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
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
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
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.
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."
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
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
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). 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.
THE ORIGINAL FEDERAL RESERVE ACT:
SOME ELEMENTS OF COMPROMISE
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
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.
- 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.
- Eustace Mullins, Secrets
of the Federal Reserve, pp.21-22.
- 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.