The History of the Federal Reserve

Michael J. Ross writes "Money plays a key role in modern life; in fact, for some people, nothing is more important than acquiring more of it. Yet most people do not know what money really is, how it is created, how its supply is expanded and contracted, and who benefits from those changes. In the United States, the central figure in this ongoing drama, is our central bank, the Federal Reserve, whose history, power, and effects are explored in G. Edward Griffin's fascinating book The Creature from Jekyll Island: A Second Look at the Federal Reserve." Read on for the rest of Michael's review. The Creature from Jekyll Island author G. Edward Griffin pages 624 publisher American Media rating 9 reviewer Michael J. Ross ISBN 0912986212 summary A compelling history and indictment of the Federal Reserve system For the citizens of the United States and several Latin American countries, the "coin of the realm" is the US dollar, which is, in simple terms, created by the Federal Reserve, a.k.a., the Fed. But who created the Federal Reserve, and why? The subjects of banking in general, and the Federal Reserve in particular, would be considered by most Americans to be dry, boring, and of little importance to their day-to-day life. But those same people are endlessly fascinated by how to make more money (with minimal effort, such as the lottery), how to spend as little of it as possible (coupons never go out of style), and how to maximize one's investment returns. Why this disconnect? Why do Americans care so little about the origins of that which they spend a third of their time pursuing, and seemingly another third spending?

Some of these "salary slaves" may understand that their money serves as a store of wealth and a medium of commercial exchange, which makes possible their daily financial transactions without the need for bartering. But, for the most part, they do not understand the critical importance of what is backing that money, if anything; how that money comes into existence, and what debt offsets it; what entities control the supply and distribution of that money; and how those changes can be used to legally steal purchasing power from victims who may not be entirely unsuspecting, but do not truly comprehend how they are getting ripped off.

The typical American, if he or she has given any thought to the matter, would consider the following statements to be true: The Federal Reserve is federal, i.e., a part of the US government. The Federal Reserve is a reserve, i.e., it has monetary savings of real value. The Federal Reserve serves the public, and is not a cartel of private banks serving itself. The US dollar has real value, i.e., it represents tangible wealth, such as gold securely stored at Fort Knox. Inflation is an increase in prices. Inflation is caused by greedy companies, not the US government or the Federal Reserve.

As G. Edward Griffin makes clear in his book, none of these beliefs are true — regardless of how well entrenched they are in our conventional "wisdom." He also explains why the US government and the Federal Reserve have their own reasons for being in no hurry to eliminate this ignorance. Yet these topics are just a small portion of what is covered in his far-ranging discussion of the theory and history of money and banking, particularly within the United States.

Spanning 624 pages, the material is organized into 26 chapters, which are grouped into six sections: "What Creature Is This?" (the Federal Reserve's shameful birth, and the shenanigans of the Fed, S&Ls, the IMF, and the World Bank), "A Crash Course on Money" (money, gold, debasement, fiat money, fractional-reserve banking, and money creation), "The New Alchemy" (the Rothschilds, J.P. Morgan, and banker financing of wars and revolutions), "A Tale of Three Banks" (America's failed experiments with central banking, and the American Civil War), "The Harvest" (the unconstitutional creation of the Federal Reserve, and its dreadful effects, including the Crash of 1929), "Time Travel into the Future" (current crises caused by central banking, how they can be reversed, future scenarios, and what the individual can do regardless). Every one of the six sections begins with a brief summary, as does every chapter, with every chapter wrapped up with a more extensive summary.

The section summaries also appear in the table of contents, which precedes a preface and the author's acknowledgments. These are followed by a delightful introduction — a piece from the British humor magazine Punch, comprising a rather telling exchange between an unusually honest banker and a soon-to-be-disillusioned bank customer. The book contains three appendices: a summary of the structure and function of the Federal Reserve system; natural laws of human behavior in economics; and whether the M-1 measure of money is subtractive or accumulative. The author also provides an index, as well as an impressive bibliography, reflecting his extensive research on the topics. In addition, the author invites readers to join Freedom Force, an organization dedicated to increasing liberty in the United States, curbing federal totalitarianism, and abolishing the Federal Reserve — all through peaceful participation in government, and the shaping of public policy starting at the grassroots level.

The Creature from Jekyll Island is published by American Media, under the ISBNs 0912986212 and 978-0912986210. It first came out in July 1994, and is now in its fourth edition, and its 19th printing. It also has Japanese and German editions, published in February 2005 and August 2006, respectively. On the book's Web page, visitors will find testimonials and comments from readers, updates to the book, a review of the book by Jane H. Ingraham of The New American, and G. Edward Griffin's response to a critique of his book by Edward Flaherty, who holds a Ph.D. in Economics. On that Web page, interested readers can order audio cassettes or CDs of the author's lecture, based upon this book, and produced in 1998.

My only criticisms of the book concern not the material itself, but its production — more specifically, the printing and layout, presumably chosen and thus fixable in the future by the publisher. The generous font size used throughout the volume, makes it easy to read; but the bold text, such as the subheads found in every chapter, is a bit rough-edged — on some pages worse than others. The subheads, already bolded, do not need to be in all uppercase; the publisher should choose one or the other. In addition, the inside margin length is a bit too small, forcing the reader to crack open the book more than should be needed, in order to comfortably read the text closest to the binding. In future editions, some of the space in the outer margin could be used to solve the problem, without any change to the words on each page, and thus the length of the book.

But aside from these minor flaws, this book is to be highly recommended. The Creature from Jekyll Island is a remarkably thorough, detailed, and challenging critique of central banking and America's latest incarnation of it, the Federal Reserve. G. Edward Griffin's precision of language, and his interweaving of the major players and their motives, makes for a most compelling historical study.

Michael J. Ross is a Web developer, freelance writer, and the editor of PristinePlanet.com's free newsletter.

You can purchase The Creature from Jekyll Island from amazon.com. Slashdot welcomes readers' book reviews -- to see your own review here, read the book review guidelines, then visit the submission page.

Comments

Another good read...

[dada21]

...and a free e-book download is What has Government done to our money? by the esteemed Murray N. Rothbard.

I've read dozens of books (over 30, for sure) on central banking theory, and none of them have given a completely clear and transparent picture of what the Fed really is, what is does, and what it is supposed to do. In the end, all central banks have one customer: member banks (the banks you and I go to), and the central banks have one policy: save their buddies in the member banks against any malinvestment or market change.

The Fed isn't here to protect the value of OUR money (in fact, since the Fed's creation in 1913, the US dollar is about 95-96% devalued), and it isn't here to protect our investments or savings.

Re:Another good read...

[Anonymous Coward]

Part of the job of the Fed is to increase the money supply at an appropriate rate, since mild inflation tends to be good for the economy and deflation tends to be disastrous.

Add up mild inflation over the course of a century, and yes, you will find that the dollar has lost 95% of its value - but you'll also find the largest, most impressive economic expansion in the history of the world.

Re:Another good read...

[Kadin2048]

I agree with you on some of the dangers of inflation; however, I disagree about the nature of "value" in an asset.

Something can have substantial value, even if it's not the sort of thing you can leave sitting around idle and come back to later.

A tractor has substantial value not in the same way a pile of gold bricks does, but because it performs a function. It represents a potential income stream to a farmer, which is why a farmer might want to own one. Thus the farmer goes to a bank and takes out a loan against the tractor, in order to purchase it. For the bank to make this loan, they want to ensure that the farmer isn't an idiot, and that he'll pay back the value of the tractor either faster than it depreciates (or he has some other assets that won't depreciate as quickly, in order to secure the loan). If they think this is the case, they can then go and create a pile of 'tractor-dollars', dollars that are backed by that tractor. Those dollars only stay in the system until the farmer pays off the loan, and assuming the loan was intelligently made, there should never be more tractor-dollars sloshing around than the tractor is actually worth (either in literal terms or as an income stream).

The same holds true for a factory, or anything else that helps create an income stream. Just because it's not a stable asset doesn't mean it's valueless; as long as you can predict the depreciation, you can still use it as collateral, and if you can use it as collateral, you can use it as the basis for new money. (As long as you trust the government to enforce the lien and let the bank repossess it, of course -- the real basis for debt banking is the threat of force by people with guns.)

I also agree that banks have been supremely irresponsible with their lending practices, but I don't think that full-reserve banking is really the best solution. There are rules that need substantial tightening, but there's nothing inherently wrong with letting a bank use mortgaged assets as part of its reserves, as long as the value of those assets over time is computed, the loans made accordingly, and there's a iron-hard willingness by the government to liquidate those assets in the event of a default by the borrower.

Bah! Who needs history when there's ADVENTURE!

[ScentCone]

No nerdly discussion about the history of money would be complete without a slavish recommendation to read Neal Stephenson's Baroque Cycle. Which, indeed, one should. ADHD raised-on-MTV types needn't bother, but it's pure gold. (+5 self-referental humor!)

You want the negatives on this book?

[brundlefly]

There are plenty. Many people do not consider this book to be a balanced discussion of the subject matter at hand. This type of controversy should be mentioned in any prominent book review.

real value?

[Lord Ender]

...The US dollar has real value, i.e., it represents tangible wealth, such as gold securely stored at Fort Knox.

Gold has almost no real value. You can do very little with it other than make jewelry. Yet, like fiat currency, people have become collectively convinced that it is valuable. Because of this, we spend countless resources digging it up from the ground, then burying it back underground. If we actually started USING the 95% of the worlds gold that wastes away in vaults, the value of gold would be almost nothing due to inflation (19x increase in supply).

Real value is power--the ability to control other people (aka labor). Whether the medium is gold coins or paper money or tootsie pops, what you are trading when you exchange money is labor.

Inflation does not tax the poor: They have no cash savings.
Inflation does not tax the middle class: They keep their assets in real-estate and mutual funds.
Inflation forces everyone else to invest in something, because hoarding money isn't good for the economy.

I'm sick of all the "money is a scam" articles on the internet recently.

Gold Standard == Bad

[brunes69]

The only people who argue for reinstatement of the gold standard are those who do not have a fundamental grasp of macroeconomics. Reinstating gold-backed currency would do several bad things, because it artificially constrains the value of gold as a commodity metal.

Because the value of gold is implicitly tied to the value of a currency, gold can no longer be traded as a commodity in any real sense. As in - if your currency is backed by gold, what happens if the value of gold should go down due to a glut in the production market? Answer is nothing, because it *can't*. If money is backed by gold then you can't logically trade gold separately from money. This means that gold is artificially valued, and the prices of things that use gold would increase for no sound economic reason.

Re:Gold Standard == Bad

[jcr]

The only people who argue for reinstatement of the gold standard are those who do not have a fundamental grasp of macroeconomics.

Oh, please. You do not support your position by proclaiming that your opponents are ignorant.

-jcr

Re:Gold Standard == Bad

[UbuntuDupe]

This is what I don't like about arguments against the gold standard.

The entire disadvantage you just listed as stemming from a gold standard is: "Things requiring gold would be unjustifiably expensive."

That advantage is so bad that no one can support a gold standard unless they "fundamentally misunderstand macroeconomics"?

It's things like this that for so long kept me from understanding the hate for the gold standard. The best arguments against it seemed to be pretty trivial, and yes, that includes the extensive list on Wikipedia.

Think how confusing that must sound: Those who support a gold standard are idiots because they are too dismissive of high prices for items containing gold. Huh?

After a while of wringing out sources for a serious argument, I finally found something more convincing, which is this:

1) Under a gold standard, the (very high) volatility of gold is imposed on the general price level, making it that much harder to plan economic activity, and magnifying negative events.
2) Significant amounts of gold must be held out of production, just for use as money, with signficant opportunity cost.
3) Increasingly huge portions of the economy are diverted to gold production during times of economic growth because that, rather than e.g. cancer cures, have the highest return.

As one who knows...

[Anonymous Coward]

I've been an employee at one of the twelve Federal Reserve Banks for eight years. During employee orientation, they asked us noobs what we knew about the Fed. I was the only one in the room with more than a rudimentary knowledge. They educate the new hires, AND they educate the public. We employees are almost always explaining what the Fed is (or myth-busting assumptions about the Fed).

• The Federal Reserve System is the collective title for the Federal Reserve Board of Governors and the twelve member banks.
  
• The Board of Governors IS a government agency; the district Federal Reserve Banks are not.
  
• The Federal Reserve Banks are owned by member banks in each Federal Reserve District.
  
• Federal Reserve District boundaries were established based on population and economic centers at the time of the Federal Reserve Act (that's why they seem weighted toward the east coast).
  
• The Federal Reserve Board has been given responsibility by Congress to oversee and manage monetary policy, distribute currency, and to ensure depository institution compliance with various regulations.
  
• The Federal Reserve Banks act under delegated authority (from the Board of Governors) to ensure that member banks in their districts comply with regulatory standards and other sound banking practices. This is the function that sends bank examiners (auditors) out to supervised institutions to review bank lending practices, risk portfolios, and overall management. If not for these guys, we never would have had "It's a Wonderful Life" (which features bank examiners as the pseudo-villans).
  
• Each Federal Reserve Bank has its own board, made up of representatives from the banking and business communities within the district. This board, aided by research conducted by the Reserve Banks or within the market, works to understand the local/regional economy. Reserve Banks then bring their views and concerns to the Federal Open Market Committee.
  
• The Federal Open Market Committee (FOMC) is a twelve member board that includes seven members of the Federal Reserve System's Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents from the remaining eleven Reserve Banks (who serve one-year, rotating terms).
  
• Federal Reserve Banks serve as banks to banks, making available overnight loans to cover transfers between institutions, and holding required reserve funds for member banks (reserve funds are cash reserves each member bank must maintain--they were designed to prevent liquidity in the event of a bank-run event like that which occurred in the 1930s).
  
• Federal Reserve Banks conduct community outreach and educational activities, both for bankers and community groups, to educate them regarding pertinent topics, especially the Consumer Reinvestment Act, minority issues and banking, reaching underserved populations.
  
• Federal Reserve Bank employees are not Federal employees.

There's much more I could say, but that's an example of the type of information I pass on to friends and neighbors all the time when they hear that I work "at the Fed."
 
[I'm posting anonymously just in case my employer might think this post violates some policy or other. I don't think it does, because this is public information, but I rather like working here, so I'll play it safe.]

Re:US Dollar and Oil?

[Colin Smith]

Until 15th August 1971, the US dollar was backed by gold. The US was fighting the Vietnam war and spent all the gold paying for the war. Nixon broke the link between the dollar and gold because they couldn't pay the bills in gold any more, they didn't have any.

http://en.wikipedia.org/wiki/Nixon_Shock

The dollar was then simply being printed, unbacked by anything. This increases the supply of dollars and the value falls massively. Huge inflation.

1972-3 Nixon or someone went to the Saudis and "persuaded" them somehow to remain only US dollars in return for oil. No idea what they promised, but it was big. From that point, the US dollar is pretty much backed by OPEC oil. It was denominated in dollars before, but the dollar had been backed by gold, so basically the oil price was based on gold. Not so after 1971.

So. All oil all over the world has to be bought in US dollars... The demand for US dollars (not gold) rockets, all the central banks across the world have to keep reserves on hand so the countries can buy oil. Billions of them. Trillions in total.

Do you see what this does? It does 2 things.

1: America gets paid first for any oil which other countries want to buy. They have to get the requisite number of dollars. And they get paid simply for running a printing press.

2: It allows the USA to print and spend as many dollars as they want to. The demand from outside the country means that inflation can't take off. The entire world is subsidising the US economy.

Now... 35 years later, there are trillions of US dollars out there sitting in central banks waiting to be spent on mostly oil. If oil were to be available in Euros, the dollars would be useless. They would come back to the USA.

Ask yourself what a million dollars would be worth if everyone had a million. ok, imagine what a trillion dollars or so would do coming back into the country. The value of the dollar would fall and as the value of the currency falls, the price of everything else increases.

As to the size of the effect... who knows.

http://www.ccc.nps.navy.mil/si/nov03/middleEast.asp