Louie Hunter
Former Cobb Commissioner Louis Hunter addressed Madison Forum members and guests at the regular breakfast meeting on Saturday, March 29, 2008 on the subject of The Federal Reserve.
Mr. Hunter opened with a quote from the U.S. Constitution, Article I Section 8…”The Congress shall have the Power To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; That means that Congress was given the authority to print the money, to coin the money. That’s probably the single biggest issue in his mind, that if we could fix it, we could fix what’s wrong with the country.
He quoted from Thomas Jefferson…”If the American people ever allow private banks to control the issue of their money, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive the people of their property until their children will wake up homeless on the continent that their fathers conquered.” That one line in the Constitution, he said, was put there because they understood what happens when you give away the right to print and control the money.
“The Fed is a non-elected body, and do not believe for a second that because the president appoints the head of the Fed that the President has any control over it. Currently and for the last 95 years, our monetary system has been run by the Federal Reserve. The Federal Reserve Act was signed into law by President Woodrow Wilson just before Christmas of 1913. This act was to supposedly stabilize and provide elasticity in giving sound monetary policy to our money supply. Hardly the case! The Federal Reserve was the desire of the elites of industry and banking, most notable J.P. Morgan and John D. Rockefeller. They had a desire to see the money supply grow in order to fund their individual needs to grow they respective businesses. At that time the money supply was strictly tied to the price of gold. The Gold Standard had served the country well to hold down inflation and keep the economic growth measured and controlled. It was, and is, impossible to legitimately inflate the money supply when the price is tied to precious metals. There were no boom and bust cycles (the dot com bubble and the current housing crisis). The Fed came into play after the public learned the truth about fractional reserve lending and made a run on a couple of New York Banks. Basically what fractional reserve lending says is; I’m the bank. I’m going to take your money in as a deposit, and I’m going to loan that money back out with a reserve requirement which is now about 10%. So I can take your $1,000 and loan back out, with interest, $900. The problem with that is that it’s newly created money. This was the impetus needed for President Wilson to sign the Fed into being. Note that one of the gentlemen who was present at the meeting to define the law enabling the creation of the Fed was Paul Warburg of the same Warburg family tied to Nazi Germany (also of today’s UBS Warburg). The Fed or central bank was not new to America or the world. Alexander Hamilton had set up the first central bank only to have Thomas Jefferson rise up against it and dismantle it after 20 years. In 1816 the central bank was again brought back to life, and Andrew Jackson staked his entire re-election campaign on the promise of “rooting it out of existence”, and he did just that upon his re-election. The central bankers of the day tried to crush the economy of the U.S. in order to maintain their control. These men did not care that there would be mass unemployment and at that time starvation if they were successful in their ploy. Thankfully they were not. In 1834 the return to the gold standard stabilized the economy, and the U.S. enjoyed the then longest peace-time prosperity in the country’s history. With a gold standard the government is held to spending only what it can take through taxation. There can be no deficit spending thereby ensuring no debt. Taxes can be the only source of funding and the invisible theft of inflation is non-existent. Inflation is an invisible tax on your money.
After a 20-plus year run of unequaled prosperity, Lincoln left the gold standard in order to fund the civil war with FIAT currency called greenbacks. This was the small crack that the bankers of the day needed in order to get the central bank once again rammed down America’s throat. After the war and the complete failure of the central bank of the day along with the FIAT currency called greenbacks, the country returned to the gold standard in 1879. Once again growth and the economy stabilized with the country averaging 4% growth for the next 20 years. Confidence had been restored in the system, and businessmen were comfortable that the system was strong enough to take risks and prosper. It was during this time that Morgan and Rockefeller sent their men to Jekyll Island to create the FED. The 4% growth was, in their minds, not enough to fund their businesses and egos. Clearly a money supply that was inflatable would allow them to monopolize their industries if they knew it was coming before their competitors did. Sadly, Wall Street got involved in the push, calling the FED the “Lender of Last Resort” and using the ominous wording of that phrase to scare Wilson into signing it into being. Lender of Last Resort is you the taxpayer. You guarantee that banks will not fail. Unfortunately banks should be allowed to fail just like manufacturing plants, computer companies, and anyone else who uses poor judgment in the operating of their business. Failure of a bank would hurt a few, but the lessons learned would strengthen the remaining banks’ lending principles, ensuring that most would be very strong. Imagine knowing that no matter how poor your business acumen you could always count on the taxpayer to bail you out. Risk becomes less and less scary and you would continue to repeat your mistakes. At least that is what the banks have done.
The Fed is a system made up of 12 member banks with an oversight Board of Governors. The board is comprised of seven members appointed by the president. Even under this scenario Wall Street soon had massive influence over the Fed just like today. Let’s talk about how the Fed and Wall Street control your money supply. The Fed has three distinct tools that it uses to maintain its control.
1. The Federal Open Market Committee – FOMC – oversees the purchase and sale of government securities. They have 100% discretion in this area. There is no government oversight or audit to oversee this Private business handling government securities. Each time the Fed takes securities and deposits them into their account, through the miracle of Fractional Reserve Lending they can multiply the value by up to 90%. This is creation of money and inflates the money supply, thereby debasing or devaluing the existing money supply that already exists in circulation. Remember that each time this money is deposited in another bank down from the Fed, it can be in turn loaned out at 90% of its value again. This happens at each deposit and at each bank. Your government does not mind this process as it allows them to pay for all the special projects and pork they want without having to ask for a tax increase. Remember, they have just stolen some of the value of the money and wealth that you hold by devaluing your existing money. And, luckily for the elected officials, the rise in prices that are the result of inflating the money supply can occur several months, maybe up to 24, down the road, and they can then be blamed on weather or some phenomenon on the other side of the world. This is happening right now. The world is losing faith in the dollar due to the incredible pace that we have printed the money. By their knowing that the purchasing power of the money they hold is being debased, they will, and are, turning away from the dollar causing it to fall even faster, and this results in higher commodity prices. You pay more because your money is worth less.
2. The discount rate – This is the amount that the Fed charges its member banks (most of them) to borrow money short term from the so called discount window. Lower rates here mean lower loan rates to the pubic. Keep in mind that once these banks borrow money and put it on their books, they can loan it out at 90% of its value again, and each time it is deposited again, so can that bank. That is new money each and every time a deposit is made and that is inflation…Get it? The money you hold is devalued every time this happens.
3. Reserve Requirements – This is the amount that the Fed requires of its member banks to keep in reserve for its depositors in case they want to make a withdrawal. Too many folks wanting their money and you have a run on the bank. Bad, bad, bad. Again, remember that the lower the reserve requirement, the more money that can be loaned and the greater the inflation of the money supply and the less that your money is worth that you currently hold!!
4. Finally, and the most important…The Fed has the right to print the money. From its inception the Fed began printing more money than it had gold to back it up with. Remember, at this time the Fed was charged with maintaining a stable supply of money, and immediately the money was not worth what its face value said it was. Don’t forget the dollar of the day was redeemable in gold coin.
Within a very shorts period of time the Fed moved to only honor the fact value of the money with a 40% backing of gold. This allowed the money supply to be inflated by 2.5 times its original value. Again, inflation robbed folks of the value of the money they already had. Sadly, the debasement continued. The Fed was then allowed by law to create checkbook money. This was just another step of inflation, since it was creating another form o the same money already in existence. One thought, when I tell you that the reserve requirement for banks to have is 10%, this means that 90% of your money is guaranteed by nothing, NOTHING!!
Once again, Fractional Reserve Lending works like this...
The Federal Government prints a security for $100, and the Fed takes possession of it, creating out of thin air a deposit on their books of $100.00. The Fed by law only has to reserve $10 or 10% of that deposit. They can now loan out to member banks $1000 who only have to reserve $100 or 10%. This gives them $10,000 to loan out into the economy and dramatically inflates the money supply all the while debasing the current dollars in the system. This is all new money and is only worth what the public thinks it is worth. It has no base value. Keep in mind that more money chasing fewer goods drives up the price of the goods. Price increases are the result of the inflated money supply. Always remember that!!
Here is the next loser portion of this system Those who get the new money first are able to benefit the most, since the money they have just received and that has just been created is still valuable at current rates of exchange. It has not been devalued yet. Amazingly, once it is spent it is losing value from that point on. Why? Because, more money has entered the system and is chasing the same goods as before. Purchasing power has gone down. This is a transfer of wealth and power from one segment of the economy to another due to the actions of the Fed. Those who benefit first and most are the federal government, big banks, government contractors, and anyone closely associated with the federal government. While all of this is happening, guess what, the increase of new money is allowing banks to loan more money and take more risks. This, in effect, drives down interest rates, and it sends the wrong signal to investors. What you have is an unsustainable investment boom. Look around and you can se what I mean. This cycle is what causes economic disasters like the “great depression”. During the WWI the government went off the gold standard again, ad the amount of government debt went from $1 billion to over $27 billion. As always this huge increase in the money supply triggered high inflation, and the Fed had no choice but to halt its actions of inflation. Interest rates doubled in 18 months. This quickly slowed the economy and, in the early 1920s, the economy once again roared out of the gate. Inflation was returning but was slower to appear, and the economists of the day just missed it. This bubble bursts, and the stock market crashed in 1929. Speculators had borrowed heavily to invest in the market and overnight it lost one third of its value. Speculators defaulted, and banks failed. The depression was here and, due to fractional reserve lending, the depositors saw their money evaporate into thin air.
A change in the presidency ushered in the Roosevelt era. When his “New Deal” failed to jump start the economy, Roosevelt declared a 4-day bank holiday to let banks gather themselves. The outcome of the 4-day “rest” was the FDIC. This was done to create confidence in the banks again. The bottom line was that the depositor could feel safe investing in an institution that had the government backing the first $100,000 in deposits. In reality, it was the same old fame. The FDIC only had reserve requirements of ½ of 1%. It was all an illusion. When and if it was necessary the Fed would create the necessary FRNs to meet the demand requirements. By 1933 the gold standard was on its last breath. FDR was spending billions on projects and the billions were simply being printed to meet the need. The restriction of the money supply by the gold standard was hampering Roosevelt’s plan to save us all.
At this point Roosevelt removed the gold standard and confiscated the gold from the public. All gold was required to be turned in to the government. It was illegal to own gold.
WWII once again saw us go to war and fund it with FRNs. Flat money. This further destabilized the money supply and clearly the United States was the cause for world concern. The entire world needed to come together to create a global inflationary system. The world’s financial leaders met in Bretton Woods, New Hampshire under the direction of economist John Maynard Keynes. Here they decided on a system that had gold AND inflation. Under this system, the dollar would be redeemable in gold but only for foreign official institutions, central banks, and foreign governments at the rate of $35 an ounce. All other currencies had fixed exchange rates with the U.S. dollar and would be redeemable in U.S. dollars, not gold. It was doomed from the start! Governments will always inflate and did; remarkably they never demanded the gold. The temptation was just too great! They were drunk with their own fiat currency. But wait, the Vietnam War and huge social programs were cause for concern, and foreign governments started cashing in their dollars for gold. We were $18 billion short in reserves. Our nation declared bankruptcy to the world.
Enter Richard Nixon. In 1973 Nixon suspended all gold redemption. Bretton Woods and the semi gold standard were now history. The dollar was now allowed to float with no fixed value. This was a very uncertain time in the world. There were no more checks and balances against inflation, and no U.S. budget has been balanced since then. Inflation is at 300% and growing annually.
Jump to the recent past of the Clinton era. During that time, 1993, the head of the Banking and Finance Committee, Rep. Henry Gonzales, called for an independent audit of the Fed. He also wanted all meetings taped. President Clinton’s response to this request was that “he was afraid the reforms would undermine the market’s confidence in the Fed”. That is where Fed reform ended. In 1995 the Mexican government almost totally devalued the Peso. Fed Chairman Greenspan lobbied the Congress and Clinton for a $52 billion bailout. In actuality the truth was that there were several large American banks that held $26 billion in Mexican debt. As usual you the taxpayer bailed out the poor judgment of the Fed member banks.
Unfortunately, you hear the Fed talk about being the “inflation fighter” when, in reality, they are the single cause of inflation that exists today and throughout history. Until we have a stable precious metal backing the money supply there will be money creation of legalized counterfeit. Our savings will never gain in value until we have a stable money supply. Businesses will continue to experience boom and bust cycles until we stabilize our monetary system. Government spending will continue to grow at unthinkable rates unless we hold them to only the money thy tax us for. The invisible tax of inflation will disappear.
This country now has debt and entitlement programs that require $75 trillion to pay off if we stop adding people to its roles right now. It is mathematically impossible to pay this off under current actuarial tables. Keep in mind that all money in circulation is debt-based money. If we pay off the debt there will be no money. We get our money from the Fed with the IOU from our government – YOU!