Piazza del Rialto was absorbed into the new bank and history's first tiny flame of sound Banking sputtered and died throughout the 15th and 16th centuries Banks had been springing up all over Europe almost without exception however they followed the lucrative practice of lending money which was not truly available for loan they created excess obligations against their reserves and as a result every one of them failed that is not to say that their owners and directors did not Prosper it merely means that their depositors lost all or a part of their assets entrusted for safe keeping the bank of Amsterdam it wasn't until the bank of Amsterdam was founded in 1609 that we find a second example of sound banking practices and the results were virtually the same as previously experienced by the Banco de La Piazza del Rialto the bank only accepted deposits and steadfastly refused to make loans its income was derived solely from service fees all payments in and around Amsterdam soon came to be made in paper currency issued by the bank and in fact that currency carried a premium overcoin itself the Virgo Masters and the city council were required to take an annual oath swearing that the coin reserve of the bank was intact Galbraith reminds us for a century after its founding it functioned usefully and with notably strict rectitude deposits were deposits and initially the metal remained in storage for the man who owned it until he transferred it to another none was loaned out in 1672 when the armies of Louis XIV approached Amsterdam there was grave alarm Merchants besieged the bank some in the suspicion that their wealth might not be there all who sought their money were paid and when they found this to be so they did not want payment as was often to be observed in the future however desperately people want their money from a bank when they are assured they can get it they no longer want it the principles of honesty and restraint were not to be long lived however the temptation of easy profit from money creation was simply too great as early as 1657 individuals had been permitted to overdraw their accounts which means of course that the bank created new money out of their debt in later years enormous loans were made to the Dutch East Indies company the truth finally became known to the public in January of 1790 and demands for a return of deposits were steady from that date forward ten months later the bank was declared insolvent and was taken over by the city of Amsterdam the bank of Hamburg the third and last experience with honest banking occurred in Germany with the bank of Hamburg for over two centuries it Faithfully adhered to the principle of safe deposit so scrupulous was its Administration that when Napoleon took possession of the bank in 1813 he found 7 million 506 956 marks in silver held against liabilities of seven million four hundred eighty nine thousand three hundred and forty three that was seventeen thousand six hundred and thirteen more than was actually needed most of the bank's treasure that Napoleon hauled away was restored a few years later by the French government in the form of securities it is not clear if the Securities were of much value but even if they were they were not the same as silver because of foreign Invasion the bank's currency was no longer fully convertible into coin as receipt money it was now fractional money and the self-destruct mechanism had been set in motion the bank lasted another 55 years until 1871 when it was ordered to liquidate all of its accounts that is the end of the short story of honest banking from that point forward fractional Reserve banking became the universal practice but there were to be many interesting twists and turns in its development before it would be ready for something as sophisticated as the Federal Reserve System early banking in England in England the first paper money was the exchequer order of Charles II it was pure Fiat and although it was decreed legal tender it was not widely used it was replaced in 1696 by the ex-chequer bill the bill was redeemable in gold and the government went to Great Lengths to make sure that there was enough actual coin or bullion to make good on the pledge in other words it was true receipt money and it became widely accepted as the medium of Exchange furthermore the bills were considered as short-term loans to the government and actually paid interest to the holders in 1707 the recently created Bank of England was given the responsibility of managing this currency but the bank found more profit in the circulation of its own banknotes which were in the form of fractional money and which provided for the collection of Interest not the payment of it consequently the government bills gradually passed out of use and were replaced by banknotes which by the middle of the 18th century became England's only paper money it must be understood that at this time the bank of England was not yet fully developed as a central bank it had been given a monopoly over the issue of banknotes within London and other Prime Geographic areas but they were not yet decreed as legal tender no one was forced to use them they were merely private fractional receipts for gold coin issued by a private bank which the public could accept reject or discount at its pleasure legal tender status was not conferred upon the bank's money until 1833 meanwhile Parliament had granted Charters to numerous other Banks throughout the Empire and without exception the issuance of fractional money led to their ultimate demise and the ruin of their depositors disaster after disaster had to come upon the country says Shaw because of the indifference of the state to these mere private paper tokens the bank of England however was favored by the government above all others and time after time it was saved from insolvency by Parliament how it came to be that way is an interesting story the bank of England England was financially exhausted after a half a century of war against France and numerous civil wars fought largely over excessive taxation by the time of the war of the league of Augsburg in 1693 King William was in serious need for new Revenue twenty years previously King Charles II had flat out repudiated a debt of over a million pounds which had been lent to him by scores of goldsmiths with the result that ten thousand depositors lost their savings this was still fresh in everyone's memory and needless to say the government was no longer considered a good investment risk unable to increase taxes and unable to borrow Parliament became desperate for some other way to obtain the money the objective says grows close was not to bring the money mechanism under more intelligent control but to provide means outside the onerous sources of taxes and public loans for the financial requirements of an impecunious government there were two groups of men who saw a unique opportunity arise out of this necessity the first group consisted of the political scientists within the government the second was comprised of the monetary scientists from the emerging business of banking the organizer and spokesman of this group was William Patterson from Scotland Patterson had been to America and came back with a grandiose scheme to obtain a British Charter for a commercial company to colonize the Isthmus of Panama then known as Darien the government was not interested in that so Patterson turned his attention to a scheme that did interest it very much the creation of money the two groups came together and formed an alliance no that is too soft a word the American Heritage dictionary defines a cabal as a conspiratorial group of plotters or intriggers there is no other word that could so accurately describe this group with much of the same secrecy and mystery that surrounded the meeting on Jekyll Island the cabal met in Mercer's Chapel in London and hammered out a seven-point plan which would serve their Mutual purposes one the government would Grant a charter to the monetary scientists to form a bank two the bank would be given a monopoly to issue banknotes which would circulate as England's paper currency three the bank would create money out of nothing with only a fraction of its total currency backed by coin four the monetary scientists then would lend the government all the money it needed five the money created for government loans would be backed primarily by government ious six although this money was to be created out of nothing and would cost nothing to create the government would pay interest on it at the rate of 8 percent seven government ious would also be considered as reserves for creating additional loan money for private Commerce these loans also would earn interest thus the monetary scientists would collect double interest on the same nothing the circular which was distributed to attract subscribers to the bank's initial stock offering explained the bank hath benefit of interest on All the Monies which it Bank creates out of nothing the charter was issued in 1694 and a strange creature took its initial Breath of Life it was the World's First Central Bank rothbard writes in short since there were not enough private Savers willing to finance the deficit Patterson and his group were graciously willing to buy government bonds provided they could do so with newly created out of thin air banknotes creating a raft of special privileges with them this was a splendid deal for Patterson and Company and the government benefited from the Flim Flam of a seemingly legitimate Banks financing their debts as soon as the bank of England was chartered in 1694 King William himself and various members of parliament rushed to become shareholders of the new money Factory they had just created the secret science of money both groups within the cabal were handsomely rewarded for their efforts the political scientists had been seeking about 500 000 pounds to finance the current War the bank promptly gave them more than twice what they originally sought the monetary scientists started with a pledged capital investment of one million two hundred thousand pounds textbooks tell us that this was lent to the government at eight percent interest but what is usually omitted is the fact that at the time the loan was made only seven hundred and twenty thousand pounds had been invested which means the bank lent 66 more than it had on hand furthermore the bank was given the privilege of creating at least an equal amount of money in the form of loans to the public so after lending their Capital to the government they still had it available to lend out a second time an honest loan of their 720 000 pounds at eight percent would have yielded fifty seven thousand six hundred pounds interest but with the new secret science they were able to earn eight percent on one million two hundred thousand pounds given to the government plus an estimated nine percent on 720 000 pounds lent to the public that adds up to a hundred and sixty thousand eight hundred pounds more than 22 percent on their investment the real point however is that under these circumstances it is meaningless to talk about a rate of interest when money is created out of nothing the true interest rate is not eight percent or nine percent or even twenty two percent it is infinity in this first official Act of the World's First Central Bank can be seen the great pretense that has characterized all those which have followed the bank pretended to make a loan but what it really did was to manufacture the money for government's use if the government has done this directly the Fiat nature of the currency would have been immediately recognized and it probably would not have been accepted at full face value in payment for the expenses of War by creating money through the banking system however the process became mystifying to the general public the newly created bills and notes were indistinguishable from those previously backed by coin and the public was none the wiser the reality of central banks therefore and we must not forget that the Federal Reserve System is such a creature is that under the guise of purchasing government bonds they act as hidden money machines which can be activated anytime the politicians want this is a godsend to the political scientists who no longer must depend on taxes or the good credit of their treasury to raise money it is even easier than printing and because the process is not understood by the public it is politically safe the monetary scientists of course are amply paid for this service to preserve the pretense of banking it is said they collect interest but this is a misnomer they didn't lend money they created it their compensation therefore should be called what it is a professional fee or commission or royalty or Kickback depending on your perspective but not interest from inflation to bank runs the new money created by the bank of England splashed through the economy like rain in April the country Banks outside of the London area were authorized to create money on their own but they had to hold a certain percentage of either coin or Bank of England certificates in reserve consequently when these plentiful banknotes landed in their hands they quickly put them into the vaults and then issued their own certificates in even greater amounts as a result of this pyramiding effect Prices rose 100 percent in just two years then the inevitable happened there was a run on the bank and the bank of England could not produce the coin when Banks cannot honor their contracts to deliver coin in return for their receipts they are in fact bankrupt they should be allowed to go out of business and liquidate their assets to satisfy their creditors just like any other business this in fact is what always had happened to Banks which lent out their deposits and created fractional money had this practice been allowed to continue There is little doubt that people eventually would have understood that they simply do not want to do business with those kinds of banks through the painful but highly effective process of trial and error mankind would have learned to distinguish real money from fool's gold and the world would be a lot better because of it today that of course was not allowed to happen the cabal is a partnership and each of the two groups is committed to protect each other not out of loyalty but out of mutual self-interest they know that if one Falls so does the other it is not surprising therefore that when there was a run on the bank of England Parliament intervened in May of 1696 just two years after the bank was formed a law was passed authorizing it to suspend payment in species by force of law the bank was now Exempted from having to honor its contract to return the gold in Europe and America the banks have always operated with the assumption that their Partners in government will come to their aid when they get into trouble politicians may speak about protecting the public but the underlining reality is that the government needs the Fiat money produced by the Banks the banks therefore at least the big ones must not be allowed to fail only a cartel with government protection can enjoy such insulation from the workings of a free market it is commonly observed in modern times that criminals often are treated lightly when they rob their neighbor but if they steal from the government or a bank the penalties are harsh this is merely another manifestation of the cabal's partnership in the eyes of government banks are special and it has been that way even from the beginning of their Brotherhood for example Galbraith tells us in 1780 when Lord George Gordon LED his mob through London in protest against the Catholic relief acts the bank was a principal Target it signified the establishment for so long as the Catholic districts of London were being pillaged the authorities were slow to react when the siege of the bank began things were thought more serious troops intervened and ever since soldiers have been sent to guard the bank by night booms and busts now guaranteed once the bank of England had been legally protected from the consequences of converting debt into money the British economy was doomed to a nauseating roller coaster ride of inflation booms and busts the natural and immediate result was the granting of massive loans for just about any wild scheme imaginable why not the money caused nothing to make and the potential profits could be enormous so the bank of England and the country Banks which pyramided their own money supply on top of the bank's Supply pumped a steady stream of new money into the economy great stock companies were formed and financed by this money one was for the purpose of draining the Red Sea to recover the gold supposedly lost by the Egyptians when pursuing the Israelites 150 million pounds were siphoned into vague and fruitless ventures in South America and Mexico the result of this flood of new money how many times must history repeated was even more inflation in 1810 the House of Commons created a special committee called the select committee on the high price of gold bullion to explore the problem and to find a solution the verdict handed down in the final report was a model of clarity prices were not going up it said the value of the currency was going down and that was due to the fact that it was being created at a faster rate than the creation of goods to be purchased with it the solution the committee recommended that the notes of the bank of England be made fully convertible into gold coin thus putting a break on the supply of money that could be created in defense of the gold standard one of the most outspoken proponents of a true gold standard was a Jewish London stockbroker by the name of David Ricardo Ricardo argued that an ideal currency should be absolutely invariable in value he conceded that precious metals were not perfect in this regard because they do shift in purchasing power to a small degree then he said they are however the best with which we are acquainted almost everyone in government agreed with Ricardo's assessment but as is often the case theoretical truth was fighting a losing battle against practical necessity men's opinions on the best form of money were one thing the war with Napoleon was another and it demanded a constant inflow of funding England continued to use the Central Bank mechanism to extract that revenue from the populace depression and reform by 1815 prices had doubled again and then fell sharply the corn Act was passed that year to protect local Growers from lower priced Imports then when corn and wheat prices began to climb once more in spite of the fact that wages and other prices were falling there was widespread discontent and Rebellion by 1816 notes Roy jastram England was in deep depression there was stagnation of industry and trade generally the iron and coal industries were paralyzed riots occurred spasmodically from May through December in 1821 after the war had ended and there was no longer a need to fund military campaigns the political pressure for a gold standard became too strong to resist and the bank of England returned to a convertibility of its notes into gold coin the basic Central Bank mechanism was not dismantled however it was merely limited by a new formula regarding the allowable fraction of Reserves the bank continued to create money out of nothing for the purpose of lending and within a year the flower of a new business boom unfolded then in November of 1825 the flower matured into its predestined fruit The Crisis began with the collapse of Sir Peter Cole and Company and was soon followed by the failure of 63 other Banks fortunes were wiped out and the economy plunged back into depression when a similar crisis with still more bank failures struck again in 1839 Parliament attempted to come to grips with the problem after five more years of analysis and debate Sir Robert peel succeeded in passing a banking reform Act it squarely faced the cause of England's booms and busts and elastic money supply what peels Bank Act of 1844 attempted to do was to limit the amount of money the banks could create to roughly the same as it would be if their banknotes were backed by gold or silver it was a good try but It ultimately failed because it fell short on three counts one it was a political compromise and was not strict enough allowing the banks to still create lending money out of nothing to the extent of 14 million pounds in other words a fractional amount thought to be safe at the time two the limitation applied only to paper currency issued by the bank it did not apply to checkbook money and That Was Then becoming the preferred form of exchange consequently the so-called reform did not even apply to the area where the greatest amount of abuse was taking place and three the basic concept was allowed to remain unchallenged that man in his infinite political wisdom can determine what the money supply should be more effectively than an unmanaged system of gold or silver responding to the law of supply and demand the Federal Reserve System should be abolished for the following reasons it is incapable of accomplishing its stated objectives chapter one it is a cartel operating against the public interests chapter 3. it is the Supreme instrument of usury chapter 10. it generates our most unfair tax chapter 10. it encourages War chapter 14. it destabilizes the economy chapter 23. it is an instrument of totalitarianism chapters 5 and 26. this is a story about Limitless money and hidden Global power the good news is that it is as fascinating as any work of fiction could be and this I trust will add both pleasure and excitement to the learning process the bad news is that every detail of what follows is true G Edward Griffin acknowledgments a writer who steals the work of another is called a plagiarist one who takes from The Works of many is called a researcher that is a roundabout way of saying I am deeply indebted to the efforts of so many who have previously grappled this topic it is impossible to acknowledge them except in footnote and bibliography without the cumulative product of their efforts it would have taken a lifetime to pull together the material you are about to hear in addition to the historical facts however there are numerous Concepts which to the best of my knowledge are not to be found in Prior literature primary among these are the formulation of certain natural laws which it seemed to me were too important to leave buried beneath the factual data you will easily recognize these and other editorial Expressions as the singular product of my own perceptions for which no one else can be held responsible I would like to give special thanks to mural Creer and Jim Toft for having first invited me to give a lecture on this subject and thus forcing me to delve into it at some depth and to Herb Joyner for encouraging me after the speech to take it on the road this book is the end result of a seven year Journey that began with those first steps Wayne C Rickert deserves a special medal for his financial support to get the project started and for his incredible patience while it crawled toward completion thanks to Bill Jasper for providing copies of numerous hard to locate documents thanks also to Linda pearlstein and Melinda Wyman for keeping my business enterprises functioning during my preoccupation with this project and a very personal thanks to my wife Patricia for putting up with my periods of long absence while completing the manuscript Or Meticulous proofreading and for a most perceptive critique of its development along the way finally I would like to acknowledge those readers of the first three printings who have assisted in the refinement of this work because of their efforts most of the inevitable Errata have been corrected for the second edition even so it would be foolhardy to think that there are no more errors within the following pages I have tried to be meticulous with even the smallest detail but one cannot Harvest such a huge crop without dropping a few seeds therefore Corrections and suggestions from new readers are sincerely invited in my Supreme optimism I would like to think that they will be incorporated into future editions of this book introduction the following exchange was published in the British Humor Magazine punch on April 3rd 1957. it is included here as an appropriate introduction and as a mental exercise to limber the mind for the material contained in this book question what are banks for answer to make money for the customers for the banks why doesn't Bank advertising mention this it would not be in good taste but it is mentioned by implication in references to reserves of 249 million dollars or thereabouts that is the money that they have made out of the customers I suppose so they also mention assets of 500 million dollars or thereabouts have they made that too and not exactly that is the money they use to make money I see and they keep it in a safe somewhere not at all they lend it to customers then they haven't got it no then how is it assets they maintain that it would be if they got it back but they must have some money in a safe somewhere yes usually 500 million dollars or thereabouts this is called liabilities but if they've got it how can they be liable for it because it isn't theirs then why do they have it it has been lent to them by customers you mean customers lend Banks money in effect they put money into their accounts so it is really lent to the banks and what do the banks do with it lend it to other customers but you said that money they lent to other people was assets yes then assets and liabilities must be the same thing you can't really say that but you've just said it if I put a hundred dollars into my account the bank is liable to have to pay it back so it's liabilities but they go and lend it to someone else and he is liable to have to pay it back so it's assets it's the same hundred dollars isn't it yes but then it cancels out it means doesn't it that Banks haven't really any money at all theoretically never mind theoretically and if they haven't any money where do they get their reserves of 249 million dollars or thereabouts I told you that is the money they have made how well when they lend your hundred dollars to someone they charge him interest how much it depends on the bank rate say five and a half percent that's their profit why isn't it my profit isn't it my money it's the theory of banking practice that when I lend them my one hundred dollars why don't I charge them interest you do you don't say how much it depends on the bank rate say half a percent grasping of me rather but that's only if you're not going to draw the money out again but of course I'm going to draw it out again if I hadn't wanted to draw it out again I could have buried it in the garden couldn't I they wouldn't like you to draw it out again why not if I keep it there you say it's a liability wouldn't they be glad if I reduced their liabilities by removing it no because if you remove it they can't lend it to anyone else but if I wanted to remove it they'd have to let me certainly but suppose they've already lent it to another customer then they'll let you have someone else's money but suppose he wants his too and they've let me have it you're being purposely obtuse I think I'm being acute what if everyone wanted their money at once it's the theory of banking practice that they never would so what banks Bank on is not having to meet their commitments I wouldn't say that naturally well if there's nothing else you think you can tell me quite so now you can go off and open a banking account just one last question of course wouldn't I do better to go off and open up a bank section one what creature is this what is the Federal Reserve System the answer may surprise you it is not federal and there are no reserves furthermore the federal reserve banks are not even Banks the key to this riddle is to be found not at the beginning of the story but in the middle since this is not a textbook we are not confined to a chronological structure the subject matter is not a curriculum to be mastered but a mystery to be solved so let us start where the action is chapter one the journey to Jekyll Island the secret meeting on Jekyll Island in Georgia at which the Federal Reserve was conceived the birth of a banking cartel to protect its members from competition the strategy of how to convince Congress and the public that this cartel was an agency of the United States government the New Jersey railway station was bitterly cold that night flurries of the year's first snow swirled around street lights November wind rattled roof panels above the track shed and gave a long mournful sound among the rafters it was approaching 10 pm and the station was nearly empty except for a few passengers scurrying to board the last southbound of the day the rail equipment was typical for that year of 1910 mostly chair cars that converted into sleepers with cramped upper and lower berths for those with limited funds coach cars were coupled to the front they would take the brunt of the engine's noise and smoke that somehow always managed to seep through unseen cracks a dining car was placed between the sections as a subtle barrier between the two classes of Travelers by today's standards the environment was drab chairs and mattresses were hard surfaces were metal or scarred wood colors were dark green and gray in their hurry to board the train and Escape The Chill of the wind few passengers noticed the activity at the far end of the platform at a gate seldom used at this hour of the night was a spectacular sight nudged against the end rail bumper was a long car that caused those few who saw it to stop and stare its gleaming black paint was accented with polished brass handrails knobs frames and filigrees the shades were drawn but through the open door one could see mahogany paneling velvet drapes plush armchairs and A well-stocked bar ERS with white serving Coats were busying themselves with routine chores and there was the distinct Aroma of expensive cigars other cars in the station bore numbers on each end to distinguish them from their dull Brothers but numbers were not needed for this beauty on the center of each side was a small plaque bearing but a single word Aldrich the name of Nelson Aldrich senator from Rhode Island was well known even in New Jersey by 1910 he was one of the most powerful men in Washington D.C and his private Railway car often was seen at the New York and New Jersey rail terminals during frequent trips to Wall Street Aldrich was far more than a senator he was considered to be the political spokesman for big business as an investment associate of J.P Morgan he had extensive Holdings in banking manufacturing and Public Utilities his son-in-law was John D Rockefeller Jr 60 years later his grandson Nelson Aldrich Rockefeller would become Vice President of the United States when Aldrich arrived at the station there was no doubt he was the commander of the private car wearing a long fur-colored coat a silk top hat and carrying a silver tipped walking stick he Strode briskly down the platform with his private secretary Shelton and a cluster of Porters behind them hauling assorted Trunks and cases no sooner had the senator boarded his car when several more passengers arrived with similar collections of luggage the last man appeared just moments before the final all aboard he was carrying a shotgun case while Aldrich was easily recognized by most of the Travelers who saw him stride through the station the other faces were not familiar these strangers had been instructed to arrive separately to avoid reporters and should they meet inside the station to pretend they did not know each other after aborting the train they had been told to use first names only so as not to reveal each other's identity as a result of these precautions not even the private car Porters and servants knew the names of these guests back at the main gate there was a double Blast from the engine's whistle suddenly the gentle sensation of motion the excitement of a journey begun but no sooner had the train cleared the platform when it shuttered to a stop then to everyone's surprise It reversed direction and began moving toward the station again had they forgotten something was there a problem with the engine a sudden Lurch and the slam of couplers gave the answer they had picked up another car at the end of the train possibly the male car in an instant the forward motion was resumed and all thoughts returned to the trip ahead and to the minimal Comforts of the accommodations and so as the passengers drifted off to sleep to the rhythmic clicking of Steel Wheels against rail little did they dream that riding in the car at the end of their train were six men who represented an estimated one-fourth of the total wealth of the entire world this was the roster of the Aldrich car that night one Nelson W Aldridge Republican whip in the Senate chairman of the national monetary commission business associate of J.P Morgan father-in-law to John D Rockefeller Jr two Abraham payet Andrew assistant Secretary of the U.S treasury three Frank a vanderlip president of the National City Bank of New York the most powerful of the banks at that time representing William Rockefeller and the International Investment Banking House of Loeb and Company four Henry P Davison senior partner of the JP Morgan company 5. Benjamin strong head of JP Morgan's Bankers Trust Company 6. Paul M Warburg a partner in Loeb and Company a representative of the Rothschild banking Dynasty in England and France and brother to Max Warburg who was head of the Warburg banking Consortium in Germany and the Netherlands concentration of wealth central control over Financial Resources was Far Advanced by 1910. in the United States there were two focal points of this control the Morgan group and the Rockefeller group within each orbit was a maze of commercial Banks acceptance Banks and investment firms in Europe the same process had proceeded even further and had coalesced into the Rothschilds group and the Warburg group an article appeared in the New York Times on May 3rd 1931 commenting on the death of George Baker one of Morgan's closest Associates it said one-sixth of the total wealth of the world was represented by members of the Jekyll Island Club the reference was only to those in the Morgan group it did not include the Rockefellers or the European financiers when all of these are combined the previous estimate that one-fourth of the world's wealth was represented by these groups is probably conservative by 1913 the year that the Federal Reserve Act became law a subcommittee of the house committee on currency and banking under the chairmanship of Arsen pujo of Louisiana completed its investigation into the concentration of financial power in the United States Cujo was considered to be a spokesman for the oil interests part of the very group under investigation and did everything possible to sabotage the hearings in spite of his efforts however the final report of the committee at large was devastating your committee is satisfied from the proofs submitted that there is an established and well-defined identity and community of interests between a few leaders of Finance which has resulted in great and rapidly growing concentration of the control of money and Credit in the hands of these few men under our system of issuing and distributing corporate Securities the investing public does not buy directly from the corporation the Securities travel from the issuing house through middlemen to the investor it is only the great Banks or Bankers with access to the mainsprings of the concentrated resources made up of other people's money in the banks trust companies and life insurance companies and with control of the machinery for creating markets and distributing Securities who have had the power to underwrite or guarantee the sale of large-scale security issues the men who threw their control over the funds of our Railroad and Industrial companies are able to direct where such funds shall be kept and thus to create these great reservoirs of the people's money are the ones who are in a position to tap those reservoirs for the ventures in which they are interested and to prevent their being tapped for purposes which they do not approve when we consider also in this connection that into these reservoirs of money and credit there flow a large part of the reserves of the banks of the country that they are also the agents and correspondence of the out-of-town banks in the loaning of their surplus funds in the only public money market of the country and that a small group of men and their partners and Associates have now further strengthened their hold upon the resources of these institutions by acquiring large stock Holdings therein by representation on their boards and through valuable patronage we begin to realize something of the extent to which this practical and effective domination and control over our greatest Financial Railroad and Industrial corporations has developed largely within the past five years and that it is fraught with Peril to the welfare of the country such was the nature of the wealth and power represented by those six men who gathered in secret that night and traveled in the luxury of Senator aldrich's private car destination Jekyll Island as the train neared its destination of Raleigh North Carolina the next afternoon it slowed and then stopped in the switching yard just outside the station terminal quickly the crew threw a switch and the engine nudged the last car onto a siding where just as quickly it was uncoupled and left behind when passengers stepped onto the platform at the terminal a few moments later their train appeared exactly as it had been when they boarded they could not know that their traveling companions for the night at that very instant were joining still another train which within the hour would depart southbound once again the elite group of financiers was embarked on an 800 mile Journey that led to Atlanta then to Savannah and finally to the small town of Brunswick Georgia it would seem that Brunswick was an unlikely destination located on the Atlantic Seaboard it was primarily a fishing village with a small but Lively port for cotton and lumber it had a population of only a few thousand people but by that time the sea Islands that sheltered the coast from South Carolina to Florida already had become popular as Winter Resorts for the very wealthy one such Island just off the coast of Brunswick had recently been purchased by J.P Morgan and several of his business associates and it was here that they came in the fall and winter to hunt ducks or deer and to escape the rigors of cold weather in the North it was called Jekyll Island when The Aldrich car was uncoupled onto a sighting at the small Brunswick station it was indeed conspicuous word traveled quickly to the office of the town's weekly newspaper while the group was waiting to be transferred to the dock several people from the paper approached and began asking questions who were Mr aldrich's guests why were they here was there anything special happening Mr Davison who was one of the owners of Jekyll Island and who was well known to the local paper told them that these were merely personal friends and that they had come for the simple Amusement of duck hunting satisfied that there was no real news in the event the reporters returned to their office even after arrival at the remote island Lodge the secrecy continued for nine days the rule for first names only remained in effect full-time caretakers and servants had been given vacation and a new carefully screened staff was brought in for the occasion this was to ensure that none of the servants might recognize by sight the identities of these guests it is difficult to imagine any event in history including preparation for war that was shielded from public view with greater mystery and secrecy the purpose of this journey was not to hunt ducks simply stated it was to come to an agreement on the structure and operation of a banking cartel the goal as is true with all cartels was to maximize profits by minimizing competition between members to make it difficult for new competitors to enter the field and to utilize the police power of government to enforce the cartel agreement in more specific terms it was to create a blueprint for the Federal Reserve System the story is confirmed for many years after the event Educators commentators and historians denied that the Jekyll Island meeting ever took place even now the accepted view is that the meeting was relatively unimportant and only paranoid unsophisticates would try to make anything out of it Ron chernow writes the Jekyll Island meeting would be the Fountain of a thousand conspiracy theories little by little however the story has been pieced together in amazing detail and it has come directly or indirectly from those who actually were there furthermore if what they say about their own purposes and actions does not constitute a classic conspiracy then there is little meaning to that word the first leak regarding this meeting found its way into print in 1916. it appeared in Leslie's weekly and was written by a young Financial reporter by the name of BC Forbes who later founded Forbes Magazine the article was primarily In Praise of Paul Warburg and it is likely that Warburg let the story out during conversations with the writer at any rate the opening paragraph contained a dramatic but highly accurate summary of both the nature and purpose of the meeting picture a party of the nation's greatest Bankers stealing out of New York on a private railroad car under cover of Darkness stealthily highing hundreds of miles south embarking on a mysterious launch sneaking onto an Island deserted by all but a few servants living there a full week under such rigid secrecy that the names of not one of them was once mentioned lest the servants learned the identity and disclosed to the world this strangest most secret expedition in the history of American Finance I am not Romancing I am giving to the world for the first time the real story of how the famous Aldrich currency report the foundation of our new currency system was written in 1930 Paul Warburg wrote a massive book 1750 pages in all entitled the Federal Reserve System its origin and growth in this Tome he explained the results of the conference were entirely confidential even the fact there had been a meeting was not permitted to become public then in a footnote he added though 18 years have since gone by I do not feel free to give a description of this most interesting conference concerning which Senator Aldrich pledged all participants to secrecy an interesting insight into warburg's attendance at the meeting came 34 years later in a book written by his son James had been appointed by FDR as director of the budget and during World War II as head of the office of War information in his book he described how his father who didn't know one end of a gun from the other borrowed a shotgun from a friend and carried it with him to the train to disguise himself as a duck hunter this part of the story was corroborated in the official biography of Senator Aldrich written by Nathaniel Wright Stephenson in the Autumn of 1910 six men went out to shoot ducks that is to say they told the world that was their purpose Mr Warburg who was of the number gives an amusing account of his feelings when he boarded a private car in Jersey City bringing with him all the accoutrements of a duck shooter the joke was in the fact that he had never shot a duck in his life and had no intention of shooting any the duck shoot was a blind Stephenson tells us that shortly after they arrived at Brunswick the station Master entered the private car and shocked them by his apparent knowledge of the identities of everyone on board to make matters worse he said that reporters were waiting outside Davison took charge come outside old man he said and I will tell you a story no one claims to know what story was told standing on the railroad ties that morning but a few moments later Davison returned with a broad smile on his face it's all right he said reassuringly they won't give us away Stevenson continues the reporters dispersed and the secret of the strange Journey was not divulged no one asked him how he managed it and he did not volunteer the information in the February 9 1935 issue of the Saturday evening post an article appeared written by Frank vanderlip in it he said despite my views about the value to Society of Greater publicity for the Affairs of Corporations there was an occasion near the close of 1910 when I was as secretive indeed as furtive as any conspirator I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual conception of what eventually became the Federal Reserve System we were told to leave our last names behind us we were told further that we should avoid dining together on the night of our departure we were instructed to come one at a time and as unobtrusively as possible to the railroad terminal on the New Jersey literal of the Hudson where Senator aldrich's private car would be in Readiness attached to the rear end of a train for the South once aboard the private car we began to observe the taboo that had been fixed on last names we addressed one another as Ben Paul Nelson Abe it is Abraham Pyatt Andrew Davison and I adopted even deeper disguises abandoning our first names on the theory that we were always right he became Wilbur and I became Orville after those two Aviation Pioneers the Wright brothers the servants and train crew may have known the identities of one or two of us but they did not know all and it was the names of all printed together that would have made Our Mysterious Journey significant in Washington in Wall Street even in London Discovery we knew simply must not happen or else all our time and effort would be wasted if it were to be exposed publicly that our particular group had got together and written a banking bill that bill would have no chance whatever of Passage by Congress the structure was pure cartel the composition of the Jekyll Island meeting was a classic example of cartel structure a cartel is a group of independent businesses which joined together to coordinate the production pricing or marketing of their members the purpose of a cartel is to reduce competition and thereby increase profitability this is accomplished through a shared Monopoly over their industry which forces the public to pay higher prices for their goods or services than would be otherwise required under free enterprise competition here were representatives of the world's leading banking consortia Morgan Rockefeller Rothschild Warburg and Loeb they were often competitors and there is little doubt that there was considerable distrust between them and skillful maneuvering for favored position in any agreement but they were driven together by one overriding desire to fight their common enemy the enemy was competition in 1910 the number of banks in the United States was growing at a phenomenal rate in fact it had more than doubled to over twenty thousand in just the previous 10 years furthermore most of them were springing up in the South and West causing the New York Banks to suffer a steady decline of market share almost all banks in the 1880s were National Banks which means they were chartered by the federal government generally they were located in the big cities and were allowed by law to issue their own currency in the form of banknotes even as early as 1896 however the number of non-national banks had grown to 61 percent and they already held 54 percent of the country's total banking deposits by 1913 when the Federal Reserve Act was passed those numbers were 71 percent non-national Banks holding 57 percent of the deposits in the eyes of those duck hunters from New York this was a trend that simply had to be reversed competition also was coming from a new trend in Industry to finance future growth out of profits rather than from borrowed capital this was the outgrowth of free market interest rates which set a realistic balance between debt and Thrift rates were low enough to attract serious borrowers who were confident of the success of their business ventures and of their ability to repay but they were high enough to discourage loans for frivolous Ventures or those for which there were alternative sources of funding for example one's own capital that balance between death and Thrift was the result of a limited money supply Banks could create loans in excess of their actual deposits as we shall see but there was a limit to that process and that limit was ultimately determined by the supply of gold they held consequently between 1900 and 1910 70 percent of the funding for American corporate growth was generated internally making industry increasingly independent of the banks even the federal government was becoming Thrifty it had a growing stockpile of gold was systematically Redeeming the greenbacks which had been issued during the Civil War and was rapidly reducing the national debt here was another Trend that had to be halted what the bankers wanted and what many businessmen wanted also was to intervene in the free market and tip the balance of interest rates downward to favor debt over Thrift to accomplish this the money supply simply had to be disconnected from gold and made more plentiful or as they described it more elastic the Specter of bank failure the greatest threat however came not from rivals or private Capital formation but from the public at large in the form of what Bankers call a run on the bank this is because when banks accept a customer's Deposit they give in return a balance in his account this is the equivalent of a promise to pay back the deposit anytime he wants likewise when another customer borrows money from the bank he also is given an account balance which usually is withdrawn immediately to satisfy the purpose of the loan this creates a ticking Time Bomb because at that point the bank has issued more promises to pay on demand than it has money in the vault even though the depositing customer thinks he can get his money anytime he wants in reality it has been given to the borrowing customer and no longer is available at the bank the problem is compounded further by the fact that banks are allowed to lend even more money than they have received in deposit the mechanism for accomplishing this seemingly impossible feat will be described in a later chapter but it is a fact of modern banking that promises to pay often exceeds savings deposits by a factor of 10 to 1. and because only about three percent of these accounts are actually retained in the vault in the form of cash the rest having been put into even more loans and Investments the bank's promises exceed its ability to keep those promises by a factor of over 300 to 1. as long as only a small percentage of depositors request their money at one time no one is the wiser but if public confidence is shaken and if more than a few percent attempt to withdraw their funds the scheme is finally exposed the bank cannot keep all its promises and is forced to close its doors bankruptcy usually follows in due course currency drains the same result could happen and prior to the Federal Reserve System often did happen even without depositors making a run on the bank instead of withdrawing their funds at the tellers window they simply wrote checks to purchase goods or services people receiving those checks took them to a bank for deposit if that bank happened to be the same one from which the check was drawn then all was well because it was not necessary to remove any real money from the vault but if the holder of the check took it to another bank it was quickly passed back to the issuing bank and settlement was demanded between Banks this is not a one-way Street however while the downtown bank is demanding payment from the Uptown Bank the Uptown bank is also clearing checks and demanding payment from the downtown Bank as long as the money flow in both directions is equal then everything can be handled with simple bookkeeping but if the flow is not equal then one of the banks will have to actually send money to the other to make up the difference if the amount of money required exceeds a few percentage points of the bank's total deposits the result is the same as a run on the bank by depositors this demand of money by other Banks rather than by depositors is called a currency drain in 1910 the most common cause of a bank having to declare bankruptcy due to a currency drain was that it followed a loan policy that was more Reckless than that of its competitors more money was demanded from it because more money was loaned by it it was dangerous enough to lend 90 percent of their customers savings keeping only one dollar in reserve out of every 10. but that had proven to be adequate most of the time some banks however were tempted to walk even closer to the precipice they pushed the ratio to 92 percent 95 percent 99 percent after all the way a bank makes money is to collect interest and the only way to do that is to make loans the more loans the better and so there was a practice among some of the more Reckless Banks to loan up as they call it which was another way of saying to push down their Reserve ratios a banker's Utopia if all banks could be forced to issue loans in the same ratio to their reserves as other Banks did then regardless of how small that ratio was the amount of checks to be cleared between them would balance in the long run no major currency drains would ever occur the entire banking industry might collapse under such a system but not individual banks at least not those that were part of the cartel all would walk the same distance from The Edge regardless of how close it was under such uniformity no individual Bank could be blamed for failure to meet its obligations the blame could be shifted instead to the economy or government policy or interest rates or trade deficits or the exchange value of the dollar or even to the capitalist system itself but in 1910 such a banker's Utopia had not yet been created if the downtown Bank began to lend at a greater ratio to its reserves than its competitors the amount of checks which would come back to it for payment also would be greater thus the bank which pursued a more Reckless lending policy had to draw against its reserves in order to make payments to the more conservative Banks and when those funds were exhausted it usually was forced into bankruptcy historian John Klein tells us that the financial panics of 1873 1884 1893 and 1907 were in large part an outgrowth of reserve pyramiding and excessive deposit creation by Reserve City Banks these panics were triggered by the currency drains that took place in periods of relative Prosperity when Banks were loaned up in other words the panics and resulting bank failures were caused not by negative factors in the economy but by currency drains on the banks which were loaned up to the point where they had practically no Reserves at all the banks did not fail because the system was weak the system failed because the banks were weak this was another common problem that brought these seven men over a thousand miles to a tiny island off the shore of Georgia each was a potentially Fierce competitor but uppermost in their minds were the so-called panics and the very real 1748 bank failures of the preceding two decades somehow they had to join forces a method had to be devised to enable them to continue to make more promises to pay on demand than they could keep to do this they had to find a way to force all banks to walk the same distance from The Edge and when the inevitable disasters happened to shift public blame away from themselves by making it appear to be a problem of the national economy rather than of private banking practice the door then could be opened for the use of tax money rather than their own funds or paying off the losses here then were the main challenges that faced that Tiny But powerful group assembled on Jekyll Island one how to stop the growing influence of small rival Banks and to ensure that control over the nation's Financial Resources would remain in the hands of those present two how to make the money supply more elastic in order to reverse the trend of private Capital formation and to recapture the industrial loan Market three how to pool the meager reserves of the nation's Banks into one large Reserve so that all banks will be motivated to follow the same loan to deposit ratios this would protect at least some of them from currency drains and Bank runs four should this lead eventually to the collapse of the whole banking system then how to shift the losses from the owners of the banks to the taxpayers the cartel adopts a name everyone knew that the solution to all these problems was a cartel mechanism that had been devised and already put into similar operation in Europe as with all cartels it had to be created by legislation and sustained by the power of government under the deception of protecting the consumer the most important task before them therefore can be stated as objective number five how to convince Congress that the scheme was a measure to protect the public the task was a delicate one the American people did not like the concept of a cartel the idea of business enterprises joining together to fix prices and prevent competition was alien to the free enterprise system it could never be sold to the voters but if the word cartel was not used if the Venture could be described with words which are emotionally neutral perhaps even alluring then half the battle would be won the first decision therefore was to follow the practice adopted in Europe henceforth the cartel would operate as a central bank and even that was to be but a generic expression for purposes of public relations and legislation they would devise a name that would avoid the word Bank altogether and which would conjure the image of the federal government itself furthermore to create the impression that there would be no concentration of power they would establish Regional branches of the cartel and make that a main selling point Stephenson tells us Aldrich entered this discussion at Jekyll Island an Ardent convert to the idea of a central bank his desire was to transplant the system of one of the great European Banks say the bank of England bodily to America but political expediency required that such plans be concealed from the public as John Kenneth Galbraith explained it it was his aldrich's thought to outflank the opposition by having not one Central Bank but many and the word bank would itself be avoided with the exception of Aldrich all of those present were Bankers but only one was an expert on the European model of a central bank because of this knowledge Paul Warburg became the dominant and guiding mind throughout all of the discussions even a casual perusal of the literature on the creation of the Federal Reserve System is sufficient to find that he was indeed the cartels Mastermind Galbraith says Warburg has with some justice been called the father of the system Professor Edwin Seligman a member of the international banking family of jnw Seligman and head of the Department of Economics at Columbia University writes that in its fundamental features the Federal Reserve Act is the work of Mr Warburg more than any other man in the country the real Daddy Warbucks Paul Moritz Warburg was a leading member of the investment banking firm of M M Warburg and Company of Hamburg Germany and Amsterdam the Netherlands he had come to the United States only nine years prior to the Jekyll Island meeting soon after arrival however and with funding provided mostly by the Rothschild group he and his brother Felix had been able to buy Partnerships in the New York Investment Banking firm of Loeb and company while continuing as partners in Warburg of Hamburg within 20 years Paul would become one of the wealthiest men in America with an unchallenged domination over the country's railroad system at this distance in history it is difficult to appreciate the importance of this man but some understanding may be had from the fact that the legendary character Daddy Warbucks in the comic strip Little Orphan Annie was a contemporary commentary on the presumed benevolence of Paul Warburg and his almost magic ability to accomplish good through the power of His unlimited wealth a third brother Max Warburg was the financial advisor of the Kaiser who became director of the reichsbank in Germany this was of course a central bank and it was one of the models used in the construction of the Federal Reserve System incidentally a few years later the reichsbank would create the massive hyperinflation in Germany which wiped out the middle class and the entire economy as well Paul Warburg soon became well known on Wall Street as a persuasive advocate for a Central Bank in America three years before the Jekyll Island meeting he had published several pamphlets one was entitled defects and needs of our banking system and the other was a plan for a modified Central Bank these attracted wide attention in both financial and academic circles and set the intellectual climate for all future discussions regarding banking legislation in these treatises Warburg complained that the American monetary system was crippled by its dependency on gold and government bonds both of which were in limited Supply what America needed he argued was an elastic money supply that could be expanded and contracted to accommodate the fluctuating needs of Commerce the solution he said was to follow the German example whereby Banks could create currency solely on the basis of commercial paper which is Banker language for ious from corporations Warburg was tireless in his efforts he was a featured speaker before scores of influential audiences and wrote a steady stream of published articles on the subject in March of that year for example the New York Times published an 11 part series written by Warburg explaining and expounding what he called The Reserve Bank of the United States the message was plain for those who understood most of warburg's writing and lecturing on this topic was eyewash for the public to cover the fact that a central bank is merely a cartel which has been legalized its proponents had to lay down a Thick Smoke screen of technical jargon focusing always on how it would supposedly benefit Commerce the public and the nation how it would lower interest rates provide funding for needed industrial projects and prevent panics in the economy there was not the slightest glimmer that Underneath It All was a master plan which was designed from top to bottom to serve private interests at the expense of the public this was nevertheless the cold reality and the more perceptive Bankers were well aware of it in an address before the American Bankers Association the following year Aldrich laid it out for anyone who was really listening to the meaning of his words he said the organization proposed is not a bank but a Cooperative Union of all the banks of the country for definite purposes precisely a union of banks two years later in a speech before that same group of Bankers a Barton Hepburn of Chase National Bank was even more candid he said the measure recognizes and adopts the principles of a central bank indeed if it works out as the sponsors of the law hope it will make all Incorporated Banks together joint owners of a central dominating power and that is about as good a definition of a cartel as one is likely to find in 1914 one year after the Federal Reserve Act was passed into law Senator Aldridge could afford to be less guarded in his remarks in an article published in July of that year in a magazine called The Independent he boasted before the passage of this act the New York Bankers could only dominate the reserves of New York now we are able to dominate The Bank Reserves of the entire country myth accepted as history the accepted version of history is that the Federal Reserve was created to stabilize our economy one of the most widely used textbooks on this subject says it's praying from the Panic of 1907 with its alarming epidemic of bank failures the country was fed up once and for all with the Anarchy of unstable private banking even the most naive student must sense a grave contradiction between this cherished View and the system's actual performance since its Inception it has presided over the crashes of 1921 and 1929 the Great Depression of 29 to 39 recessions in 53 57 69 75 and 81 a stock market Black Monday in 87 and a one thousand percent inflation which has destroyed 90 percent of the Dollar's purchasing power let us be more specific on that last point by 1990 an annual income of ten thousand dollars was required to buy what took only one thousand dollars in 1914. that incredible loss in value was quietly transferred to the federal government in the form of hidden Taxation and the Federal Reserve System was the mechanism by which it was accomplished actions have consequences the consequences of wealth confiscation by the Federal Reserve mechanism are now upon us in the current decade corporate debt is soaring personal debt is greater than ever both business and personal bankruptcies are at an all-time high Banks and Savings and Loan associations are failing in larger numbers than ever before interest on the national debt is consuming more than half of our personal income tax heavy industry largely has been replaced by overseas competitors we are facing an international trade deficit for the first time in our history 75 percent of downtown Los Angeles and other metropolitan areas is owned by foreigners and the nation is in economic recession first reason to abolish the system that is the scorecard 80 years after the Federal Reserve was created supposedly to stabilize our economy there can be no argument that the system has failed in its stated objectives furthermore after all this time after repeated changes in Personnel after operating under both political parties after numerous experiments in monetary philosophy after almost a hundred revisions to its Charter and after the development of countless new formulas and techniques there has been more than ample opportunity to work out mirror procedural flaws it is not unreasonable to conclude therefore that the system has failed not because it needs a new set of rules or more intelligent directors but because it is incapable of achieving its stated objectives if an institution is incapable of achieving its objectives there is no reason to preserve it unless it can be altered in some way to change its capability that leads to the question why is the system incapable of achieving its stated objectives the painful answer is those were never its true objectives when one realizes the circumstances under which it was created when one contemplates the identities of those who authored it and when one studies its actual performance over the years it becomes obvious that the system is merely a cartel with a government facade there is no doubt that those who run it are motivated to maintain Full Employment High productivity low inflation and a generally sound economy they are not interested in killing the goose that lays such beautiful golden eggs but when there is a conflict between the public interest and the private needs of the cartel a conflict that arises almost daily the public will be sacrificed that is the nature of the Beast it is foolish to expect a cartel to act in any other way this view is not encouraged by establishment institutions and publishers it has become their apparent mission to convince the American people that the system is not intrinsically flawed it merely has been in the hands of bumbling oafs for example William Grider was a former assistant managing editor for the Washington Post his book secrets of the temple was published in 1987 by Simon and Schuster it was critical of the Federal Reserve because of its failures but according to Grider these were not caused by any defect in the system itself but were merely the result of economic factors which are so complicated that the good men who have struggled to make the system work just haven't been able to figure it all out but don't worry folks they're working on it that is exactly the kind of powder puff criticism which is acceptable in our mainstream media yet grider's own research points to an entirely different interpretation speaking of the system's origin he says as new companies prospered without Wall Street so did the new Regional banks that handled their funds New York's concentrated share of Bank deposits was still huge about half the nation's total but it was declining steadily Wall Street was still the biggest kid on the Block but less and less able to bully the others this trend was a crucial fact of history a misunderstood reality that completely Alters the political meaning of the reform legislation that created the Federal Reserve at the time the conventional wisdom in Congress widely shared and sincerely espoused by progressive reformers was that a government institution would finally harness the money trust disarm its powers and establish broad Democratic control over money and credit their results were nearly the opposite the money reforms enacted in 1913 in fact helped to preserve the status quo to stabilize the old order Money Center Bankers would not only gain dominance over the new Central Bank but would also enjoy new insulation against instability and their own decline once the Fed was in operation the steady diffusion of financial power halted Wall Street maintained its dominant position and even enhanced it Anthony Sutton former research fellow at the Hoover Institution for war Revolution and peace and also former professor of Economics at California State University Los Angeles provides a somewhat deeper analysis he writes warburg's revolutionary plan to get American society to go to work for Wall Street was astonishingly simple even today academic theoreticians cover their blackboards with meaningless equations and the general public struggles in bewildered confusion with inflation and the coming credit collapse while the quite simple explanation of the problem goes undiscussed and almost entirely uncomprehended the Federal Reserve System is a legal private Monopoly of the money supply operated for the benefit of the few under the guise of protecting and promoting the public interest the real significance of the journey to Jekyll Island and the creature that was hatched there was inadvertently summarized by the words of Paul warburg's admiring biographer Harold kellock Paul M Warburg is probably the mildest mannered man that ever personally conducted a revolution it was a bloodless Revolution he did not attempt to Rouse the populace to Arms he stepped forth armed simply with an idea and he conquered that's the amazing thing a shy sensitive man he imposed his idea on a nation of a hundred million people summary the basic plan for the Federal Reserve System was drafted at a secret meeting held in November of 1910 at the private Resort of J.P Morgan on Jekyll Island off the coast of Georgia those who attended represented the great financial institutions of Wall Street and indirectly Europe as well the reason for secrecy was simple had it been known that rival factions of the banking Community had joined together the public would have been alerted to the possibility that the bankers were plotting an agreement in Restraint of trade which of course is exactly what they were doing what emerged was a cartel agreement with five objectives stopped the growing competition from the nation's newer Banks obtain a franchise to create money out of nothing for the purpose of lending get control of the reserves of all banks so that the more Reckless ones would not be exposed to currency drains and Bank runs get the taxpayer to pick up the cartel's inevitable losses and convince Congress that the purpose was to protect the public it was realized that the bankers would have to become partners with the politicians and that the structure of the cartel would have to be a central bank the record shows that the FED has failed to achieve its stated objectives that is because those were never its true goals as a banking cartel and in terms of the five objectives stated above it has been an unqualified success chapter 2. the name of the game is bailout the analogy of a spectator sporting event as a means of explaining the rules by which taxpayers are required to pick up the cost of bailing out the banks when their loans go sour it was stated in the previous chapter that the Jekyll Island Group which conceived the Federal Reserve System actually created a national cartel which was dominated by the larger Banks it was also stated that a primary objective of that cartel was to involve the federal government as an agent for Shifting The Inevitable losses from the owners of those Banks to the taxpayers that of course is one of the more controversial assertions made in this book yet there is little room for any other interpretation when one confronts the massive evidence of history since the system was created let us therefore take another leap through time having jumped to the year 1910 to begin this story let us now return to the present era to understand how banking losses are shifted to the taxpayers it is first necessary to know a little bit about how the scheme was designed to work there are certain procedures and formulas which must be understood or else the entire process seems like chaos it is as though we had been isolated all our lives on a South Sea Island with no knowledge of the outside world imagine what it would then be like the first time we traveled to the mainland and witnessed a game of professional football we would stare with incredulity at men dressed like aliens from another planet throwing their bodies against each other tossing a funny-shaped object back and forth fighting over it as though it were of Great Value yet occasionally kicking it out of the area as though it were worthless and despised chasing each other knocking each other to the ground and then walking away to regroup for another surge all this with tens of thousands of Spectators riotously shouting in unison for no apparent reason at all without a basic understanding that this was a game and without knowledge of the rules of that game the event would appear as total chaos and Universal Madness the operation of our monetary system through the Federal Reserve has much in common with professional football first there are certain plays that are repeated over and over again with only minor variations to suit the special circumstances second there are definite rules which the players follow with great precision third there is a clear objective to the game which is uppermost in the minds of the players and fourth if the spectators are not familiar with that objective and if they do not understand the rules they will never comprehend what is going on which as far as monetary matters are concerned is the common state of the vast majority of Americans today let us therefore attempt to spell out in plain language what that objective is and how the players expect to achieve it to demystify the process we shall present an overview first after the concepts are clarified we then shall follow up with actual examples taken from the recent past the name of the game is bailout as stated previously the objective of this game is to shift the inevitable losses from the owners of the larger Banks to the taxpayers the procedure by which this is accomplished is as follows rules of the game the game begins when the Federal Reserve System allows commercial Banks to create checkbook money out of nothing details regarding how this incredible feat is accomplished are given in chapter 10 entitled The Mandrake mechanism the banks derive profit from this easy money not by spending it but by lending it to others and collecting interest when such a loan is placed on the bank's books it is shown as an asset because it is earning interest and presumably someday will be paid back at the same time an equal entry is made on the liability Side Of The Ledger that is because the newly created checkbook money now is in circulation and most of it will end up in other Banks which will return the canceled checks to the issuing bank for payment individuals may also bring some of this checkbook money back to the bank and request cash the issuing Bank therefore has a potential money payout liability equal to the amount of the loan asset when a borrower cannot repave and there are no assets which can be taken to compensate the bank must write off that loan as a loss however since most of the money originally was created out of nothing and cost the bank nothing except bookkeeping overhead there is little of tangible value that is actually lost it is primarily a bookkeeping entry a bookkeeping loss can still be undesirable to a bank because it causes the loan to be removed from The Ledger as an asset without a reduction in liabilities the difference must come from the equity of those who own the bank in other words the loan asset is removed but the money liability Remains the original checkbook money is still circulating out there even though the borrower and cannot repay and the issuing Bank still has the obligation to redeem those checks the only way to do this and balance the books once again is to draw upon the capital which was invested by the bank's stockholders or to deduct the loss from the bank's current profits in either case the owners of the bank lose an amount equal to the value of the defaulted loan so to them the loss becomes very real if the bank is forced to write off a large amount of bad loans the amount could exceed the entire value of the owner's equity when that happens the game is over and the bank is insolvent this concern would be sufficient to motivate most Bankers to be very conservative in their loan policy and in fact most of them do act with great caution when dealing with individuals and small businesses but the Federal Reserve System the Federal Deposit Insurance Corporation and the Federal Deposit loan corporation now guarantee that massive loans made to large corporations and to other governments will not be allowed to fall entirely upon the bank's owners should those loans go into default this is done under the argument that if these corporations or banks are allowed to fail the nation would suffer from vast unemployment and economic disruption more on that in a moment the Perpetual debt play the end result of this policy is that the banks have little motive to be cautious and are protected against the effect of their own folly the larger the loan the better it is because it will produce the greatest amount of profit with the least amount of effort a single loan to a third world country netting hundreds of millions of dollars in annual interest is just as easy to process if not easier than a loan for fifty thousand dollars to a local Merchant on the shopping mall if the interest is paid it's gravy time if the loan defaults the federal government will protect the public and through various mechanisms described shortly we'll make sure that the banks continue to receive their interest the individual and the small businessmen find it increasingly difficult to borrow money at reasonable rates because the banks can make more money on loans to the corporate Giants and to foreign governments also the bigger loans are safer for the banks because the government will make them good even if they default there are no such guarantees for the small loans the public will not swallow the line that bailing out the little guy is necessary to save the system the dollar amounts are too small only when the figures become mind-boggling does the ploy become plausible it is important to remember that Banks do not really want to have their loans repaid except as evidence of the dependability of the borrower they make a profit from interest on the loan not repayment of the loan if a loan is paid off the bank merely has to find another borrower and that can be an expensive nuisance it is much better to have the existing borrower pay only the interest and never make payments on the loan itself that process is called rolling over the debt one of the reasons Banks prefer to lend to governments is that they do not expect those loans ever to be repaid when Walter riston was chairman of the citicorp bank in 1982 he extolled the virtue of the action this way if we had a truth in Government Act comparable to the truth in advertising law every note issued by the treasury would be obliged to include a sentence stating this note will be redeemed with the proceeds from an identical note which will be sold to the public when this one comes due when this activity is carried out in the United States as it is weekly it is described as a treasury bill auction but when basically the same process is conducted abroad in a foreign language our news media usually speak of a country's rolling over its debts the perception remains that some form of disaster is inevitable is not to see why it is only necessary to understand the basic facts of government borrowing the first is that there are few recorded instances in history of government any government actually getting out of debt certainly in an era of 100 billion dollar deficits No One Lending money to our government by buying a treasury bill expects that it will be paid at maturity in any way except by our governments selling the new bill of like amount the debt rollover play since the system makes it profitable for banks to make large unsound loans that is the kind of loans which banks will make furthermore it is predictable that most unsound loans eventually will go into default when the borrower finally declares that he cannot pay the bank responds by rolling over the loan this often is stage managed to appear as a concession on the part of the bank but in reality it is a significant forward move toward the objective of Perpetual interest eventually the borrower comes to the point where he can no longer pay even the interest now the play becomes more complex the bank does not want to lose the interest because that is its stream of income but it cannot afford to allow the borrower to go into default either because that would require a write-off which in turn could Wipe Out the owner's equity and put the bank out of business so the bank's next move is to create additional money out of nothing and lend that to the borrower so he will have enough to continue paying the interest which by now must be paid on the original loan plus the additional loan as well what looked like certain disaster suddenly is converted by a brilliant play into a major score this not only maintains the old loan on the books as an asset it actually increases the apparent size of that asset and also results in higher interest payments thus greater profit to the bank the up the ante play sooner or later the borrower becomes restless he is not interested in making interest payments with nothing left for himself he comes to realize that he is merely working for the bank and once again interest payments stop the opposing teams go into a huddle to plan the next move then rush to the scrimmage line where they hurl threatening innuendos at each other the borrower simply cannot will not pay collect if you can the lender threatens to blackball the borrower to see to it that he will never again be able to obtain alone finally a compromise is worked out as before the bank agrees to create still more money out of nothing and lend that to the borrower to cover the interest on both of the previous loans but this time they upped the ante to provide still additional money for the borrower to spend on something other than interest that is a perfect score the borrower suddenly has a fresh supply of money for his purposes plus enough to keep making those bothersome interest payments the bank on the other hand now has still larger assets higher interest income and greater profits what an exciting game the rescheduling play the previous plays can be repeated several times until the reality finally Dawns on the borrower that he is sinking deeper and deeper into the debt pit with no prospects of climbing out this realization usually comes when the interest payments become so large they represent almost as much as the entire corporate earnings or the country's total tax base this time around rollovers with larger loans are rejected and default seems inevitable but wait what's this the players are back at the scrimmage line there is a great confrontation referees are called in two shrill blasts from the horn tell us a score has been made for both sides a voice over the public address system announces this loan has been rescheduled rescheduling usually means a combination of a lower interest rate and a longer period for repayment the effect is primarily cosmetic it reduces the monthly payment but extends the period further into the future this makes the current burden to the borrower a little easier to carry but it also makes repayment of the capital even more unlikely it postpones the Day of Reckoning but in the meantime you guessed it the loan remains as an asset and the interest payments continue the protect the public play eventually the Day of Reckoning arrives the borrower realizes he can never repay the capital and flatly refuses to pay interest on it it is time for the final maneuver according to the banking safety digest which specializes in rating the safety of America's Banks and snls most of the banks involved with problem loans are quite profitable businesses note that except for third world loans most of the large banks in the country are operating quite profitably in contrast with the continually worsening SNL crisis the bank's profitability has been the engine with which they have been working off albeit slowly their overseas debt at last year's profitability levels the banking industry could in theory buy out the entirety of their own Latin American Loans within two years the banks can absorb the losses of their bad loans to multinational corporations and foreign governments but that is not according to the rules it would be a major loss to the stockholders who would receive little or no dividends during the adjustment period and any chief executive officer who embarked upon such a course would soon be looking for a new job that this is not part of the game plan is evident by the fact that while a small portion of the Latin American debt has been absorbed the banks are continuing to make gigantic loans to governments in other parts of the world particularly Africa China Russia and Eastern European nations or reasons which will be analyzed in chapter four there is little hope that the performance of these loans will be different than those in Latin America but the most important reason for not absorbing the losses is that there is a standard play that can still breathe life back into those dead loans and reactivate the Bountiful income stream that flows from them here's how it works the captains of both teams approached the referee and the game commissioner to request that the game be extended the reason given is that this is in the interest of the public The Spectators who are having such a wonderful time and who will be sad to see the game ended they request also that while the spectators are in the stadium enjoying themselves the parking lot attendance be ordered to quietly remove the hubcaps from every car these can be sold to provide money for additional salaries for all the players including the referee and of course the commissioner himself that is only fair since they are now working overtime for the benefit of the spectators when the deal is finally struck the horn will blow three times and a roar of joyous relief will sweep across the stadium in a somewhat less recognizable form the same play may look like this the president of the lending bank and the finance officer of the defaulting Corporation or government will join together and approach Congress they will explain that the borrower has exhausted his ability to serve as the loan and without assistance from the federal government there will be dire consequences for the American people not only will there be unemployment and hardship at home there will be massive disruptions in world markets and since we are now so dependent on those markets our exports will drop foreign Capital will dry up and we will suffer greatly what is needed they will say is for Congress to provide money to the borrower either directly or indirectly to allow him to continue to pay interest on the loan and to initiate new spending programs which will be so profitable he will soon be able to pay everyone back as part of The Proposal the borrower will agree to accept the direction of a third-party referee in adopting an austerity program to make sure that none of the new money is wasted the bank also will agree to write off a small part of the loan as a gesture of its willingness to share the burden this move of course will have been foreseen from the very beginning of the game and is a small step backward to achieve a giant stride forward after all the amount to be lost through the write-off was created out of nothing in the first place and without this final maneuver the entirety would be written off furthermore this modest write down is dwarfed by the amount to be gained through restoration of the income stream the guaranteed payment play one of the standard variations of the final maneuver is for the government not always to directly provide the funds but to provide the credit for the funds that means to guarantee future payments should the borrower again default once Congress agrees to this the government becomes a co-signer to the loan and the inevitable losses are finally lifted from The Ledger of the bank and placed onto the backs of the American taxpayer money now begins to move into the banks through a complex system of federal agencies International agencies foreign aid and direct subsidies all of these mechanisms extract payments from the American people and channel them to the deadbeat borrowers who then send them to the banks to service their loans very little of this money actually comes from taxes almost all of it is generated by the Federal Reserve System when this newly created money returns to the banks it quickly moves out again into the economy where it mingles with and dilutes the value of the money already there the result is the appearance of rising prices but which in reality is a lowering of the value of the dollar the American people have no idea they are paying the bill they know that someone is stealing their hubcaps but they think it is the greedy businessman who raises prices or the selfish laborer who demands higher wages or the Unworthy farmer who demands too much for his crop or the wealthy Foreigner who bids up our prices they do not realize that these groups also are victimized by a monetary system which is constantly being eroded in value by and through the Federal Reserve System public ignorance of how the game is really played was dramatically displayed during a recent Phil Donahue TV show the topic was the Savings and Loan crisis and the billions of dollars that it would cost the taxpayer a man from the audience Rose and asked angrily why can't the government pay for these debts instead of the taxpayer and the audience of several hundred people actually cheered in enthusiastic approval Prosperity through insolvency since large corporate loans are often guaranteed by the federal government one would think that the banks which make those loans would never have a problem yet many of them still managed to bungle themselves into insolvency as we shall see in a later section of this study insolvency actually is inherent in the system itself a system called fractional Reserve banking nevertheless a bank can operate quite nicely in a state of insolvency so long as its customers don't know it money is brought into being and transmuted from one imaginary form to another by mere entries on a ledger and creative bookkeeping can always make the bottom line appear to balance the problem arises when depositors decide for whatever reason to withdraw their money lo and behold there isn't enough to go around and when that happens the cat is finally out of the bag the bank must close its doors and the depositors still waiting in line outside are well just that still waiting the proper solution to this problem is to require the banks like all other businesses to honor their contracts if they tell their customers that deposits are payable upon demand then they should hold enough cash to make good on that promise regardless of when the customers want it or how many of them want it in other words they should keep cash in the vault equal to one hundred percent of their depositors accounts when we give our hat to the Hat check girl and obtain a receipt for it we don't expect her to rent it out while we eat dinner hoping she'll get it back or one just like it in time for our departure we expect all the hats to remain there all the time so there will be no question of getting ours back precisely when we want it on the other hand if the bank tells us it is going to lend our deposit to others so we can earn a little interest on it then it should also tell us forthrightly that we cannot have our money back on demand why not because it is loaned out and not in the vault any longer customers who earn interest on their accounts should be told that they have time deposits not demand deposits because the bank will need a stated amount of time before it will be able to recover the money which was loaned out none of this is difficult to understand yet Bank customers are seldom informed of it they are told they can have their money anytime they want it and they are paid interests as well even if they do not receive interest the bank does and this is how so many customer services can be offered at little or no direct cost occasionally a 30-day or 60-day delay will be mentioned as a possibility but that is greatly inadequate for deposits which have been transformed into 10 20 or 30-year loans the banks are simply playing the odds that everything will work out most of the time we shall examine this issue in Greater detail in a later section but for now it is sufficient to know that total disclosure is not how the banking game is played the Federal Reserve System has legalized and institutionalized the dishonesty of issuing more hat checks than there are hats and it has devised complex methods of disguising this practice as a perfectly proper and normal feature of banking students of Finance are told that there simply is no other way for the system to function once that premise is accepted then all attention can be focused not on the inherent fraud but on ways and means to live with it and make it as painless as possible based on the assumption that only a small percentage of the depositors will ever want to withdraw their money at the same time the Federal Reserve allows the nation's commercial Banks to operate with an incredibly thin layer of cash to cover their promises to pay on demand when a bank runs out of money and is unable to keep that promise the system then acts as a lender of Last Resort that is Banker language meaning it stands ready to create money out of nothing and immediately lend it to any Bank in trouble details on how that is accomplished are in chapter 8. but there are practical limits to just how far that process can work even the FED will not support a bank that has gotten itself so deeply in the hole it has no realistic chance of digging out When A bank's bookkeeping assets finally become less than its liabilities the rules of the game call for transferring the losses to the depositors themselves this means they pay twice once as taxpayers and again as depositors the mechanism by which this is accomplished is called the Federal Deposit Insurance Corporation the FDIC play the FDIC guarantees that every insured deposit will be paid back regardless of the financial condition of the bank the money to do this comes out of a special fund which is derived from assessments against participating Banks the banks of course do not pay this assessment as with all other expenses the bulk of the cost ultimately is passed on to their customers in the form of higher service fees and lower interest rates on deposits the FDIC is usually described as an insurance fund but that is deceptive advertising at its worst one of the primary conditions of insurance is that it must avoid what Underwriters call moral hazard that is a situation in which the policyholder has little incentive to avoid or prevent that which is being insured against when moral hazard is present it is normal for people to become careless and the likelihood increases that what is being insured against will actually happen an example would be a government program forcing everyone to pay an equal amount into a fund to protect them from the expense of parking fines one hesitates even to mention this absurd proposition lest some enterprising politicians should decide to put it on the ballot therefore let us hasten to point out that if such a numbskull plan were adopted two things would happen one just about everyone soon would be getting parking tickets and two since there now would be so many of them the taxes to pay for those tickets would greatly exceed the previous cost of paying them without the so-called protection the FDIC operates exactly in this fashion depositors are told their insured accounts are protected in the event their Banks should become insolvent to pay for this protection each bank is assessed a specified percentage of its total deposits that percentage is the same for all banks regardless of their previous record or how risky their loans under such conditions it does not pay to be cautious the banks making Reckless loans earn a higher rate of interest than those making conservative loans they also are far more likely to collect from the fund yet they pay not one cent more conservative banks are penalized and gradually become motivated to make more risky loans to keep up with their competitors than to get their fair share of the fund's protection moral hazard therefore is built right into the system as with protection against parking tickets the FDIC increases the likelihood that what is being insured against will actually happen it is not a solution to the problem it is part of the problem real insurance would be a blessing a true deposit insurance program which was totally voluntary and which geared its rates to the actual risks would be a blessing banks with solid loans on their books would be able to obtain protection for their depositors at reasonable rates because the chances of the insurance company having to pay would be small banks with unsound loans however would have to pay much higher rates or possibly would not be able to obtain coverage at any price depositors therefore would know instantly without need to investigate further that a bank without insurance is not a place where they want to put their money in order to attract deposits Banks would have to have insurance in order to have insurance at rates they could afford they would have to demonstrate to the insurance company that their financial affairs are in good order consequently Banks which failed to meet the minimum standards of Sound business practice would soon have no customers and would be forced out of business a voluntary private insurance program would act as a powerful regulator of the entire banking industry far more effectively and honestly than any political scheme ever could unfortunately such is not the banking world of today the FDIC protection is not Insurance in any sense of the word it is merely part of a political scheme to bail out the most influential members of the banking cartel when they get into financial difficulty as we have already seen the first line of defense in this scheme is to have large defaulted loans restored to Life by a congressional pledge of tax dollars if that should fail and the bank can no longer conceal its insolvency through creative bookkeeping it is almost certain that anxious depositors will soon line up to withdraw their money which the bank does not have the second line of defense therefore is to have the FDIC step in and make those paints for them Bankers of course do not want this to happen it is a last resort if the bank is rescued in this fashion management is fired and what is left of the business usually is absorbed by another bank furthermore the value of the stock will plummet but this will affect the small stockholders only those with controlling interests and those in management no long in advance of the pending catastrophe and are able to sell the bulk of their shares while the price is still high the people who create the problem seldom suffer The Economic Consequences of their actions the FDIC will never be adequately funded the FDIC never will have enough money to cover its potential liability for the entire banking system if that amount were in existence it could be held by the Banks themselves and an insurance fund would not even be necessary instead the FDIC operates on the same assumption as the banks that only a small percentage will ever need money at the same time so the amount held in reserve is never more than a few percentage points of the total liability typically the FDIC holds about a dollar twenty for every one hundred dollars of covered deposits at the time of this writing however that figure had slipped to only 70 cents and was still dropping that means that the financial exposure is about 99 times larger than the safety net which is supposed to catch it the failure of just one or two large banks in the system could completely Wipe Out the entire fund and it gets even worse although The Ledger may show that so many millions or billions are in the fund that also is but creative bookkeeping by law the money collected from Bank assessments must be invested in treasury bonds which means it is Lent to the government and spent immediately by Congress in the final stage of this process therefore the FDIC itself runs out of money and turns first to the treasury then to Congress for help this step of course is an act of final desperation but it is usually presented in the media as though it were a sign of the system's great strength U.S news and World Report blandly describes it this way should the agencies need more money yet Congress has pledged the full faith and credit of the federal government gosh gee whiz isn't that wonderful it sort of makes one feel Rosy all over to know that the fund is so well secured let's see what full faith and credit of the federal government actually means Congress already deeply in debt has no money either it doesn't dare openly raise taxes for the shortfall so it applies for an additional loan by offering still more treasury bonds for sale the public picks up a portion of these ious and the Federal Reserve buys the rest if there is a monetary crisis at hand and the size of the loan is great the FED will pick up the entire issue but the FED has no money either so it responds by creating out of nothing an amount of brand new money equal to the ious and through the magic of Central Banking the FDIC is finally funded this new money gushes into the banks where it is used to pay off the depositors from there it floods through the economy diluting the value of all money and causing prices to rise the old paycheck doesn't buy as much anymore so we learn to get along with a little bit less let's see the bank's doors are open again and all the depositors are happy until they return to their cars and discover the missing hubcaps that is what is meant by the full faith and credit of the federal government summary although National monetary events May appear mysterious and chaotic they are governed by well-established rules which bankers and politicians rigidly follow the central facts to understanding these events is that all the money in the banking system has been created out of nothing through the process of making loans a defaulted loan therefore costs the bank little of tangible value but it shows up on The Ledger as a reduction in assets without a corresponding reduction in liabilities if the bad loans exceed the size of the assets the bank becomes technically insolvent and must close its doors the first rule of survival therefore is to avoid writing off large bad loans and if possible to at least continue receiving interest payments on them to accomplish that the endangered loans are rolled over and increased in size this provides the borrower with money to continue paying interest plus fresh funds for new spending the basic problem is not solved but it is postponed for a little while and made worse the Final Solution on behalf of the banking cartel is to have the federal government guarantee payment of the loan should the borrower default in the future this is accomplished by convincing Congress that not to do so would result in great damage to the economy and hardship for the people from that point forward the burden of the loan is removed from the bank's Ledger and transferred to the taxpayer should this effort fail and the bank be forced into insolvency the last resort is to use the FDIC to pay off the depositors the FDIC is not Insurance because the presence of moral hazard makes the thing it supposedly protects against more likely to happen a portion of the FDIC funds is derived from assessments against the banks ultimately however they are paid by the depositors themselves when these funds run out the balance is provided by the Federal Reserve System in the form of freshly created new money this floods through the economy causing the appearance of rising prices but which in reality is the lowering of the value of the dollar the final cost of the bailout therefore is passed to the public in the form of a hidden tax called inflation so much for the rules of the game in the next chapter we shall look at the scorecard of the actual play itself chapter 3 Protectors of the public the bailout game as applied in real life to Penn Central Lockheed New York City Chrysler Commonwealth Bank of Detroit first Pennsylvania Bank Continental Illinois and beginning in 2008 literally all major Banks AIG automobile companies and even Banks of other nations in the previous chapter we offered the Whimsical analogy of a sporting event to clarify the maneuvers of monetary and political scientists to bail out those commercial banks that comprise the Federal Reserve cartel the danger in such an approach is that it could lead the impression the topic is frivolous so let us abandon the analogy and turn to reality now that we have studied the rules of the game it is time to check the scorecard of the actual play itself and it will become obvious that this is no trivial matter a good place to start is with the rescue of a Consortium of banks that were holding the endangered loans of Penn Central Railroad Penn Central Penn Central was the nation's largest railroad with 96 000 employees and a weekly payroll of 20 million dollars in 1970 it became the nation's biggest bankruptcy it was in depth to just about every Bank willing to lend it money including Chase Manhattan Morgan guarantee manufacturers Hanover First National City Chemical Bank and Continental Illinois officers of those Banks had been appointed to Penn Central's board of directors as a condition for obtaining funds and they had acquired control over the railroads management the banks also held large blocks of Penn Central stock in their trust departments Bankers sitting on the board of directors were privy to information long before the public received it that would affect the market price of Penn Central stock Chris wells in the last days of the club describes what happened on May 21st a month before the railroad went under David Bevin Penn Central's Chief Financial Officer privately informed representatives of the company's banking creditors that its Financial condition was so weak it would have to postpone an attempt to raise a hundred million dollars in desperately needed operating funds through a bond issue instead said Bevin the railroad would seek some kind of government loan guarantee in other words unless the railroad could manage a federal bailout it would have to close down the following day Chase Manhattan's trust Department sold 134 300 shares of its Penn Central Holdings before May 28 when the public was informed of the postponement of the bond issue Chase sold another 128 000 shares David Rockefeller the bank's chairman vigorously denied Chase had acted on the basis of inside information virtually all of the management decisions that led to Penn Central's demise were made by or with the concurrence of its board of directors which is to say by the banks that provided the loans the banks were not in trouble because of Penn Central's poor management they were Penn Central's poor management an investigation conducted in 1972 by Congressman Wright Patman chairman of the house Banking and currency committee revealed the following Banks provided large loans for disastrous expansion projects and then lent additional Millions so the railroad could pay dividends to stockholders this created the false appearance of prosperity and inflated the price of its stock long enough to dump it on the unsuspecting public thus the banker managers engineered a three-way Bonanza for themselves they won received dividends on worthless stock to earned interest on loans that funded those dividends and three were able to unload 1.8 million shares of stock after dividends of course at unrealistically high prices the company's top Executives disposed of their stock in this fashion at a personal gain of more than one million dollars the public be damned in his letter of transmittal accompanying the staff report Congressman Patman provided this summary it was as though everyone was a part of a close-knit club in which Penn Central and its officers could obtain with very few questions asked loans for almost everything they desired both for the company and for their own personal interests where the bankers sitting on the board asked practically no questions as to what was going on simply allowing management to destroy the company to invest in questionable activities and to engage in some cases in illegal activities these banks in return obtained most of the company's lucrative banking business the attitude of everyone seemed to be while the game was going on that all these dealings were of benefit to every member of the club and the railroad and the public be damned the company's cash crisis came to a head over a weekend and in order to avoid having the corporation forced to file for bankruptcy on Monday morning Arthur burns the FED chairman called the homes of the heads of the Federal Reserve Banks around the country and told them to get the word out immediately that the system was anxious to help on Sunday William treiber who was the first vice president of the New York branch of the FED contacted the chief Executives of the 10 largest banks in New York and told them the fed's discount window would be wide open the next morning translated that means the Fed was prepared to create fresh money and lend it to commercial Banks so they in turn could multiply and re-lend it to Penn Central the interest rates for these funds were low enough to compensate for the risk speaking of what transpired on the following Monday Burns boasted I kept the board in session practically all day to change regulation Q so that money could flow into CDs at the banks looking back at the event Chris Wells approvingly describes it as what is by Common consent the fed's finest hour finest hour or not the banks were not interested unless they could be assured that the taxpayer would co-sign the loans and guarantee payment so the action inevitably shifted back to Congress Penn Central's Executives bankers and Union Representatives came in droves to explain how the railroad's existence was in the best interest of the public of The Working Man of the economic system itself the Navy Department spoke of protecting the nation's defense resources Congress of course could not callously ignore these pressing needs it ordered a retroactive 13 and a half percent pay raise for all Union employees after having added that burden to the railroad's cash drain and putting it even deeper into the hole it passed the emergency rail Services Act of 1970 authorizing 125 million dollars in Federal Loan guarantees none of this solved the basic problem nor was it intended to almost everyone knew that eventually the railroad would be nationalized which is a euphemism for becoming a black hole into which tax dollars disappear forever this came to pass with the creation of Amtrak in 1971 and Conrail in 1973. Amtrak took over the passenger Services of Penn Central and Conrail assumed operation of freight services Conrail is a private Corporation when it was created 85 percent of its stock was held by the government the rest was held by employees fortunately the government stock was sold in a public offering in 1987. Amtrak continues under political control and operates at a loss by 1998 Congress had given it 21 billion dollars by 2002 it was consuming more than 200 million dollars of taxes per year by 2005 it requested an increase in subsidy to 1.8 billion dollars per year between 1990 and 2009 it had lost another 23 billion Conrail on the other hand since it was returned to the private sector has been running at a profit paying taxes instead of consuming them Lockheed in 1970 the Lockheed Corporation the nation's largest defense contractor was facing bankruptcy the Bank of America and several smaller Banks had lent 400 million dollars to the Goliath and did not want to lose the Bountiful income that flowed from that so they joined forces with lockheed's management stockholders and labor unions and descended on Washington sympathetic politicians were told that if Lockheed were allowed to fail 31 000 jobs would be lost hundreds of subcontractors would go down thousands of suppliers would be forced into bankruptcy and National Security would be seriously jeopardized what the company needed was to borrow more money and lots of it but because of its Current financial predicament no one was willing to lend a bailout plan was quickly engineered by treasury secretary John B Connolly that guaranteed payment on an additional 250 million dollars in loans an amount which would put Lockheed 60 percent deeper into the debt hole than it had been before but that made no difference now once the taxpayer had been made a co-signer to the account Banks had no qualms about advancing the funds the government now had a powerful motivation to make sure Lockheed would be awarded as many defense contracts as possible and that they would be as profitable as possible this was an indirect method of paying off the banks with tax dollars but doing so in such a way as not to arouse public indignation other defense contractors which had operated more efficiently would lose business but that could not be proven furthermore a slight increase in defense expenditures would hardly be noticed New York City in 1975 New York had reached the end of its credit rope and was unable to make payroll the cause was not mysterious it had become a mini welfare state and success in City politics was achieved by lavish Promises of benefits and subsidies for the poor whereas the average large city employed 31 people per thousand residents New York had 49 and their salaries outstripped those in Private Industry while an x-ray technician in a private Hospital earned 187 dollars a week a porter working for the city earned 203 dollars bank tellers earned 154 dollars per week but change makers on the city's Subway received two hundred and twelve dollars Municipal fringe benefits were twice as generous as those in Private Industry on top of this were free college educations subsidized housing free medical care and endless varieties of welfare programs city taxes were greatly inadequate to cover the costs of this Utopia there now were only three options increased city taxes reduce expenses or go into debt the choice was never in serious doubt by 1975 New York had floated so many bonds and had saturated the market and could find no more lenders two billion dollars of this debt was held by a small group of banks dominated by Chase Manhattan and citicorp when the payment of interest on these loans finally came to a halt it was time to play the bailout game the bankers and City fathers traveled down the coast to Washington and put their case before Congress the largest city in the world could not be allowed to go bankrupt they said essential Services would be halted and millions of people would be without garbage removal without transportation even without police protection starvation disease and crime would run rampant through the city it would be a disgrace to America David Rockefeller at Chase Manhattan persuaded his friend Helmut Schmidt Chancellor of West Germany to make a statement to the media that the disastrous situation in New York could trigger an international financial crisis Congress did not want to bring Anarchy to New York nor to disgrace America nor to trigger a worldwide Financial panic so in December of 1975 it passed a bill authorizing the treasury to make Direct Loans to the city up to 2.3 billion dollars an amount which would more than double the size of its current debt to the banks interest payments on the old debt resumed immediately which is the object of the game New York City has continued to be a welfare Utopia and it is unlikely that it will ever get out of debt Chrysler by 1978 the Chrysler Corporation was on the verge of bankruptcy it had rolled over its debt many times and that phase of the game was nearing an end it was not interested in borrowing just enough to pay interest on its existing loans to make the game worth playing it wanted over a billion dollars in New Capital managers bankers and union leaders found common cause in Washington if one of the largest corporations in America was allowed to fold think of the hardship to thousands of employees and their families consider the damage to the economy as shock waves of unemployment move across the country tremble at the thought of lost competition in the automobile Market if there were only two major brands from which to choose instead of three could anyone blame Congress for not wanting to plunge innocent families into poverty nor to upend the National economy nor to deny anyone their constitutional right to freedom of choice so a bill was passed directing the treasury to guarantee up to 1.5 billion dollars in new loans to Chrysler the banks agreed to write down 600 million dollars of their old loans and to exchange an additional 700 million dollars for preferred stock both of these moves were advertised as evidence the banks were taking a terrible loss but were willing to yield in order to save the nation it should be noted however that the value of the stock which was exchanged for previously uncollectible debt Rose drastically after the settlement was announced to the public furthermore not only did interest payments resume on the balance of the old loans but the banks now replaced the written down portion with fresh loans and these were far superior in quality because they were fully guaranteed by the taxpayers Commonwealth Bank of Detroit the next bailout occurred in 1972 involving the 1.5 Billion Dollar Bank of the Commonwealth of Detroit Commonwealth had funded most of its phenomenal growth through loans from another bank Chase Manhattan in New York when Commonwealth went Belly Up largely due to security speculation and self-dealing on the part of its management Chase seized 39 percent of its common stock and actually took control of the bank in an attempt to find a way to get its money back FDIC director Sprague describes the inevitable sequel Chase officers suggested that Commonwealth was a public interest problem that the government agencies should resolve that unsettle hint was the way Chase phrased its request for a bailout by the government their proposal would come down to bailing out the shareholders the largest of which was Chase the bankers argued that Commonwealth must not be allowed to fold because it provided essential banking services to the community that was Justified on two counts one it served many minority neighborhoods and two there were not enough other banks in the city to absorb its operation without creating an unhealthy concentration of banking power in the hands of a few the FDIC did not want to be accused of being indifferent to the needs of minorities or of destroying free enterprise competition so on January 17 1972 Commonwealth was bailed out with a 60 million dollar loan plus numerous Federal guarantees Chase absorbed some losses but those were minor compared to what would have been lost without FDIC intervention since continuation of the bank supposedly was necessary to prevent concentration of financial power FDIC engineered its sale to the first Arabian Corporation a Luxembourg firm funded by Saudi princes the bank continued to flounder and in 1983 what was left of it was resold to the former Detroit Bank and Trust Company now called Comerica thus the dreaded concentration of local power was realized after all but not until Chase was able to walk away from the deal with most of its losses covered first Pennsylvania Bank the 1980 bailout of first Pennsylvania Bank of Philadelphia was next with Assets in excess of nine billion dollars it was six times the size of Commonwealth it also was the nation's oldest bank dating back to the bank of North America which was created by the Continental Congress in 1781. the bank had experienced rapid growth and handsome profits due to the aggressive leadership of its CEO John bunting formerly an economist with the Federal Reserve he was the epitome of the era's Go-Go Bankers he vastly increased earnings by reducing safety margins making risky loans and speculating in the bond market as long as the economy expanded these gambles were profitable when the bond market turned sour however the bank plunged into a negative cash flow By 1979 first pen was forced to sell off several of its profitable subsidiaries to obtain operating funds and it was carrying 328 million dollars in bad loans that was 16 million dollars more than the total investment from stockholders the time had arrived to hit up the taxpayer for the loss the bankers went to Washington to present their case Not only was the bailout of first pen essential or the continuation of banking services in Philadelphia it was also critical to the preservation of world economic stability the bank was so large they said if it were allowed to fall it would act as the first Domino leading to an international financial crisis Sprague recalls there was strong pressure from the beginning not to let the bank fail besides hearing from the bank itself the other large Banks and the Comptroller we heard frequently from the Fed I recall at one session Fred Schultz the FED Deputy chairman argued in an Ever Rising voice that there were no Alternatives we had to save the bank he said quit wasting time talking about anything else the directors of the FDIC did not want to cross swords with the Federal Reserve System and they most assuredly did not want to be blamed for tumbling the entire world economic system by allowing the first Domino to fall so in due course a bailout package was put together which featured a 325 million dollar loan from FDIC interest free for the first year and at a subsidized rate thereafter about half the market rate Continental Illinois in the early 1980s Chicago's Continental Illinois was the nation's seventh largest bank with assets of 42 billion dollars and with 12 000 employees its loan portfolio had undergone spectacular growth its net income on loans had doubled in just five years and by 1981 had rocketed to an annual figure of 254 million dollars it had become the darling of the market analysts and had been named by Dunn's review as one of the five best managed companies in the country these opinion leaders failed to perceive that the spectacular performance was due not to expertise in banking or investment but to financing shaky business enterprises and foreign governments that could not obtain loans elsewhere the gaudy fabric began to unravel during the 4th of July weekend of 1982 with the failure of the Penn Square Bank in Oklahoma that was the notorious shopping center bank that had booked a billion dollars in oil and gas loans and resold them to Continental just before the collapse of the energy Market other loans also began to sour at the same time the Mexican and Argentine debt crisis was coming to a head and a series of major corporate bankruptcies were receiving almost daily headlines Continental had placed large chunks of its easy money with all of them when these events caused the bank's credit rating to drop cautious depositors began to withdraw their funds and new funding dwindled to a trickle the bank became desperate for cash to meet its daily expenses in an effort to attract new money it began to offer unrealistically High rates of interest on its CDs loan officers were sent to scour the European and Japanese markets and to conduct a public relations campaign aimed at convincing Market managers that the bank was calm and steady David Taylor the bank's chairman at that time said we had the Continental Illinois reassurance Brigade and we fanned out all over the world by the end of 1983 the bank's burden of non-performing loans had reached unbearable proportions and was growing at an alarming rate by 1984 it was 2.7 billion dollars that same year the bank sold off its profitable credit card operation to make up for the loss of income and to pay stockholders their expected quarterly dividend the internal structure was near collapse but the external facade continued to look like business as usual the first crack in the facade appeared at 11 39 am on Tuesday May 8 Reuters the British news agency moved a story on its wire service stating that banks in the Netherlands West Germany Switzerland and Japan had increased their interest rate on loans to Continental and that some of them had begun to withdraw their funds the story also quoted the bank's official statement that rumors of pending bankruptcy were totally preposterous world's first electronic Bank Run as the sun rose the following morning foreign investors began to withdraw their deposits a billion dollars in Asian money moved out the first day the next day a little more than 24 hours following continental's assurance that bankruptcy was totally Preposterous its long-standing customer the Board of Trade Clearing Corporation withdrew 50 million dollars word of the defection spread through the financial wire services and the Panic was on it became the world's first Global electronic Bank Run by Friday the bank had been forced to borrow 3.6 billion dollars from the Federal Reserve in order to cover escaping deposits a Consortium of 16 Banks led by Morgan Guaranty offered a generous 30-day line of credit but all of this was Far short of the need within seven more days the outflow surged to over 6 billion dollars in the beginning almost all of this action was at the institutional level other Banks and professionally managed funds which closely monitor every minuscule detail of the financial markets the general public had no inkling of the catastrophe even as it unfolded chernow says the Continental run was like some modernistic fantasy there were no throngs of hysterical depositors just cool nightmare flashes on computer screens Sprague writes inside the bank all was calm the teller lines moved as always and Bank officials recall no visible sign of trouble except in The Wire room here the employees knew what was happening as withdrawal order after order moved on The Wire bleeding Continental to death some cried from the beginning there was only one serious question how to justify fleecing the taxpayer to save the bank the rules of the game require that the scam must be described as a heroic effort to protect the public in the case of Continental the shear size of the numbers May deploy relatively easy there were so many depositors involved so many billions at risk so many other Banks interlocked it could be claimed that the economic fabric of the entire nation of the world itself was at stake and who could say that it was not so Sprague argues the case in familiar terms an early morning meeting was scheduled for Tuesday May 15th at the Fed we talked over the Alternatives they were few none really treasury secretary Regan and fed chairman volcker raised The Familiar concern about a national banking collapse that is a chain reaction if Continental should fail volcker was worried about an international crisis we all were acutely aware that never before had a bank even remotely approaching continental's size closed no one knew what might happen in the nation and in the world it was no time to find out just for the purpose of intellectual curiosity this was the golden moment for which the Federal Reserve and the FDIC were created without government intervention Continental would have collapsed its stockholders would have been wiped out depositors would have been badly damaged and the financial world would have learned that Banks not only have to talk about prudent management they actually have to do it future banking practices would have been severely altered and the long-term economic benefit to the nation and world would have been enormous but with government intervention the discipline of a free market is suspended and the cost of failure and fraud is passed to the taxpayers depositors continue to live in a dream world of false security and Banks can operate recklessly and fraudulently with the knowledge that their political Partners will come to their rescue when they get into trouble the final bailout package at the May 15th meeting treasury secretary Wigan spoke eloquently about the value of a free market and the necessity of having the banks Mount their own rescue plan at least for a part of the money to work out that plan a summit meeting was arranged the next morning among the chairman of the seven largest banks Morgan guarantee Chase Manhattan Citibank Bank of America Chemical Bank Bankers Trust and manufacturers Hanover the meeting was perfunctory at best the bankers knew full well that the Reagan Administration would not risk the political embarrassment of a major bank failure that would make the president and the Congress look bad at re-election time but still some kind of tokenism was called for to preserve the administration's conservative image so with urging from the fed and the treasury the Consortium agreed to put up the sum of 500 million dollars an average of only 71 million dollars for each far short of the actual need sure now describes the plan as make-believe and says they pretended to mount a rescue Sprague supplies the details the bankers said they wanted to be in on any deal but they did not want to lose any money they kept asking for guarantees they wanted it to look as though they were putting money in but at the same time wanted to be absolutely sure they were not risking anything by 7 30 a.m We had made little progress we were certain the situation would be totally out of control in a few hours Continental would soon be exposing itself to a new business day and the stock market would open at 10 o'clock Isaac another FDIC director and I held a hallway conversation we agreed to go ahead without the banks we told Conover the third FDIC director the plan and he concurred later we got word from Bernie McKeon our regional director in New York that the bankers had agreed to be at risk actually the risk was remote since our announcement had promised 100 insurance the final bailout package was a Whopper basically the government took over Continental Illinois and assumed all of its losses the FDIC took 4.5 billion dollars in bad loans and paid Continental 3.5 billion dollars for them the difference was made up by the infusion of one billion dollars in fresh capital in the form of stock purchase the bank therefore now had the government as a stockholder controlling 80 percent of its shares and its bad loans had been dumped under the taxpayer in effect even though Continental retained the appearance of a private Institution it had been nationalized by 1984 the Federal Reserve and the treasury had given Continental the Staggering sum of eight billion dollars by early 1986 the figure had climbed to 9.24 billion dollars and was still Rising while explaining this fleecing of the taxpayer to the Senate Banking Committee fed chairman Paul volcker said the operation is the most basic function of the Federal Reserve it was why it was founded with those words he has confirmed one of the more controversial assertions of this book small Banks be damned it has been mentioned previously that large Banks receive a free ride on their FDIC coverage at the expense of small Banks there is no better example of this than the bailout of Continental Illinois in 1983 the bank paid 6.5 million dollars into the fund to ensure deposits of three billion dollars the actual liability however including its institutional and overseas deposits was 10 times that figure and the FDIC guaranteed payment on the whole amount as Sprague admitted small Banks pay proportionately far more for their insurance and have far less chance of a continental style bailout how true within the same week that the FDIC and the FED were providing billions for Continental Illinois it closed down the tiny Bledsoe County Bank of Pikeville Tennessee and the Planters trust and Savings Bank of Appaloosas Louisiana during the first half of that year 43 smaller banks failed without FDIC bailout in most cases a merger was arranged with a larger Bank the impact of this inequity is enormous it sends a message to bankers and depositors alike but small Banks if they get into trouble will be allowed to fold whereas large banks are safe regardless of how poorly or fraudulently they are managed as a New York investment analyst stated to news reporters Continental Illinois even though it had just failed was obviously the safest Bank in the country to have your money in nothing could be better calculated to drive the small independent Banks out of business or to force them to sell out to the Giants since 1984 while hundreds of small banks have been forced out of business the average size of the banks that remain has more than doubled it will be recalled that disadvantage of the big Banks over their smaller competitors was one of the objectives of the Jekyll Islands plan the subprime Meltdown by 2008 the engine of Destruction was running at Full Throttle Decades of low interest rates had lured homeowners speculators and lending institutions into the real estate market where fortunes could be made by what appeared to be perpetually Rising values knowing that they would be bailed out by the FED if they got into trouble large Banks threw caution to the wind and offered loans to just about anyone who would sign the documents regardless of ability to make payments many of them crafted fraudulent documents overstating the value of underlying properties and the incomes of borrowers and then made loans that were greater than the value of the property the game was simple make as many subprime loans as possible package them into large blocks of similar loans give the packages impressive names such as Prime Diversified fund and then sell them to unsuspecting investors two of the largest conduits for this scam are Fannie Mae and Freddie Mac loan repackagers sponsored by the government the scheme worked for a while because the feds artificially low interest rates created a real estate boom with Rising home prices those who had been enticed into loans they could not afford were able to sell their properties at a profit and come out ahead even if they could not afford payments foreclosures were rare and the investment packages appeared to be solid however as with all booms caused by manipulation of Market forces the real estate boom came to an end when it did it was compounded by rampant inflation high taxes crippling regulation and loss of jobs to other countries all of which combined to create an economic recession as foreclosure rates began to climb Fannie Mae Freddie Mac large Banks and loan brokers were in trouble not only were their loans not performing they became defendants in hundreds of lawsuits from institutional buyers of their fraudulent investment packages it was time once again for the Federal Reserve to bail them out which it did with over a trillion dollars of newly created money Ambrose Evans Pritchard with the London Telegraph reports the emergency bailout gives the U.S treasury sweeping authority to inject Capital into the giant mortgage lenders Fannie Mae and Freddie Mac which together own or guarantee half the country's 12 trillion dollar stock of Home Loans the ceiling on the U.S national debt has been lifted by a further 800 billion dollars giving the treasury almost unlimited resources to prop up the two lenders in parallel the federal Housing Authority FHA is to guarantee up to 300 billion dollars of fresh mortgages for struggling homeowners trapped with soaring loan costs often the result of Honey Trap contracts the scheme aims to avoid an avalanche of fresh defaults as the housing market continues to deteriorate over 740 000 homes fell into foreclosure in the second quarter the share prices of Fanny and Freddie the world's two biggest financial institutions have dropped by almost 85 percent collapse of the House of Cards everything up to this point was but the Sleepy beginning of what rapidly became a mad rush of new financial disasters and mega bailouts it was at this point that the House of Cards began to collapse in September of 2008 the federal government took over Fannie Mae and Freddie Mac and pumped over 100 billion dollars into them in that same month the government loaned 85 billion dollars to AIG insurance company to keep it in business the money for both infusions was created by the Federal Reserve no one seriously expected repayment the cost was passed to consumers in the form of future inflation incidentally Fannie Mae and Freddie Mac previously had given 4.8 million dollars in campaign donations to congressman shortly after the bailout AIG Executives came together for nine days to celebrate their good fortune and plan future strategies they did this at the Saint Regis in Monarch Beach California a 500 per night Resort one of their high priority strategies was how to pay bonuses to themselves without calling them that because taxpayers were upset over seeing their hard-earned money going to Executives as rewards for running their business into the ground AIG decided to describe these bonuses as retention payouts later when the public demanded a legislative limit to retention payouts the executives dropped the word games and simply increased their salaries and perks 700 billion dollar Bank bailout or was it five trillion dollars in October of 2008 Congress passed a 700 billion dollar bailout Bill to save the largest banks in the nation all of which were tottering on the edge of bankruptcy congressman who voted for this had received 54 percent more in donations from Banks than those who voted against it the White House urged news services to stop using the word bailout and say rescue instead they complied while the world was stunned by the sheer size of a 700 billion dollar bailout the reality was even worse credit sites and independent research firm in New York and London looked at the total commitment including deals made by the Federal Reserve and the FDIC that were not widely publicized and concluded that the real figure was five trillion dollars that represents an additional 16 500 in Lost savings and purchasing power for every American shortly thereafter American Express received 3.39 billion dollars Executives from the steel industry were lobbying for a similar deal GMAC the financial services division of General Motors was allowed to change its structure to a commercial bank so it also could be eligible for bailout just before Thanksgiving Day the government bailed out Citigroup to the tune of 45 billion dollars Goldman Sachs announced a 2.1 billion dollar loss and began negotiations for a bailout in November the Bank of America received 15 billion dollars and then invested seven billion dollars in China's construction Bank a few days later the treasury announced that the budget deficit would be one trillion dollars the highest in American history up to that point billions for the automakers it was a busy time in Washington Executives from the Auto industry were making weekly trips to the capital in private jets they wanted billions of dollars and they wanted them now they were having trouble making interest payments on those pesky bank loans and time was running out GM and Chrysler wanted cash Ford preferred credits because they wanted to continue borrowing from Banks not the government but the banks saw them as a bad risk and refused any new loans the solution was simple Ford asked the government to be a co-signer and guarantee repayment what bank wouldn't loan money on that kind of a deal taxpayers would be on the hook either way altogether the auto companies were given 17.4 billion dollars two months later Ford which already had plants in Mexico Germany and Spain began producing cars in China GM soon followed suit and announced that it also would build more cars overseas taxpayers pay to send their jobs overseas among bailout recipients it is common to see the money used in ways that destroy jobs for the same American taxpayers who pay the bill during the time when U.S banks were receiving more than 150 billion dollars from American workers they were requesting special visas to import 21 800 Personnel from other countries to replace Americans in Upper Echelon jobs including corporate lawyers investment analysts programmers and human resource specialists this disdain for the American Workforce is partly because of corporate pursuit of Maximum profit Above All Else and partly because decision makers consider themselves to be internationalists with no special interest in America except as a cash cow to be milked as regularly and thoroughly as possible as we'll be Illustrated in the following chapters of this book some of these people acting through organizations such as the CFR Council on Foreign Relations are consciously pursuing policies designed to lower the economic stature of America so it can be more comfortably merged into Global government taking money from American workers to build up the economies of foreign countries has done much to advance that goal by the end of 2008 bailout of just the financial services industry during the Bush Administration had reached over seven trillion dollars which was 10 times the amount originally estimated it was more than twice the cost of World War II although this was many times greater than anything like it in history it was considered to be a temporary solution leaving final decisions for the incoming Obama administration although many voters thought there would be a change under Obama the handwriting was already on the wall ninety percent of the donations to Obama's inauguration fund came from Wall Street firms that received billions in bailout and were anticipating more of the same they were not to be disappointed Merrill Lynch a gift to Bank of America in the fall of 2008 the giant brokerage house Merrill Lynch was out of money and on the verge of closing its doors Bank of America agreed to buy the ailing firm for 50 billion dollars a strange offer considering that the bank itself was in trouble and recently received 25 billion dollars in bailout when the Staggering fourth quarter losses of Merrill Lynch were finally known the bank decided to back out of the deal but this was not to be allowed according to the sworn testimony of Ken Lewis Bank of America's CEO treasury secretary Hank Paulson threatened to remove the bank's board of directors and its management if they didn't acquire Merrill as agreed this threat was made at the request of Ben Bernanke chairman of the Federal Reserve when Lewis asked if the government would cover the bank's inevitable losses Paulson said yes but was not willing to put it in writing because a written commitment he said would be a disclosable event and we do not want a disclosable event on December 30th the bank's board dutifully approved the merger two weeks later the treasury delivered to Bank of America an additional 20 billion dollars plus a 118 billion dollar guarantee to pick up further losses from Merrell's assets all of that was placed on the backs of the American people an icon for conflict of interest Henry Paulson CFR was the epitome of the fusion between the banking cartel and government as former CEO of Goldman Sachs he was instrumental in using the power of his office to destroy three of his old rivals he arranged the sale of bear Stearns to J.P Morgan Chase allowed Lehman Brothers to collapse and forced the absorption of Merrill Lynch by Bank of America all the while providing a generous bailout for his alma mater Goldman Sachs this left only Goldman and Morgan as major investment Banks documents obtained by a citizen Watchdog group Judicial Watch revealed that Paulson had told Bankers they must accept bailout money even if their Banks were in fair condition and didn't need it the reason was so as not to stigmatize the weaker banks by allowing a comparison to well-run Banks by March of 2009 Fannie Mae asked for an additional 15 billion dollars the government complied and then approved retention bonuses of one million dollars or more to each of Fannie Mae's top executives in its final days of existence before being purchased by Bank of America with government funds Merrill Lynch paid 3.6 billion dollars in bonuses with the knowledge and approval of the Bank of America the bank on the other hand said it was considering raising the salaries of its own investment Executives by as much as 70 percent to avoid the bad publicity associated with bonuses bonuses become a distraction this incredible record of self-dealing and plunder of the public treasury was given full attention in the Press which led to a national outcry against greedy corporate executives scores of politicians made impassioned speeches about the need for new laws and regulations to tame this bonus monster it was the perfect decoy to divert public attention away from the greater issue to be sure million dollar bonuses for executives who led their companies into bankruptcy are worthy of attention but that issue is microscopically small compared to the fact that these companies were being bailed out in the first place that the process was unconstitutional and that the astronomical amount of money involved literally was killing the nation the media had framed the debate so that the really important issues were not even part of it all that was left for the public to think about was how much bailout should be given who should get it first and how to limit the bonuses to let the corrupt Banks fail and let the economy recover in the absence of fraud was not allowed in mainstream debate the repayment scam in December of 2009 Bank of America announced that it had repaid its 45 billion dollar loan from the treasury government officials boasted that their actions were Vindicated and the taxpayers even made a profit the media thought it was wonderful and accepted the announcement at face value the source of the money was said to be cash reserves and the sale of a new stock offering but there was something very wrong with that picture cash reserves were not a likely Source because the bank reported a net outflow of cash and was still losing money its loans were continuing to go sour and defaults had more than tripled from the first quarter to the Third bad loans were up 15 percent the only way the bank could have sizable cash reserves was to receive a confidential infusion from the treasury what Mr Paulson would call a non-disclosable event in other words the government may have provided the money to pay itself back in which case it was an accounting trick a publicity stunt to fool the public into thinking that bailouts were acts of great statesmanship after all the sale of Bank stock had similar problems the general public was dumping Bank of America's stock at that time not buying it so who were the buyers could they be the treasury itself directly or indirectly could they be a few trusted institutional buyers who were given non-disclosable guarantees by the treasury to cover their losses we know that by March of 2010 the treasury was auctioning warrants given to it by various Banks as Securities against their loans could these have been the so-called stocks that were sold warrants are not stocks they are contracts that give buyers the future right to buy stock at a stated price warrants are derivatives and those who purchase them are speculating not investing could whoever bought them be privately assured by the government and the Federal Reserve that they will be bailed out if their gamble goes sour in view of the recent record of the treasury and the FED in similar matters these are not unreasonable questions but no one in mainstream media was asking them the Federal Reserve of New York reported that the assets acquired when AIG was bailed out were showing a paper profit that means if they were sold on the open market they would generate a profit over their purchase price if so one can only speculate why they did not sell them the plausible answer is that the Federal Reserve economists are like a man who bought a clunker automobile for nine hundred dollars then claimed a paper profit because he says he can sell it for a thousand dollars when in fact he would be lucky to sell it for one hundred dollars until these assets actually are sold any claims of paper profits should be viewed with great caution news that the Bank of America had repaid its loan had a tranquilizing effect on the public temper and so it wasn't long before other recipients announced that they too were repaying their loans even though they too were continuing to operate at a deficit ibank and General Motors said they would repay their loans by issuing new stock in April of 2010 General Motors announced it actually had paid back its loan but wait upon investigation we discover that it paid back its first bailout with money from the second bailout none of it came from car sales or even stock sales the whole thing was a con game to fool the public nationalization becomes a reality what the government funds it controls and what it controls it owns this point was made Crystal Clear when on April 1st 2009 treasury secretary Timothy Geithner Council on Foreign Relations announced he was prepared to oust the CEO of any bank that received a bill out if he doesn't run the bank correctly Geithner was not planning to fire anyone the purpose of his statement was to convince the public that the government was being conscientious and responsible with the handling of so much money but the significance of his statement is that the Secretary of the Treasury now holds the power to oust Bank CEOs without concern for the wishes of their Boards of directors that represents the ultimate privilege of ownership the new reality is that the financial industry and major chunks of the insurance and automobile Industries now have been nationalized which is a soft word for saying they are owned by the government in May 2009 the government pumped another 7.5 billion dollars into GMAC the finance arm of GM another 3.8 billion dollars in December and another 3.8 billion dollars in January 2010 for a total of 16.3 billion dollars this gave the government a controlling ownership of 56 percent by early 2010 the government had given a total of 57.6 billion dollars to General Motors itself and held controlling interest it now runs the company as it wishes by February of 2009 AIG broke again was 80 percent owned by the government in that same month Alan Greenspan former chairman of the Federal Reserve openly called for nationalization of all failing Banks which means most of them the new business model for America is clearly recognizable its dominant feature is the merger of government real estate and commerce into a single structure tightly controlled at the top it is the same model used in Soviet Russia Nazi Germany fascist Italy and communist China the system already is global one of the most revealing episodes in this drama was played out in a federal hearing room on March 3rd 2009 when fed chairman Bernanke testified before the Senate budget committee when Senator Bernie Sanders asked if he would provide the names of the financial institutions that received bailouts Bernanke paused for a moment and then said flatly no the excuse for this amazing refusal was that to reveal their names might cause the public to lose confidence in those Banks and withdraw their deposits which would cause further problems there may have been a less praiseworthy motive for the secrecy rumors were flying that billions of dollars had been sent overseas to Banks of other countries and such information would not have set well with American citizens were the rumors true subsequent events indicate they were two months later the IMF announced it was bailing out banks in Greece to the tune of 145 billion dollars twenty percent of which was provided by the U.S American citizens were giving 8 billion dollars to Greek Banks the following week the Federal Reserve announced it would bail out European Banks without Congressional approval bypassing Congress was not news because Congressional approval has never been a serious obstacle the newsworthy aspect was that the FED now admitted it had become a money machine for the world the new program is integrated with the central banks of Canada England the EU Switzerland and Japan money for future bailouts in other countries will be created by the Federal Reserve at the expense of American citizens without their knowledge or consent and moved to the central banks of those countries to be distributed to their commercial Banks that was big news but mainstream media treated it as a dry press release and said nothing about the popularization of American taxpayers the saga continues in August 2010 Freddie Mac was back at the payout window asking for another 1.8 billion dollars bringing the total to over 64 billion dollars on June 12 2010 President Obama asked Congress for 50 billion dollars to bail out American cities and states many states and local governments had run out of money and were asking Washington to pay the shortfall especially for welfare if welfare checks stop coming in the mail they said there will be riots in the streets no one wants that so federal funds are assured the next phase of this charade was to create the illusion of paying back the bailouts out of profits that don't exist using the same kind of accounting tricks that sent Jeffrey's Skilling president of Enron Corporation to prison James Quinn senior director of strategic planning at Quinn advisors explained it this way it should warm your hearts to know that Financial profits have amazingly reached their pre-crash highs all it took was the Federal Reserve taking 1.3 trillion dollars of bad loans off their books overstating the value of their remaining loans by 40 percent borrowing money from the FED at zero percent relying on the Bernanke put so their trading operations could gamble without fear of losses and lastly by pretending their future losses will be lower and relieving their loan loss Reserves the banking industry didn't need to do any of that stodgy old school stuff like make loans to small businesses extending and pretending is much more profitable the cost of funding States and local governments in addition to the federal government in addition to the banks and insurance companies in addition to the auto companies in addition to the banks of Europe in addition to endless Wars and a global standing army they'll Crush what is left of the American middle class how long it can continue is anyone's guess but we do know it is coming close to completion chapters 25 and 26 are devoted to where it is headed and how it may end second reason to abolish the Federal Reserve a sober evaluation of this record leads to the second reason for abolishing the Federal Reserve far from being a protector of the public it is a cartel operating against the public interest summary the game called bailout is not a Whimsical figment of the imagination it is real here are some of the big games of the past and their final scores in 1970 Penn Central Railroad became bankrupt the banks that lent money to it had taken over its board of directors and put it further into the hole all the while extending bigger loans to cover the losses directors concealed reality from stockholders and made additional loans so the company could pay dividends to keep up a false front directors and their Banks unloaded their stock at unrealistically high prices when the truth became public stockholders were left holding the empty bag when Congress was told that the collapse of Penn Central would be devastating to the public interest it responded by granting 125 million dollars in loan guarantees so Banks would not be at risk the railroad failed anyway but the banks were covered Penn Central was nationalized into Amtrak and continues to operate at a loss as Lockheed faced bankruptcy in 1970 Congress heard essentially the same story thousands would be unemployed subcontractors would go out of business and the public would suffer greatly so Congress guaranteed 250 million dollars in new loans which put Lockheed 60 percent deeper into debt than before now that government was guaranteeing the loans it made sure Lockheed became profitable by granting lucrative defense contracts at non-competitive bids the banks were paid back in 1975 New York City had reached the end of its credit rope it had borrowed heavily to maintain an extravagant bureaucracy and a mini welfare state when Congress was told that the public would be jeopardized if city services were curtailed and that America would be disgraced in the eyes of the world it authorized 2.3 billion dollars of additional loans which more than doubled the size of the current debt the banks continued to receive their interests in 1978 Chrysler was near bankruptcy Congress was told that the public would suffer if the company folded and that it would be a blow to the American way if Freedom of Choice were reduced from three to two makes of automobiles so Congress guaranteed up to 1.5 billion dollars in new loans the bank's previously uncollectible debt was converted into a taxpayer-backed interest-bearing asset in 1972 the Commonwealth Bank of Detroit with 1.5 billion dollars in assets became insolvent it had borrowed heavily from Chase Manhattan to invest in high risk and potentially High profit Ventures now that it was in trouble so was Chase the bankers went to Washington and told the FDIC the public must be protected from the great financial hardship that would follow if Commonwealth folded so the FDIC pumped in a 60 million dollar loan Plus Federal guarantees of repayment Chase took a minor write down but converted most of its potential loss into taxpayer-backed assets in 1979 the first Pennsylvania Bank of Philadelphia became insolvent with Assets in excess of nine billion dollars it was six times the size of Commonwealth it too had been an aggressive player in the 70s now the bankers and the Federal Reserve told the FDIC that the public must be protected from the Calamity of a bank failure of this size that the national economy was at stake perhaps even the entire world so the FDIC gave a 325 million dollar loan interest free for the first year and at half the market rate thereafter the FED offered money to other banks at a subsidized rate for the purpose of re-lending to First pin with that enticement they Advanced 175 million dollars in immediate loans plus a one billion dollar line of credit in 1982 Chicago's Continental Illinois became insolvent it was the nation's seventh largest bank with 42 billion dollars in assets the previous year its prophets had soared as a result of loans to high-risk business ventures and foreign governments although it had been the darling of Market analysts it quickly unraveled when its cash flow turned negative fed chairman volcker told the FDIC it would be Unthinkable to allow the world economy to be ruined by a bank failure of this magnitude so the FDIC assumed 4.5 billion dollars in bad loans and took 80 percent ownership of the bank in the form of stock in effect the bank was nationalized but no one called it that bailouts up to this point hail by comparison to the trillions of dollars pumped into Banks insurance companies automobile manufacturers and banks of other countries beginning in 2008. it started with what was called the subprime Meltdown caused by a calculated policy of the nation's largest banks to entice low-income families into accepting mortgages in excess of what they could afford the Assumption was that the value of houses would rise forever so people could pay off old loans by taking out larger new loans based on the increasing value of Real Estate these doomed mortgages were packaged together given fancy names and sold to naive investors and investment funds when the Day of Reckoning arrived millions of mortgage holders lost their mythical equity and their homes while millions of investors lost their money the banks that created this bubble were on the brink of collapse but they told Congress they were too big to fail because if they did so would America itself Congress dutifully approved virtually every request for taxpayer funding regardless of the amount this legalized plunder was coordinated by two secretaries of the treasury Henry Paulson and Timothy Geithner who came from the banking fraternity and used their positions of public trust to protect and enrich the cartel all of the money was provided by the Federal Reserve acting as the lender of Last Resort that was one of the purposes for which it had been designed we must not forget that the phrase lender of Last Resort means that the money is created out of nothing resulting in the confiscation of wealth through inflation chapter 4. home sweet loan the history of increasing government intervention in the Housing Industry the stifling of free market forces in residential real estate the resulting crisis in the SNL industry the bailout of that industry with money taken from the taxpayer as we have seen in previous chapters the Damage Done by the banking cartel is made possible by the fact that money can be created out of nothing it also destroys our purchasing power through the hidden tax called inflation the mechanism by which it works is hidden and subtle let us turn now from the Arcane world of Central Banking to the giddy world of savings and loan institutions by comparison the problem in the Savings and Loan industry is easy to comprehend it is simply that vast amounts of money are disappearing into the black hole of government mismanagement and the losses must eventually be paid by us the end result is the same in both cases socialism takes root in America it all began with a concept the concept took root in America largely as a result of the Great Depression of the 1930s American politicians were impressed at how radical marxists were able to attract popular support by blaming the capitalist system for the country's woes and by promising a socialist Utopia they admired and feared these radicals admired them for their skill at Mass psychology feared them lest they become so popular as to win a plurality at The Ballot Box it was not long before many political figures began to mimic the soapbox orders and the voters enthusiastically put them into office while the extreme and violent aspects of Communism generally were rejected the more genteel theories of socialism became popular among the educated Elite it was they who would naturally become the leaders in an American Socialist system someone had to look after the masses and tell them what to do for their own good and many with college degrees and those with great wealth became enamored by the thought of playing that role and so the concept became widely accepted at all levels of American Life the downtrodden masses as well as the educated Elite that it was desirable for the government to take care of its citizens and to protect them in their economic affairs and so when more than 1900 snls went Belly Up in the Great Depression Herbert Hoover and a most willing Congress created the Federal Home Loan Bank board to protect depositors in the future it began to issue charges to institutions that would submit to its regulations and the public was led to believe that government Regulators would be more wise prudent and honest than private managers a federal Charter became a kind of government seal of approval the public at last was being protected Hoover was succeeded by FDR in the White House who became the epitome of the New Breed earlier in his political career he had been the Paragon of free enterprise and individualism he spoke out against big government and for the free market but in midlife he reset his sale to catch the shifting political wind he went down in history as a pioneer of socialism in America it was FDR who took the next step toward government paternalism in the SNL industry as well as the banking industry by establishing the Federal Deposit Insurance Corporation FDIC and the Federal Saving and Loan Insurance Corporation fslic from that point forward neither the public nor the managers of the thrifts needed to worry about losses everything would be reimbursed by the government a house on every lot at about the same time loans on private homes became subsidized through the federal Housing Authority FHA which allowed snls to make loans at rates lower than would have been possible without the subsidy this was to make it easier for everyone to realize the dream of having their own home while the marxists were promising a chicken in every pot the new dealers were winning elections by pushing for a house on every lot in the beginning many people were able to purchase a home who otherwise might not have been able to do so or who would have had to wait longer to accumulate a higher down payment on the other hand the FHA induced easy credit began to push up the price of houses for the middle class and that quickly offset any real advantage of the subsidy the voters however were not perceptive enough to understand this canceling effect and continued to vote for politicians who promised to expand the system The Next Step was for the Federal Reserve board to require Banks to offer interest rates lower than those offered by snls the result was that funds moved from the banks into the snls and became abundantly available for home loans this was a deliberate National policy to favor the home industry at the expense of other industries that were competing for the same investment dollars it may not have been good for the economy as a whole but it was good politics abandonment of the free market these measures effectively removed real estate loans from the free market and placed them into the political Arena where they have remained ever since the damage to the public as a result of this intervention would be delayed a long time in coming but when it came it would be cataclysmic the reality of government disruption of the free market cannot be overemphasized for it is at the heart of our present and future crisis we have savings institutions that are controlled by government at every step of the way federal agencies provide protection against losses and lay down rigid guidelines for capitalization levels number of branches territories covered management policies service is rendered and interest rates charged the additional cost to snls of compliance with this regulation has been estimated by the American Bankers Association at about 11 billion dollars per year which represents a whopping 60 percent of all their profits on top of that the healthy component of the industry must spend over a billion dollars each year for extra premiums into the so-called Insurance Fund to make up for the failures of the unhealthy component a form of penalty for success when some of the healthy institutions attempted to convert to Banks to escape this penalty The Regulators said no their cash flow was needed to support the bailout fund insurance for the Common Man the average private savings deposit is about six thousand dollars yet under the Carter Administration the level of FDI insurance was raised from forty thousand dollars to a hundred thousand dollars for each account those with more than that merely had to open several accounts so in reality the sky was the limit clearly this had nothing to do with protecting the Common Man the purpose was to prepare the way for brokerage houses to reinvest huge blocks of capital at high rates of Interest virtually without risk it was after all insured by the federal government in 1979 Federal Reserve policy had pushed up interest rates and the S L's had to keep Pace to attract deposits by December of 1980 they were paying 15.8 percent interest on their money market certificates yet the average rate they were charging for new mortgages was only 12.9 percent many of their older loans were still crunching away at seven or eight percent and to compound the problem some of those were in default which means they were really paying zero percent the thrifts were operating deep in the red and had to make up the difference somewhere the weakest snls paid the highest interest rates to attract depositors and they are the ones which obtained the large blocks of brokered funds Brokers no longer cared how weak the operation was because the funds were fully insured they just cared about the interest rate on the other hand the SNL managers reasoned that they had to make those funds work miracles for the short period they had them it was their only chance to dig out and they were willing to take big risks or them also the government's insurance program had removed any chance of loss to their depositors so many of them plunged into high profit high risk real estate developments deals began to go sour in 1979 was the first year since the Great Depression of the 1930s that the total net worth of federally insured snls became negative and that was despite expansion almost everywhere else in the economy the public began to worry full faith and credit the protectors in Washington responded in 1982 with a joint resolution of Congress declaring that the full faith and credit of the United States government stood behind the fslic that was a reassuring phrase but many people had the gnawing feeling that somehow we were going to pay for it ourselves and they were right Consumer Reports explained behind the troubled Banks and the increasingly troubled insurance agencies stands the full faith and credit of the government in effect a promise sure to be honored by Congress that all citizens will chip in through taxes or through inflation to make all depositors all the plight of the S L's was dramatically brought to light in Ohio in 1985 when the Home State Savings Bank of Cincinnati collapsed as a result of a potential 150 million dollar loss in a Florida Securities firm this triggered a run not only on the 33 branches of home state but on many of the other snls as well the news impacted International markets where overseas speculators dumped paper dollars for other currencies and some rushed to buy gold within a few days depositors demanding their money caused 60 million dollars to flow out of the state's 130 million dollar insurance fund which true to form for all government protection schemes was terribly inadequate if the Run had been allowed to continue the fund likely would have been obliterated the next day it was time for a political fix on March 15 Ohio governor Richard Celeste declared one of the few bank holidays since the Great Depression and closed all 71 of the state insured thrifts he assured the public there was nothing to worry about he said this was merely a cooling off period until we can convincingly demonstrate the soundness of our system then he flew to Washington and met with Paul volcker chairman of the Federal Reserve board and with Edwin gray chairman of the federal Home Loan Bank board to request federal assistance they assured him it was available a few days later depositors were authorized to withdraw up to seven hundred and fifty dollars from their accounts on March 21st President Reagan calmed the world money markets with assurances that the crisis was over furthermore he said the problem was limited to Ohio this was not the first time there had been a failure of state-sponsored insurance funds the one in Nebraska was pulled down in 1983 when the Commonwealth savings company of Lincoln failed it had over 60 million dollars in deposits but the insurance fund had less than two million dollars to cover not just Commonwealth but the whole system depositors were lucky to get 65 cents on the dollar and even that was expected to take up to 10 years an invitation to fraud in the early days of the Reagan Administration government regulations were changed so that the snls were no longer restricted to the issuance of home mortgages the sole reason for their Creation in the first place in fact they no longer even were required to obtain a down payment on their loans they could now Finance one hundred percent of a deal or even more Office Buildings and shopping centers sprang up everywhere regardless of the need developers Builders managers and appraisers made Millions the field soon became overbuilt and riddled with fraud billions of dollars disappeared into defunct projects in at least 22 of the failed snls there is evidence that the mafia and CIA were involved fraud is not necessarily against the law in fact most of the fraud in the SNL Saga was not only legal it was encouraged by the government the Garn Saint-Germain act allowed the thrifts to lend an amount of money equal to the appraised value of real estate rather than the market value it wasn't long before appraisers were receiving handsome fees for appraisals that were to say the least unrealistic but that was not fraud it was the intent of the regulators the amount by which the appraisal exceeded the market value was defined as appraised equity and was counted the same as capital since the S L's were required to have one dollar in capital for every 33 dollars held in deposits an appraisal that exceeded market value by one million dollars could be used to Pyramid 33 million dollars in deposits from Wall Street Brokerage houses and the anticipated profits from those funds was one of the ways in which the snls were supposed to recoup their losses without the government having to cough up the money which it didn't have in effect the government was saying we can't make good on our protection scheme so go get the money yourself by putting the investors at risk not only will we back you up if you fail we'll show you exactly how to do it The Fallout begins in spite of the accounting gimmicks which were created to make The Walking Dead snells look healthy by 1984 The Fallout began the fslic closed one institution that year and arranged for the merger of 26 others which were insolvent in order to persuade healthy firms to absorb insolvent ones the government provides cash settlements to compensate for the liabilities by 1984 these subsidized mergers were costing the FDIC over 1 billion dollars per year yet that was just the small beginning between 1980 and 1986 a total of 664 insured snls failed government Regulators had promised to protect the public in the event of losses but the losses were already far beyond what they could handle they could not afford to close down all the insolvent thrifts because they simply didn't have enough money to cover the payout in March of 1986 the fslic had only three cents for every dollar of deposits by the end of that year the figure had dropped to two tenths of a penny for each dollar insured obviously they had to keep those thrifts in business which meant they had to invent even more accounting gimmicks to conceal the reality postponement of the inevitable made matters even worse keeping the snls in business was costing the fslic 6 million dollars per day by 1988 two years later the thrift industry as a whole was losing 9.8 million dollars per day and the unprofitable ones the corpses which were propped up by the fslic were losing 35.6 million dollars per day and still the game continued by 1989 the fslic no longer had even two tenths of a penny for each dollar insured its reserves had vanished altogether like the thrifts it supposedly protected it was itself insolvent and looking for loans it had tried offering Bond issues but these fell far short of its needs Congress had discussed the problem but it failed to provide new funding the collapse of Lincoln's savings brought the crisis to a head there was no money period the fed usurps the role of Congress in February an agreement was reached between Alan Greenspan chairman of the Federal Reserve board and M Danny wall chairman of the federal Home Loan Bank board you have 70 million dollars of bailout funding for Lincoln savings come directly from the Federal Reserve this was a major break in precedent historically the FED has served to create money only for the government or for banks if it were the will of the people to bail out a savings institution then it is up to Congress to approve the funding if Congress does not have the money or cannot borrow it from the public then the FED can create it out of nothing of course and give it to the government but in this instance the Fed was usurping the role of Congress and making political decisions entirely on its own there is no basis in the Federal Reserve Act for this action yet Congress remained silent apparently out of collective guilt for its own paralysis finally in August of that year Congress was visited by the ghost of FDR and sprang into action it passed the financial institution's reform and Recovery Act firia and allocated a minimum of 66 billion dollars for the following 10 years 300 billion dollars over 30 years of this amount 225 billion dollars was to come from taxes or inflation and 75 billion dollars was to come from the healthy snls it was the biggest bailout ever bigger than the combined costs for Lockheed Chrysler Penn Central and New York City in the process the fslic was eliminated because it was hopelessly insolvent and replaced by the savings Association Insurance Fund also created was the banking Insurance Fund for the protection of commercial Banks and both are now administered by the FDIC as is often the case when previous government control fails to produce the desired result the response of Congress is to increase the controls four entirely new layers of bureaucracy were added to the existing Tangled mess the resolution trust oversight board to establish strategies for the RTC the resolution funding Corporation to raise money to operate the RTC the office of thrift supervision to supervise Thrift institution even more than they had been and the oversight board for the home loan Banks the purpose of which remains vague but probably is to make sure that the S L's continue to serve the political directive of subsidizing the home industry when President Bush signed the bill he said this legislation will safeguard and stabilize America's Financial system and put in place permanent reforms so these problems will never happen again moreover it says to tens of millions of savings and loan depositors you will not be the victims of others mistakes we will see guarantee that your insured deposits are secure [Music] the estimates are slightly wrong by the middle of the following year it was clear that the 66 billion dollar funding would be greatly inadequate treasury spokesman were now quoting a hundred and thirty billion dollars about twice the original estimate how much is a hundred and thirty billion dollars in 1990 it was 30 percent more than the salaries of all the school teachers in America it was more than the combined prophets of all the Fortune 500 industrial companies it would send 1.6 million students through the best four-year colleges including room and board and the figure did not even include the cost of liquidating the huge backlog of thrifts already seized nor the interest that had to be paid on borrowed funds within only a few days of the announced increase the treasury again revised the figure upward from 130 billion dollars to a hundred and fifty billion dollars as treasury secretary Nicholas Brady told the Press no one should assume that the estimates won't change they will indeed the estimates continued to change with each passing week the government had sold or merged 223 insolvent thrifts during 1988 and had given grossly inadequate estimates of the cost financiers such as Ronald Pearlman and the Texas investment partnership called Temple Inland Incorporated picked up many of these at Fantastic Bargains especially considering that they were given cash subsidies and tax advantages to sweeten the deal at the time Danny wall who was then chairman of the federal Home Loan Bank board announced that these deals took care of the worst Thrift problems he said the cost of the bailout was 39 billion dollars The Wall Street Journal replied wrong again the new study the compilation of audits prepared by the Federal Deposit Insurance Corporation indicates that the total cost of the so-called class of 88 will be 90 billion dollars to 95 billion dollars including tax benefits granted the buyers and a huge amount of interest on government debt to help Finance this assistance but the 1988 Thrift rescue's most expensive flaw doesn't appear to be the enrichment of tycoons rather it's that none of the deals ended or even limited the government's exposure to mismanagement by the new owners hidden losses on real estate in the past or the vicissitudes of the real estate markets in the future and some of the deals appear to be sham transactions in which failing thrifts were sold to failing thrifts which are failing all over again although the thrifts proved to be in far worse shape than the bank board estimated Mr wall defends his strategy for rescuing them with open-ended assistance we didn't have the money to liquidate he says when Congress passed Furia the previous year to safeguard and stabilize America's Financial system The Staggering sum of 300 billion dollars was authorized to be taken from taxes and inflation over the following 30 years to do the job now Federal Reserve chairman Alan Greenspan was saying that the true long-term cost would stand at 500 billion dollars an amount even greater than the default of loans to all the third world countries combined the figure was still too low a non-biased private study released by veribank Incorporated showed that when all the hidden costs are included the bill presented to the American people will be about 532 billion dollars the problems that President Bush promised would never happen again were happening again bookkeeping sleight of hand long before this point the real estate market had begun to contract and many mortgages exceeded the actual price for which the property could be sold furthermore Market interest rates had risen far above the rates that were locked into most of the s l loans and that decreased the value of those mortgages the true value of a fifty thousand dollar mortgage that is paying seven percent interest is only half of a fifty thousand dollar mortgage that is earning 14 percent so the Protectors of the public devised a scheme whereby the snls were allowed to Value their assets according to the original loan value rather than their true market value that helped but much more was still needed The Next Step was to create bookkeeping assets out of thin air this was accomplished by authorizing the snls to place a monetary value on community Goodwill with the mere stroke of a pin the referees created 2.5 billion dollars in such assets and the players continued the game then the fslic began to issue certificates of net worth which were basically promises to bail out the ailing s and LS should they need it the government had already promised to do that but by printing it on pieces of paper and calling them certificates of net worth the snls were allowed to count them as assets on their books such promises are assets but since the thrifts would be obligated to pay back any money it received in a bailout those payback obligations should also have been put on the books as liabilities the net position would not change the only way they could count the certificates as assets without adding the offsetting liabilities would be for the bailout promises to be outright gifts with no obligation to ever repay that may be the eventual result but it is not the way the plan was set up in any event the thrifts were told they could count these pieces of paper as capital the same as if the owners had put up their own cash and the game continued the Moment of Truth arrives when the snls have to liquidate some of their Holdings such as in the sale of their mortgages or foreclosed homes to other snls commercial Banks or private parties that is when the inflated bookkeeping value is converted into the true market value and the difference has to be entered into the Ledger as a loss but not in the Never Never Land of socialism where government is the great protector Dennis Turner explains the fslic permits the SNL which sold the mortgage to take the loss over a 40-year period most companies selling an asset at a loss must take the loss immediately only snls can engage in this patent fraud two failing snls could conceivably sell their lowest yielding mortgages to one another and both would raise their net worth this dishonest Accounting in the banking system is approved by the highest regulatory authorities U.S news and World Report continues the commentary today scores of savings and loan associations kept alive mainly by accounting gimmicks continue to post big losses only a fraction of the industry's aggregate net worth comprises hard assets such as mortgage notes intangible assets which include bookkeeping entries such as Goodwill make up nearly all of the industry's estimated net worth of 37.6 billion dollars accounting gimmicks are not fraud we must keep in mind that a well-managed institution would never assume these kinds of risks or resort to fraudulent accounting if it wanted to stay in business for the Long Haul but with Washington setting guidelines and standing by to make up losses a manager would be fired if he didn't take advantage of the opportunity after all Congress specifically said it was okay when it passed the laws these were loopholes deliberately put there to be used Dr Edward Kane explains deception itself doesn't constitute illegal fraud when it's authorized by an accounting system such as the generally accepted accounting principles Gap system which allows institutions to forego recording assets at their true worth maintaining them instead at their inflated value the regulatory accounting principle system in 1982 added even new options to overstate Capital intense speculation such as we observed in these firms is not necessarily bad management at all in most of these cases it was clever management there were clever gambles that exploited not depositors or savers but taxpayers the Press has greatly exaggerated the role of illegal fraud in these matters with much time spent excoriating the likes of Donald Dixon at Vernon essendale and Charles Keating at Lincoln savings true these flops cost the taxpayer well over three billion dollars but all the illegal fraud put together amounts to only about one half of one percent of the total losses so far focusing on that minuscule component serves only to distract from the fact that the real problem is government regulation itself junk bonds are not junk another part of the distraction has been to make it appear that the thrifts got into trouble because they were heavily invested in junk bonds wait a minute what are junk bonds anyway this may come as a surprise but those held by the S L's were anything but junk in fact in terms of risk return ratios most of them were Superior grade Investments to bonds from The Fortune 500 companies so-called junk bonds are merely those that are offered by smaller companies which are not large enough to be counted among the nation's Giants the large reinvestors such as managers of mutual funds and retirement funds prefer to stay with well-known names like General Motors and IBM they need to invest truly huge blocks of money every day and the smaller companies don't have enough to offer to satisfy their needs consequently bonds from most smaller companies are not traded by the large brokerage houses or the bonds division of the New York Stock Exchange they are traded in smaller exchanges or directly between brokers in what is called over-the-counter because they do not have the advantage of being traded in the larger markets they have to pay a higher interest rate to attract investors and for that reason they are commonly called high-yield bonds bonds offered by these companies are derided by some Brokers as not being investment grade yet many of them are excellent performers in fact they have become an important part of the American economy because they are the backbone of new industry the most successful companies of the future will be found among their ranks during the last decade while the Fortune 500 companies were shrinking and eliminating 3.6 million jobs this segment of new industry has been growing and has created 18 million new jobs not all new companies are good Investments the same is true of older companies but the small company sector generally provides more jobs has greater profit margins and pays more dividends than the so-called investment grade companies from 1981 to 1991 the average return on 10-year treasury bills was 10.4 percent the Dow Jones Industrial Average was 12.9 and the average return on so-called junk bonds was 14.1 because of this higher yield they attracted more than 180 billion dollars from Savvy investors some of whom were snls it was basically a new market which was orchestrated by an upstart Michael Milken at the california-based Drexel Burnham Lambert brokerage house Capital Growth without bank loans or inflation one of the major concerns at Jekyll Island in 1910 was the trend to obtain business growth capital from sources other than bank loans here seventy years later the same Trend was developing again in a slightly different form Capital especially for small companies was now coming from bonds which Drexel had found a way to mass Market in fact Drexel was even able to use those bonds to engineer corporate takeovers an activity that previously had been reserved for the Mega investment houses by 1986 Drexel had become the most profitable Investment Bank in the country here was a hundred and eighty billion dollars that no longer was being channeled through Wall Street here was a hundred and eighty billion dollars that was coming from people's savings instead of being created out of nothing by the Banks in other words here was growth built upon real investment not inflation certain people were not happy about it Glenn Yago director of the economic research Bureau and associate professor of management at the State University of New York at Stony Brook explains the problem it was not until high yield Securities were applied to restructuring through deconglomeration and takeovers that hostilities against the junk bond market broke out the high-yield market grew at the expense of Bank debt and high-yield companies grew at the expense of the hegemony of many established firms as Peter pasel noted in the New York Times the impact was first felt on Wall Street where sharp elbows and a working knowledge of computer spreadsheets suddenly counted more than a nose for dry sherry or membership in skull and bones the first line of attack on this new market of high-yield bonds was to call them junk the word itself was powerful the financial media picked it up and many investors were frightened away The Next Step was for compliant politicians to pass a law requiring snls to get rid of their junk supposedly to protect the public that this was a hoax is evident by the fact that only five percent ever held any of these bonds and their Holdings represented only 1.2 percent of the total s L's assets furthermore the bonds were performing satisfactorily and were a source of much needed Revenue nevertheless the financial institutions reform and Recovery Act which was discussed previously was passed in 1989. it forced snls to liquidate at once their junk bond Holdings that caused their prices to plummet and the thrifts were even further weakened as they took a loss on the sale Jane Ingraham comments overnight profitable snls were turned into government-owned basket cases in the hands of the resolution trust Corporation RTC you add to the disaster the RTC itself which became the country's largest owner of junk bonds flooded the market again with 1.6 billion dollars of its Holdings at the Market's bottom in 1990 so it was the government itself that crashed the junk bond market not Michael Milken although the jailed Milken and other former officials of Drexel Burnham Lambert have just agreed to a 1.3 billion dollar settlement of the hundreds of lawsuits brought against them by government Regulators aggrieved investors and others demanding Justice incidentally these bonds have since recovered and had the snls been allowed to keep them they would be in better Financial condition today and so would be the RTC with the California upstarts out of the way it was a simple matter to buy up the detested bonds at bargain prices and to bring control of the new market back to Wall Street the New York firm of Solomon Brothers for example one of Drexel's most severe critics during the 1980s went on to become a leading Trader in the market Drexel created real problem is government regulation so the real problem within the Savings and Loan industry is government regulation which has insulated it from the free market and encouraged it to Embark upon unsound business practices as the Wall Street Journal stated on March 10 1992 if you're going to wreck a business the size of the U.S Thrift industry you need a lot more power than Michael Milken ever had you need the power of national political Authority the kind of power possessed only by regulators and Congress whatever hold Milken or junk bonds may have had on the snls it was nothing compared with the interventions of Congress at the time this book went to press the number of snls that operated during the 1980s had dropped to less than half as failures mergers and conversion into Banks continue the number will decline further those that remain fall into two groups those that have been taken over by the RTC and those that have not most of those that remain under private control and that is a relative term in view of the regulations they endure are slowly returning to a healthy State as a result of improved profitability asset quality and capitalization the RTC run organizations on the other hand continue to hemorrhage due to failure by Congress to provide funding to close them down and pay them off losses from this group are adding 6 billion dollars per year to the ultimate cost of bailout President Clinton was asking Congress for an additional 45 billion dollars and hinting that this should be the last bailout but no promises the game continues Congress is paralyzed with good reason Congress seems disinterested and paralyzed with inaction one would normally expect dozens of politicians to be calling for a large-scale investigation of the ongoing disaster but there is hardly a peep the reason becomes obvious when one realizes that Savings and Loan associations Banks and other federally regulated institutions are heavy contributors to the election campaigns of those who write the regulatory laws a thorough public investigation would undoubtedly turn up some cozy relationships that the legislators would just as soon keep confidential the second reason is that any honest inquiry would soon reveal the shocking truth that Congress itself is the primary cause of the problem by following the Socialist path and presuming to protect or benefit their constituency they have suspended and violated the natural laws that drive a free market economy in so doing they created a Frankenstein monster they could not control the more they tried to tame the thing the more destructive it became as Economist Hans sinholz has observed the real cause of the disaster is the very Financial structure that was fashioned by the legislators and guided by Regulators they together created a cartel that like all other monopolistic concoctions is plain Mischief with its victims a cartel within a cartel senholtz has chosen exactly the right word cartel the Savings and Loan industry is really a cartel within a cartel it could not function without Congress standing by to push unlimited amounts of money into it and conquerors could not do that without the banking cartel called the Federal Reserve System standing by as the lender of Last Resort to create money out of nothing for Congress to borrow this comfortable Arrangement between political scientists and monetary scientists permits Congress to vote for any scheme it wants regardless of the cost if politicians try to raise that money through taxes they would be thrown out of office but being able to borrow it from the Federal Reserve System upon demand allows them to collect it through the hidden mechanism of inflation and not one voter in a hundred will complain the thrifts have become the illegitimate half-breed Children of the creature and that is why the Savings and Loan story is included in this study if America is to survive as a free Nation her citizens must become far more politically educated than they are at present as a people we must learn not to reach for every political carrot dangled in front of us as desirable as it may be for everyone to afford a home we must understand that government programs pretending to make that possible actually wreak havoc with our system and bring about just the opposite of what they promise after 60 years of subsidizing and regulating the Housing Industry how many young people today can afford a home tinkering with the laws of supply and demand plus the hidden tax called inflation to pay for the tinkering has driven prices beyond the reach of many and has wiped out the down payments of others without such costs common people would have much more money in purchasing power than they do today and homes would be well within their reach summary our present day problems within the Savings and Loan industry can be traced back to the Great Depression of the 1930s Americans were becoming impressed by the theories of socialism and soon embraced the concept that it was proper for government to provide benefits for its citizens and to protect them against economic hardship under the Hoover and Roosevelt administration's new government agencies were established which purported to protect deposits in the snls and to subsidize home mortgages for the middle class these measures distorted the laws of supply and demand and from that point forward the Housing Industry was moved out of the free market and into the political Arena once the pattern of government intervention had been established there began a long unbroken series of federal rules and regulations that were the source of windfall profits for managers appraisers Brokers developers and Builders they also weakened the industry by encouraging unsound business practices and high-risk Investments when these Ventures failed and when the value of real estate began to drop many snls became insolvent the federal Insurance Fund was soon depleted and the government was confronted with its own promise to bail out these companies but not having any money to do so the response of The Regulators was to create accounting gimmicks whereby insolvent thrifts could be made to appear solvent and thus continue in business this postponed the inevitable and made matters considerably worse the failed essendales continued to lose billions of dollars each month and added greatly to the ultimate cost of bailout all of which would eventually have to be paid by the common man out of taxes and inflation the ultimate cost is estimated at over one trillion dollars Congress appears to be unable to act and is strangely silent this is understandable many representatives and senators are the beneficiaries of generous donations from the snls but perhaps the main reason is that Congress itself is the main culprit in this crime in either case the politicians would like to talk about something else in the larger view the SNL industry is a cartel within a cartel Fiasco could never have happened without the cartel called the Federal Reserve System standing by to create the vast amounts of bailout money pledged by Congress chapter 5. nearer to the heart's desire the 1944 meeting in Bretton Woods New Hampshire at which the world's most prominent socialists established the international monetary fund and the World Bank as mechanisms for eliminating gold from World Finance the hidden agenda behind the IMF World Bank revealed as the building of world socialism the role of the Federal Reserve in bringing that about as we have seen the game called bailout has been played over and over again in the rescue of large corporations domestic Banks and Savings and Loan institutions the pretense has been that these measures were necessary to protect the public the result however has been just the opposite the public have been exploited as billions of dollars have been expropriated through taxes and inflation the money has been used to make up losses that should have been paid by the failing Banks and corporations as the penalty for mismanagement and fraud while this was happening in our hometown Stadium the same game was being played in the international Arena there are two primary differences one is that the amount of money at stake in the international game is much larger through a complex tangle of bank loans subsidies and grants the Federal Reserve is becoming the lender of Last Resort for virtually the entire planet the other difference is that instead of claiming to be Protectors of the public the players have emblazoned across the backs of their uniforms saviors of the world Bretton Woods an attack on gold the game began at an international meeting of Finance years politicians and theoreticians held in July of 1944 at the Mount Washington hotel in Bretton Woods New Hampshire officially it was called the United Nations monetary and financial conference but is generally referred to today as simply the Bretton Woods conference two International agencies were created at that meeting the international monetary fund and its sister organization the International Bank for reconstruction and development commonly called the World Bank the announced purposes of these organizations were admirable the World Bank was to make loans to war-torn and underdeveloped Nations so they could build stronger economies the international monetary fund IMF was to promote monetary cooperation between nations by maintaining fixed exchange rates between their currencies but the method by which these goals were to be achieved was less admirable it was to terminate the use of gold as the basis of international currency exchange and replace it with a politically manipulated paper standard in other words it was to allow governments to escape the discipline of gold so they could create money out of nothing without paying the penalty of having their currencies drop in value on world markets prior to this conference currencies were exchanged in terms of their gold value and the arrangement was called the gold exchange standard this is not the same as a gold standard in which a currency is backed by gold it was merely that the exchange ratios of the various currencies most of which were not backed by gold were determined by how much gold they could buy in the open market their values therefore were set by supply and demand politicians and bankers hated the arrangement because it was beyond their ability to manipulate in the past it had served as a remarkably efficient mechanism but it was a strict disciplinarian as John Kenneth Galbraith observed the Bretton Woods Arrangements sought to recapture the advantages of the gold standard currencies that were exchangeable at stable and predictable rates into gold and thus at stable and predictable rates into each other and this is sought to accomplish while minimizing the pain imposed by the gold standard on countries that were buying too much selling too little and thus losing gold the method by which this was to be accomplished was exactly the method devised on Jekyll Island to allow American Banks to create money out of nothing without paying the penalty of having their currencies devalued by other Banks it was the establishment of a world Central Bank which would create a common Fiat money for all nations and then require them to inflate together at the same rate there was to be a kind of International Insurance Fund which would rush that Fiat money to Any Nation that temporarily needed it to face down a run on its currency it wasn't born with all these features fully developed just as the Federal Reserve wasn't fully developed when it was born that nevertheless was the plan and it was launched with all the structures in place the theoreticians who drafted this plan were the well-known Fabian socialist from England John Maynard Keynes and the assistant Secretary of the U.S treasury Harry Dexter White the Fabian Society the fabians originally were an elite group of intellectuals who formed a semi-secret society for the purpose of bringing socialism to the world whereas Communists wanted to establish socialism quickly through violence and Revolution the fabians preferred to do it slowly through propaganda and legislation the word socialism was not to be emphasized instead they would speak of benefits for the people such as welfare Medical Care higher wages and better working conditions in this way they planned to accomplish their objective without Bloodshed and even without serious opposition they scorned the Communists not because they disliked their goals but because they disagreed with their methods to emphasize the importance of gradualism they adopted the turtle as the symbol of their movement the three most prominent leaders in the early days were Sydney and Beatrice Webb and George Bernard Shaw a stained glass window in the Beatrice Webb house in Surrey England is especially enlightening across the top appears the last line from Omar khayyam dear love Cuts thou and I with fate conspire to grasp this sorry scheme of things entire Would we not shatter it to bits and then re-mold it nearer to the heart's desire beneath the line re-mold it nearer to the heart's desire the mural depicts Shaw and Webb striking the Earth with hammers across the bottom the masses kneel in worship of a stack of books advocating the theories of socialism thumbing his nose at the docile masses is H.G Wells who after quitting the fabians denounced them as the new machiavellians the most revealing component however is the Fabian Crest which appears between Shaw and Webb it is a wolf in sheep's clothing communist moles Harry Dexter white was America's Chief technical expert and the dominant Force at the conference he eventually became the first executive director for the United States at the IMF an interesting footnote to this story is that white was simultaneously a member of the Council on Foreign Relations CFR and a member of a communist Espionage ring in Washington while he served as assistant Secretary of the Treasury and even more interesting is that the White House was informed of that fact when President Truman appointed him to his post the FBI had transmitted to the White House detailed proof of White's activities on at least two separate occasions serving as the technical secretary at the Bretton Woods conference was Virginia's Frank Coe a member of the same Espionage ring to which white belonged Co later became the first Secretary of the IMF