IV. The Federal Reserve Conspiracy

America's Unknown Enemy: Beyond Conspiracy

Editorial Staff of the
American Institute for Economic Research


One recent form of the allegation that the Federal Reserve System aggrandizes the private bankers at the public's expense turns on the fact that the 12 Federal Reserve banks are owned by the private member banks of the Federal Reserve System. By implication or assertion, the charge is made that the private bankers as owners of the U.S. central bank, the Federal Reserve System -- have controlled and continue to control U.S monetary policy and regulation to enrich themselves.

Dozens of publications assert much more. They charge that both the Federal Reserve System and the bankers who own stock in Federal Reserve banks are key elements in a grand conspiracy among a few elite to control the world. They hold that the Federal Reserve System was the plan of an illegal secret conspiracy aimed at controlling the Nation's money and credit policies in order to virtually dictate the course of events -- to start wars, to induce recessions and depressions, and to create money and debt -- all of which would enhance the power of and increase the profits of the manipulators in charge.

Long-time followers of our work will know that our research suggests that today's grave monetary and economic problems are largely attributable to actions taken since the founding of the Federal Reserve System. We also have declared many times that leading private bankers have used their great influence with central bankers and politicians to obtain adoption of monetary policies and banking laws that were in the bankers' immediate interest but against the long-run public interest and that of the bankers, too.

Nevertheless, we point out that allegations that a secret conspiracy illegally directed formation of the Federal Reserve -- and continues to control it -- disregard some pertinent events: (1) Years before the Federal Reserve System was formed, Supreme Court decisions had given Congress virtually total power over the U.S. monetary system and that power was used to advance easy-credit, fiat-money interests. (2) The Federal Reserve bill was openly debated in Congress and before the American public, and it was passed with broad bipartisan support (however misguided) in a political and social climate that strongly favored the creation of a central bank. (3) The power of the member banks as stockholders of the Federal Reserve banks is narrowly circumscribed by the terms of the Federal Reserve Act; thus, the influence of bankers on U.S. monetary policy is via some avenue other than the little-known fact of their stock ownership in the Federal Reserve banks.

Although there is a reasonable basis for doubting the Constitutionality of fiat money, by the time the Federal Reserve plan was conceived the Supreme Court had long ruled that Congress did indeed have Constitutional power to control the monetary system of the United States. Congress had passed Legal Tender Acts in 1862, 1863, 1864, and 1865 as wartime measures, and additional acts in 1878 and 1890 as peacetime legislation. According to these acts, non-interest-bearing legal-tender notes issued by the United States were declared "lawful money and a legal tender in payment of all debts, public and private, within the United States." Initially such notes were not legal tender in payment of duties on imports or on Government interest-bearing obligations, but by 1890 these exceptions had been eliminated.

The Supreme Court ruled on the Constitutionality of these Acts in three landmark cases: Hepburn v. Griswold (1870); Knox v. Lee (1871); and Juilliard v. Greenman (1884). Although in Hepburn v. Griswold the Court first ruled against Congress's authority to issue fiat money, as soon as the Court's membership changed, it reversed the ruling. As a result of rulings in Knox v. Lee and Juilliard v. Greenman the power exercised by Congress in authorizing issues of legal-tender notes was a legitimate power in both wartime and peacetime. The nearly unanimous (8 to 1) 1884 decision granted Congress sweeping powers to regulate virtually all monetary issues. Thus Congress had already taken many easy-money steps before it passed the Federal Reserve Act in 1913. The Constitutionality of the Act was upheld in Raichie v. Federal Reserve Bank of New York on July 15, 1929. One can today continue to maintain, we grant, that the Supreme Court's decision was innocently or malevolently contrary to the Constitution, but that decision settled the issue according to the legal procedures of the Nation.

Behind-the-Scenes Collaboration

Although it is true that several years before the Federal Reserve bill came before Congress a group of politicians and bankers had met privately to formulate plans for a central banking system, the Federal Reserve Act itself was not passed clandestinely. Conspiracy theorists make much of the "secret" meeting held on Jekyll Island, Georgia in November 1910 as evidence that a conspiracy lay behind the Federal Reserve plan. Consider, for example, the financial reporter B.C. Forbes's account: "Picture a party of the nation's greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily hieing 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 learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance."

According to this scenario, the banking houses of 3. P. Morgan and of Kuhn, Loeb and Company - in concert with the Rockefeller "Standard Oil group" at National City Bank - bought influence in Congress and invested in the career of Presidential hopeful Woodrow Wilson in order to secure legislation favorable to their conspiratorial designs. The details of this plot, which resulted in the Federal Reserve System and thereby delivered control of the Nation's money into the hands of the conspirators, allegedly were hatched at the Jekyll Island ultra-secret meeting. The chief figures at this clandestine gathering were: Senator Nelson Aldrich (Nelson Rockefeller's namesake), who was then the head of the National Monetary Commission; Frank Vanderlip, president of the National City Bank of New York; Henry P Davison, senior partner of J. P Morgan Company; Charles D. Norton, president of the First National Bank of New York; Paul Warburg of Kuhn, Loeb and Company (he was the principal author of the draft of the Federal Reserve bill); and Col. Edward Mandel House (he would become President Woodrow Wilson's closest advisor, even though without official title). Especially sinister implications are often drawn in conspiracy literature from the biographies of two of the participants. Paul Warburg, a Jew who emigrated to the United States from Germany in 1904, was the brother of Felix Warburg, also of Kuhn, Loeb, and of the international bankers Max and Fritz Warburg of Germany. Col. House, on the other hand, was a Texan "connected" to the London banking establishment by virtue of his father's Civil War exploits as a blockade runner for the Confederacy. But his greater notoriety derived from a novel he had written the year before Wilson was elected President. That novel, titled Philip Dru, Administrator, ostensibly endorsed "a detailed plan for the future government of the United States" which "would establish Socialism as dreamed by Karl Marx." In conspiracy literature, these men are condemned on the basis of these relationships. Admittedly, the relationships provided opportunity for scheming, but "nonbelievers" are not likely to be persuaded by such circumstantial evidence.

The Jekyll Island meeting was indeed convened in secret, but it did not remain a secret for long. And although the imagery of the supposed intrigues on Jekyll Island may be fully consistent with what would be expected of powerful personalities, there is no verifiable evidence that any activities at that meeting constituted conspiracy or fraud. Unquestionably, a draft of legislation - or at least the broad outlines - for a U.S. central bank was drawn there; participants in the meeting subsequently acknowledged and celebrated their "achievement." For example, Frank Vanderlip recalled in his autobiography, "Our secret expedition to Jekyll Island was the occasion of the actual conception of what eventually became the Federal Reserve System. The essential points ... were all contained in the Federal Reserve Act as it was passed."

There was and is nothing illegal about collaboration of this type -- that is, collaboration among interested parties. Allegations that "much of the influence exerted to get the Federal Reserve Act passed was done behind the scenes, principally by two shadowy, non-elected persons: The German immigrant, Paul Warburg, and Colonel Edward Mandel House of Texas" describe the way the American legislative process often has worked. Somebody behind the scenes initiates an idea or a working draft that subsequently is publicly debated, revised, and either rejected or adopted.

Open Debate Followed

One could justifiably say that debate on the Federal Reserve bill was more open and less restrained than previous debates on money and banking issues. Many supporters of the Federal Reserve Act plainly viewed it as a vehicle for reducing the abused power of "Eastern bankers." Speaking in favor of the bill in December 1913, Senator Robert Owen of Oklahoma became short with those who wanted the issue studied some more:

Mr. President, not only has this matter, therefore, been considered during the last five years, but during the summer before last, beginning in May, 1912, there was a very careful examination made by one branch of the Committee on Banking and Currency of the House of Representatives' under the management of Mr. Pujo, acting as chairman of that subcommittee of the Committee on Banking and Currency of the House of Representatives, into the so-called Money Trust. It was a very remarkable investigation, covering several thou-sand pages of printed matter, with a most illuminating report, prepared under the direction of the committee and drafted by one of the ablest and most patriotic men in the United States -- Samuel Untermyer, of New York --showing that a fraction over a hundred men exercised dominating control over property amounting to $22,000,000,000, an unthinkable sum, practically a third of the national wealth, excluding the land of the country.

The Pujo examination verified what was generally well understood, that so far had the concentration of financial and commercial power proceeded in this country that a handful of men exercised practically commercial and financial supremacy over the people of the United States; that they could at their will shake the foundations of the country; that they could at their pleasure cause not only stringency, but, what is far more dangerous, could carry those stringencies of credit to a point of absolute and overwhelming panic that could close the doors of the banks of this country from the Atlantic to the Pacific in a single day.

I shall not pretend to believe for one moment that the panic of 1907 was an accident. It is a long story. I cannot at this time go into that story but I profoundly believe that the result in October, 1907, was a part of a concerted plan by which a few men did two things, first, enriched themselves on the one hand at the expense of the Nation, and administered what they conceived to be a terrifying political rebuke to the administration then in power.

I have always contended that a drastic congressional investigation of this panic should have been made and its promoters and beneficiaries exposed to full public view.

The Pujo investigation did not end this inquiry into our banking system. The chairman of another branch of the Committee on Banking and Currency of the House of Representatives, Mr. Glass, of Virginia, who is justly entitled to very great credit in preparing and helping to perfect this bill, began the consideration of the question with a view to framing a bill to afford adequate remedy to this country against the exercise of individual unrestrained and irresponsible power over the businessmen of this country. That Committee patiently heard the representatives of the great banking institutions of the country, of the great commercial houses of the country, of financial experts, and their investigations were printed in a volume of over 700 printed pages.

Nor was that the end of the investigation. I refer to these investigations because it has been given out to the country in various ways that the Congress of the United States was dealing with this matter with extreme haste, that Congress was rushing through a measure affecting the interests of the country without suitable inquiry or examination. I remind Senators that when the Aldrich bill was proposed to be submitted to the Senate the very men who recently have said "do not be in haste" were at that time urging haste on a proposal which would have concentrated in private hands the control of the credit system of the United States.

But this was not all. In addition to the investigation of the Monetary Commission, the investigation of the Pujo committee, of the Glass committee, numerous hearings were extended to representatives of the American Bankers' Association by those who were charged with the duty of making a preliminary draft for the consideration of their colleagues, and when these hearings had been much extended finally there was a preliminary draft made of this bill.

But before it was ever submitted it was considered by many thoughtful, careful men, various amendments suggested, various amendments made, and finally it was brought into the Committee on Banking and Currency of the House of Representatives and there discussed. It was afterwards discussed in the Democratic conference of Members of the House of Representatives, and finally came to this body on the 18th of September last. But before it came here the members of the Banking and Currency Committee of the Senate had been giving this matter attention, had been studying it, had been considering it, and they began their formal hearings on the 2nd of September last. Sixteen days before the bill reached the Senate they began to take evidence upon this question, and finally concluded the taking of evidence on the 25th of October, and submitted it to the Senate in three volumes, including something over 3,200 printed pages of matter. We heard at length the representatives of the banks, the representatives of business interests, of credit associations, of clearing houses, of financial experts, and of interested citizens not claiming to be experts. The committee, with great patience and industry, gave a careful consideration to various groups of people, and finally submitted to the Senate as a Senate document these hearings.

So, Mr. President, it is impossible for anyone to contend that the Congress of the United States has not given this matter the most infinite pains and considerate care.[1]

Others concerned about the power of the banking establishment opposed the bill. Consider, for example, the dissenting remarks made in Senate debate by Senator Stone: "The great banks for years have sought to have and control agents in the Treasury to serve their purposes. ...There are bankers of this country who are enemies of the public welfare. In the past, a few great banks have followed policies and projects that have paralyzed the industrial energies of the country to perpetuate their tremendous power over the financial and business industries of America."[2]

Legislators were keenly aware of the enormous power of private bankers. Unquestionably, the banking lobby constituted a powerful interest group, and unquestionably it exerted great pressure (financial and otherwise) on individual legislators. Nonetheless, the Federal Reserve Act went through the full legislative process. Compared with what was perceived about the power and narrow interests of bankers, the secretive matters seem of little consequence.

In its final form, the Federal Reserve Act represented a compromise among three political groups. Most Republicans (and the Wall Street bankers) favored the Aldrich Plan that came out of Jekyll Island. Progressive Democrats demanded a reserve system and currency supply owned and controlled by the Government in order to counter the "money trust" and destroy the existing concentration of credit resources in Wall Street. Conservative Democrats proposed a decentralized reserve system, owned and controlled privately but free of Wall Street domination. No group got exactly what it wanted. But the Aldrich plan more nearly represented the compromise position between the two Democrat extremes, and it was closest to the final legislation passed. (See "The Original Federal Reserve Act" box on the preceding page.)

With few exceptions, virtually all political factions favored some form of central bank. Their lack of political and monetary wisdom was prophetically voiced by only a few stalwart dissenters. One was Senator Elihu Root, who feared the inflationary consequences of a central bank and spoke vainly against the bill. His Senate remarks are reproduced in the box on the following page.

Ownership and Control Separated

As for the suggestion that stock ownership of the Federal Reserve banks by their private member banks confers control of U.S. monetary policy to the bankers, the ownership simply does not do so. Six of the nine directors of the Federal Reserve bank must not be bankers or stockholders of the member banks. Member banks elect six of the Reserve bank's directors, only three of whom can be bankers or bank stockholders. The Board of Governors of the Federal Reserve System appoints the other three directors, all of whom must not be bankers or stockholders. In turn, the President of the United States appoints and Congress confirms the seven members of the Federal Reserve Board of Governors, whose terms are staggered and run for 14 years. This reduces the chance that any one President can load the Board with people whose first loyalty might be to the President's political interests.

As for the Nation's monetary policies, the Federal Reserve today affects money-credit conditions primarily through its "open-market operations," that is, its decisions to buy or sell debt securities (mainly those of the U.S. Government or Federal agencies but by law they could be issued by foreign governments).[3] Purchases of securities by the Fed increase the available reserves in the private banking system, which enables the private banks to expand their loans and investment. Credit conditions thus are "eased," all other conditions unchanged. When the Fed sells securities from its portfolio, credit conditions are "tightened."

Of course private bankers prefer "easier" Fed policy so that the bankers can increase their loans and investments in order to raise their profits. But open market policy is determined not by the member banks but by the Federal Open Market Committee (FOMC). Its membership is the seven members of the Board of Governors and five presidents of the Federal Reserve banks, one of whom is the New York Fed president. The other four presidential places on the FOMC are rotated among the remaining eleven Federal Reserve banks.

By legal structure, then, the private bankers do not determine the Federal Reserve's monetary policy. If they do determine it by virtue of their influence with the FOMC members (gained from deserved respect or feared financial clout), that is a problem unrelated to the fact that member banks own the Federal Reserve banks. If the U.S. central bank were wholly owned by the Federal Government, some private bankers still would have more influence on policy than other bankers and the great majority of Americans.

Also contrary to conspiracy contentions, the private member banks are not making huge profits from owning stock of the Federal Reserve banks. The Federal Reserve Act prohibits the payment of more than a 6 percent dividend on the stock of the Federal Reserve banks, and by recent standards, 6 percent is a fairly modest rate of return. Net earnings of the Reserve banks in excess of the dividends and any additions to the Reserve banks' capital surplus, in order to keep the surplus equal to paid-in capital, are paid annually to the U.S. Treasury as "interest on Federal Reserve notes." In fiscal year 1985, the Federal Reserve banks paid a total of $17.8 billion to the Treasury, 173 times more than the $103.0 million paid to the member banks as dividends in 1985.

The Path to Easy Money

When the Federal Reserve System was created, informed, well-intentioned persons could reasonably have supported it. Although Senator Root plainly expected that the Federal Reserve would be inflationary, his remarks also reveal that bankers' abuses and inflationary excesses often occurred when there was no central bank. Furthermore, the original Federal Reserve Act contained some provisions that proscribed inflationary excesses. One was that the Federal Reserve banks were required to hold reserves in gold of not less than 40 percent of the amount of their Federal Reserve notes (paper currency) outstanding, and the public could demand redemption in gold for any Federal Reserve notes held.

Another legislated safeguard was that the balance ot notes outstanding that was not secured by gold had to be secured by the pledge of "...notes, drafts, bills of exchange arising out of actual commercial transactions..." that were rediscounted by those banks. Such notes, drafts, and bills of exchange were short-term, self-liquidating promissory notes reflecting the movement of goods to the markets for sale. When held by the central bank, these instruments represented a claim on outstanding purchasing media: repayment of the loans represented by such instruments involved the removal from circulation of an equal amount of purchasing media that the borrowers had acquired as things were sold. This arrangement was intended to promote dynamic balance between the dollar value of gold and other products offered in the markets, on the one hand, and the amount of purchasing media available to bid for the gold and other products on the other hand.

The gold provisions both enhanced the domestic and international acceptability of the purchasing media and established an upper limit to the amount of the Federal Reserve notes that could be issued, given the stock of gold held by the central bank. Within that upper limit, the provision requiring backing by rediscounted trade paper provided a means by which the volume of paper currency could expand and contract in accordance with the sustainable needs of business and agriculture.

Purchasing media comprised checking accounts in commercial banks as well as paper currency. However, with checking accounts redeemable in currency and with currency redeemable in gold, total purchasing media reflected the gold-convertible limitations of the aforementioned provisions of the original Federal Reserve Act.

These were useful provisions because they set limits to the Federal Reserve's inflationary actions. But over the years whenever the limiting features of the Federal Reserve Act began to pinch, the Congress amended the Act in order to permit continuation of "easy" money-credit conditions in the mistaken attempt to stimulate economic activity in the short run. So, true to history, government (no doubt egged on by the bankers) has continually promoted a "little more" inflating. Now the monetary scene is a mess in the United States and throughout the free world. Clearly the Federal Reserve has played a major part in creating these conditions and thus has demonstrated its uselessness for the purpose of maintaining reliable money.

What were disastrous were the policies of the Federal Reserve (and of the Congress). The unverifiable theory that the Federal Reserve was the product of a bankers' conspiracy seems unessential to the case against the Fed. Indeed, by distracting attention from the significant aspects -- the policies themselves -- conspiracy theory may unwittingly prolong the harmful policies.


A few provisions of the original Federal Reserve Act (it has been amended many times) illustrate its compromise features. It provided for a system of district (regional) Federal Reserve banks (12 districts were formed) and a Federal Reserve Board. The district banks satisfied regional interests and those who opposed Eastern banking influence. Provision for the Federal Reserve Board met the desires of those who perceived a need for a unified central banking structure. The Federal Reserve Board consisted of seven persons: the Secretary of the Treasury and the Comptroller of the Currency as ex officio members, and five members appointed by the President with the advice and consent of the Senate. No more than one of the five could be from any one Federal Reserve district. During the time in office and for 2 years thereafter Federal Reserve Board members were prohibited from holding "any office, position, or employment in any member bank."

Athough owned by the private member banks of its district, each Federal Reserve bank's policies were set by a nine-person Board of Directors. There were three classes of Directors (classes A, B, and C), each class having three persons. To reduce the power of big bankers, the member banks of each district were divided into roughly three equally numbered groups by capitalization size of banks, and each group elected one each of classes A and B Directors. Class A Directors were bank representatives. Class B Directors were from industry, commerce, or agriculture in the district. Class C Directors were designated by the Federal Reserve Board, and two of those three were designated Chairman and Vice Chairman of the Reserve Bank's Board of Directors.

Powers of the Federal Reserve System to affect credit conditions also were shared between the regionalized Federal Reserve banks and the centralized Federal Reserve Board. Every Reserve bank made its own decisions about the volume of loans and investments it would make, but only from those specified as "eligible" by the Act and "under rules and regulations prescribed by the Federal Reserve Board." Every Reserve bank also established its own discount rate (the interest rate it charged its member banks for borrowings), "subject to review and determination of the Federal Reserve Board." Raising the discount rate "tightened" credit conditions; lowering it "eased" credit conditions.


  1. Congressional Record, 63rd Congress, 1st session, I, 513-514, 5992-96, quoted in Documentary History of Banking and Currency in the United States, Hennan E. Krooss, ed., Chelsea House Publishers, 1969, pp.2423-2425.
  2. Eustace Mullins, Secrets of the Federal Reserve, pp.21-22.
  3. For more about the legal structure of the Federal Reserve System and its current policy instruments, we suggest readers consult the pertinent sections of an introductory-level money and banking college textbook.