WEBVTT

NOTE The Founding of The Federal Reserve

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There was a statement, I think somebody asked Professor Peden earlier,

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what was this naivete on the part of the people advocating inflation,

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and he answered basically people tend to seem to be naive in their own self-interest.

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And this is very relevant to what I'm talking about today, namely the origin of the Federal Reserve system.

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The orthodox view, so to speak, or the mainstream view of the history of the Federal Reserve System

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is very similar to the mainstream view of the history of all government regulation, progressive institutions, so to so-called,

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history of the public school system, all the histories written before about 1960.

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Essentially, it's an exercise in hagiography, which is, those of you not familiar with theology,

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The history is the lives of the saints. Heroic enlightened people in some, you know, some county, in Zilch County, North Dakota, whatever, decide there should be public schools and they agitate for it and backward types and don't want to pay more taxes or against it and finally the enlightened people win out.

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And it's that sort of approach in progressive regulation, it's things like those who want to, those who think we shouldn't have diseased meat agitate for it and finally they went out over a narrow, selfish businessman who were against the meat control regulation.

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So that sort of approach to the history of regulation is naive and biased at best.

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It turns out, in the last 20 years or so, historians have revised this whole picture of the history of government regulation in the United States.

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And the same thing goes for the history of the founding of the Federal Reserve system.

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The thing, one thing we have to realize in the first place is that the Federal Reserve Act was a part of the progressive era, part of the progressive package, so-called progressive legislation, which started around 1900 and continued on through World War I.

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And if we realize that the nature of the progressive movement and progressivism was not simply we discover enlightenment,

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we realize the public good requires that untrammeled businessmen be regulated, made to serve the public interest and that sort of stuff.

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If we realize that the whole history is totally different, then we're more apt to have a better picture of the founding of the Federal Reserve system.

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Basically, the insight into the history of the progressive era can be related to something like this.

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For example, when tariffs go up, when the steel industry, well, let's put it this way,

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say the government institutes a higher tariff on steel, which it's doing most of the time anyway, since about 1820.

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When the government institutes a higher tariff on steel or import quotas on steel,

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Well, nobody really thinks that this is done because of farsighted, enlightened people

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think we really need it and therefore we come in and they persuade businessmen to go along

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with it and persuade the government to go along with it.

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Nobody really believes that.

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Everybody realizes that if the steel tariff goes up, it's probably because the steel

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industry is agitated for it.

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And then if you check on this hypothesis, you're fine, of course.

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That's exactly what happened.

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Not every person in the steel industry, but basically the steel industrialists, realizing

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that they're inefficient and being out-competed by foreign steel, decide to agitate for a

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higher tariff.

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So in things like tariffs, this is common practice, you're not called an economic determinist

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or a Marxist if you make the statement that tariff went up because industrialists in that

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particular industry agitated for it.

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And yet, for anything else, this somehow becomes a no-no, or for Boehm kind of proposition entertain.

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For any other kind of regulation, banking regulation or whatever, down to things like foreign aid and war,

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to make the similar statement, in other words, to go a little bit deeper into just tariffs, where the thing is obvious,

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the tariffs are agitated for by the particular industry, to expand the analysis a little bit,

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becomes unrespectable, to say the least,

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and both among historians and among everybody else.

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So people engaging in this sort of analysis,

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or power elite analysis, if you want to call it that,

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it's not very common, either in the historical profession

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or in the rest of scholarship or in the public.

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But in the last 20 years or so, there has been quite a bit of it,

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and it's helped to revise our whole viewpoint of what happened.

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and government regulation in general and the progressive period in particular.

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Basically what happened was in the progressive period, by the end of the 19th century, business, first of all, was extremely competitive,

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all during the late 19th century as a broad generalization, and prices were falling throughout.

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In other words, from the Civil War down to about 1900, late 1890s, prices were generally falling.

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were falling, and they were falling for good reason, namely that business was so competitive

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and the economy was so productive that the supply of goods and services was increasing

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at a rapid rate.

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In other words, that's when America industrialized.

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It was the biggest period of economic growth in the history of the world.

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And the standard of living went up and productivity went up and prices fell, not being that businesses

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were suffering because costs were also falling as productivity increased and mass production

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So in this situation, many business groups who tend to be inefficient try to correct this price falling situation by organizing cartels.

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In other words, by organizing a cartel of each industry so that they could cut production and raise prices.

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And this was tried in industry after industry, starting with the railroads, which were the first big business in the United States,

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First large-scale business and continuing on through manufacturing by the late 1890s.

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Either trying through cartels, formal cartels, or through mergers.

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And in the late 1890s, the theory was, we'll just merge into one big, we'll have one big firm for the entire steel industry, the oil industry, etc.

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And then we'll be able to cut production and raise prices and raise profits at the same time.

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So they tried this systematically. This was the ideology, so to speak, among businessmen,

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that the way to benefit for all of us is to have quotas, either formal quotas as in cartels

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or in mergers where you just agree that you will have certain shares of this corporation

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and then we'll cut production and raise prices. That was the great goal. All of this was a

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total flop-a-roo and case after case, literally hundreds of cases of this kind of merger or

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of the Cartel, they all flopped.

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And they flopped for two basic reasons.

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One is that an economic theory can predict this,

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and this is confirmed time and time again.

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Two basic reasons.

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One is, well, the basic reason is that the industry is free.

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Government cannot step in and force

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people to accept the cartel or accept the merger.

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So what happens is that as soon as the cartel is formed

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or the merger is completed, and then they cut production

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and raise prices and profits go up. Other businessmen come in and say,

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hey, this looks like a great industry here, the zinc, whatever, the zinc industry or the oil industry or whatever, railroads.

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They're making a lot of profits. Let's nip in there and out-compete them because they're raising prices.

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And we're going to come in with a new firm, a new factory, a new railroad, and we'll bust them.

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And that's exactly what happens. So you have new competition always coming in and out-competing the older firms.

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And then the older firms are stuck with a new firm, and they have a permanent competitor,

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which is a big pain in the neck, because they come in with later equipment, with new factories

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and new equipment, the latest technology, etc.

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And now they have a permanent new competitor on their hands.

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So the whole thing became a big pain in the neck for them.

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And that's one reason.

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And then internally, what happened was that individual firms would start breaking in the cartel.

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They'd say, look, we've raised...

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In other words, the cartel restricts production, raises prices.

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Prices are very high, and then the individual firm says, look, I'm not supposed to do this because I have a cartel agreement with the rest of my buddies in the industry, but here's what we're going to do.

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For you, my old pal and drinking buddy or whatever, other than my buyer, I will sell you the steel or whatever, titanium, et cetera, for 20% off list, provided you don't tell anybody about it.

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So you have a secret price cutting, and then this firm gains profits, gains sales, and of course the secret leaks out pretty quickly, after about six months or a year, and then the other firms get very mad about this, and they call it your rate buster, which in business terms is equivalent to scab in the union terms, and the whole cartel falls apart with mutual recrimination and hatred, and they're back where they started, except now they've got more hatred than they had before.

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So in other words, this system didn't work. The cartel policy and the merger policy flopped.

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And at that point, some of the, each step of the way, some of the, were farsighted in the sense of realizing this was a flop,

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among the business groups, decided the only way to preserve a cartel, preserve a merger, is to have the government enforce it.

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The turn of the political arm to create the cartel for you.

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And this was the origin of progressive regulation.

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Progressive system was not a group of farsighted,

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essentially was not a group of farsighted intellectuals

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who sat around and said, we have to plan,

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we have to curb businessmen for the sake of public interest.

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It was groups of businessmen saying,

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we have to impose cartels through the government

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and thereby eliminating our competition,

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curbing the maverick firm,

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which doesn't want to engage in a cartel

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and gaining profits that way.

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So, for example, in railroad regulation, the first things they did after the railroad businesses put in the ICC, the Interstate Commerce Commission,

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the first thing the ICC did was outlaw secret price cutting, because secret price cutting is always the great instrument by which an individual firm can bust the cartel.

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And how do you do it? You do it in the name of publicity. You say, well, it's a terrible thing to have a secret price cutting.

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all prices should be, the books should be open. All firms should have, they should release publicity about their prices and costs and so forth, et cetera, so the public will know the right to know and won't have jazz.

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What it really meant was we want to know what our competitors are charging. We do it by making the government make all of us release, you know, open the books.

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So anyway, this is, and of course you do this in the name of openness or democracy or whatever, in the name of the public interest because

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America was born in an anti-monopoly ideology, a hatred of monopoly, meaning, by the way, monopoly meant

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for centuries, until modern economics came in and poisoned the well, so to speak,

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what monopoly meant was very simple. It meant a grant of special privilege on the part of the government to different businesses

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for exclusive production or sale of a product, period. It didn't mean a large firm,

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it didn't mean a differentiated product, and all the rest of it.

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And it's meant very simply, grant by the government of exclusive privilege.

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It's very much like what we've done during the discussion of Professor Peden before,

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that when the church fathers attacked the rich, they didn't mean the rich period.

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They meant the tax collectors and so forth.

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It's a similar situation, a shift in the language.

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So how could they sell this to the American public?

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How could these business groups sell this, a compulsory cartel system to the American public?

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They can't say we want compulsory cartels.

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So what they did was they created the ideology

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of the public interest.

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This is the public good.

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We have to curb evil business groups and sort of stuff.

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And the businessmen who took this position

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were then called enlightened by their allies,

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by the media or whatever, the media of that epoch.

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These are enlightened businessmen

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who rise above their own self-interest

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to look at the larger good.

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They have the far vision of, unlike Diocletian,

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They want to curb their selfish profits for the good of the entire industry and the good of the country.

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Now how was this ideology pushed? The ideology was pushed very simply by intellectuals who were rising up.

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Throughout history, the statism has been imposed by two groups, an alliance of two groups.

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The state itself, the state apparatus, the king, the throne, and the opinion molding groups, the intellectuals,

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and intellectuals, which in most cases in history have been the churches, the state church.

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And so this is known as the Alliance of Throne and Altar.

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You have the church and the state. The church, the function of the church was to tell the people to obey the state.

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The state is God in many cases. The king is God. The king is divinely sanctioned.

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And in return for this, and the public believes them because they are the intellectual opinion molders.

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And in return for that, the church gets part of the bootle, they get part of the state revenue in the form of tax subsidies and so forth.

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So this is a very cozy alliance until essentially Western Europe, until the age of Western Europe and the church and state were separated.

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And essentially in the progressive period, in the early 20th century, you begin to reform the old alliance of intellectuals and government,

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Big government intellectuals have performed the function of court apologists for the new regime

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and informing the public, this is the public interest, the common good, the general welfare and all the rest of it.

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The intellectuals are ready for this alliance because there are a lot of them coming up.

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There's a multiplication of the number of intellectuals in the world in this country in the late 19th century.

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The PhD program came in. Suddenly PhDs poured on the market, engineers poured on the market, various guild groups, physicians, all that.

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They're looking for jobs and also looking for special privilege. They're looking for ways to keep their competitors out.

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And so this alliance became a very cozy one because the intellectuals then became state intellectuals.

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They became planners, apologists for planning and so forth and so on.

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Okay, so this is a general background of a banking situation.

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So we have to realize the Federal Reserve System was a progressive measure.

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1913, it was part of the Wilson Progressive Package, Woodrow Wilson being the acne of progressivism up to that point.

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And once again, we have a similar situation. There was no, before the Federal Reserve System, there was no free banking.

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There was a quasi-centralized system.

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Free banking, or an approximation of free banking was before the Civil War, approximately

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from the 1840s after Andrew Jackson destroyed the central bank of his epoch until the Civil

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War.

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During those 20 years or so, it was more or less a free banking system, competitive, there

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was no centralized system, and it worked pretty well.

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And to the extent it didn't work is because there was still government interference.

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But basically a free system.

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During the Civil War, the Republican Party took the opportunity of a one-party Congress,

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since the South had seceded, to enact their beloved economic legislation, one of which

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was high tariffs, another of which was the greenbacks, and it was eliminating the gold

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standard for many years, and a third was to eliminate the free banking system.

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The way they did it was by imposing a very prohibitive tax on state bank notes, in other words, the banks, private banks and centralizing them, monopolizing the issue of bank notes or paper money in the hands of a few nationally chartered banks, there were no nationally chartered banks before that, a few, very few large Wall Street banks and then tying this so any other bank had to, in order to get paper money, had to go to the, had to have deposits in the national banks and in order to buy paper money,

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for Money, so to speak, because the individual banks couldn't issue it themselves, and tying

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that to the federal, to the public debt. In other words, national banks could have termed

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their credit on top of US government bonds. And this was done in order to sell the government

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bonds during the war, the Civil War. And specifically, to get even more specific than that, Jay Cook

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Jay Cooke was the main instigator of this. Jay Cooke was, being a friend of Secretary of Treasury Chase and political ally, managed to get the monopoly of all government bond underwriting during the Civil War.

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Remember, there was hardly any underwriting at all before that. And so this is a tremendous bonanza to Cooke.

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And he gets the monopoly of all government bond issue. He then, he was the first one to engage in modern propaganda efforts.

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and he hired pamphleteers to talk about the glories of government bonds and all the rest of it.

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And in addition to that, he essentially pushed through the national banking system,

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the system I've been talking about, founding there...

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So every national bank has the permanent credit on top of government bonds, which they own,

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thereby forcing the banks to buy government bonds from him, Jay Cook,

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since he had the controllable government bonds.

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And then he himself set up several of these national banks himself as part of this system.

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So at any rate, we had, this is the beginning, after that, this system continues after the Civil War

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and the hard money people had to spend at least 15 years trying to get back to gold, period.

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They couldn't worry about the banking system.

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And so their energies were restricted or confined to eliminating greenbacks or getting back to gold.

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So this system then continues on.

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continues on.

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We then have a quasi-centralized system based on Wall Street national, a few Wall Street

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national banks.

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But it still was not central.

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It was a halfway house to the Federal Reserve system.

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Okay.

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In this situation, the banks become unhappy, especially the large Wall Street banks become

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unhappy because they're beginning to be outcompeted by other regional banking structures.

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Chicago becomes a central reserve city, Kansas City banks become important, and the whole

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banking credit system becomes more and more decentralized as the economy grows, and the

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Wall Street banks become more and more unhappy about the situation, the control is slipping

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away from them, gradually but very rapidly.

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Another problem was, and this is a problem inherent in all fractional reserve banking,

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Reserve Banking in my view is inherently bankrupt. It's always ready to go bust. The reason is

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fairly simple. Most businesses, all businesses as far as I know, try to adjust the time structure

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of their assets to follow the time structure of their liabilities. In other words, if you

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have a $1 million debt coming up in next July 1st, you make sure that the million dollars

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you have coming in owed to you will come in before July 1st, not after. So you'll have

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Bankers have the million bucks to pay your own creditor.

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So most businesses try to have a time structure of their assets shorter than the time structure

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of their liabilities.

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Certainly a lot longer.

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Have the money flowing in before they have to pay the money out.

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With banks, however, just the opposite.

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Banks liabilities are zero time structure, in other words, you have to pay immediately.

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I'm not talking about certificates of deposit or time deposit, I'm talking about demand

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deposits and bank notes.

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These have to be paid on demand immediately.

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It's a zero-time structure, whereas their assets, of course, flow into the future.

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So all banks are inherently bankrupt.

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All of these for the public to find out about it.

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Essentially, it's a structure based on mythology more than anything else.

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And so all banks are subject to bank runs.

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And historically, when confidence is lost, I don't know if you've seen these old movies

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The bankers were made in the 30s. There were a lot of movies in that period where there was a small town and there was a big line up from five in the morning and lining up at the bank, because the public had heard a rumor that the bankers really didn't have the money they thought they'd have, and they wanted to get their money out fast before the other guy could get the money out. So there was a long line of the bankers, of course, very respectable looking, usually fat. In those days, fatness meant respectability. And the bankers would assure them, no, it's a pack of lies, and I assure you, madam,

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The money is there, don't worry about it, you don't have to take it out.

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And if the people are astute enough or scared enough, they'll say,

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no, no, we want our money out, we don't listen to this stuff.

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Of course the banker is a big liar, he says he didn't have the money.

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And by 8 o'clock or 9 o'clock the bank is bust.

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So the banks understand the situation, they're inherently in bad shape,

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plus the fact that if any banks expand their credit,

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Banks that don't expand will have liabilities upon them and will try to cash them in, not because they have no confidence, it's simply in a daily matter of business, and they might go bust for that reason.

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Any bank that expands beyond what his fellow bankers are expanding will quickly go under.

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So for those reasons, it became evident to the banking community that in order for these fractional reserve banks to survive, you have to have a central bank, a lender of last resort, as it's called, which will have the resources to bail them out in case of trouble and also will be able to centralize reserves so that all banks will more or less expand reserves together, so you don't have a problem with one bank expanding and suddenly being caught up short by the sounder or more conservative banks. All banks will expand through the

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to a central banking system, central bank buying assets and the reserves flooding into the system and the credits,

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everything ballooning and wafting upward nicely and harmoniously uniformly.

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In other words, the banks realize in order to preserve their soundness and structure,

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they have to have a compulsory cartelized system because voluntary cartels don't work in banking much very well either.

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So in other words, the turn toward compulsory cartels and banking

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is very similar of a piece with the turn toward compulsory cartels and the rest of the business,

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industry, railroads, manufacturing, meatpacking, insurance and everything else.

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Okay, and also the Wall Street banks were particularly interested in getting control

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over the rest of the economy as a second factor here, not just to save themselves but also to

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got control of the maverick western and regional banks that were proliferating.

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And in particular, the person, the banking firm of the most vision on this subject,

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the one which always took the lead in cartelization and regulatory commissions and all the rest of it,

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was the firm, the interest center around JP Morgan & Company.

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Morgan being the largest investment banker after Jay Cooke.

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By the way, justice doesn't always triumph in the world, but in the case of Jay Cooke,

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Just this triumph, he went bust in the panic of 1873, after controlling the banking system and inflating and so forth and so on, he finally went under.

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After that, J.P. Morgan becomes the preeminent investment banker.

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And first on the railroads and then in manufacturing, Morgan takes the lead in this vision of a new cartelized system, including a new cartelized banking system.

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Okay, just to give you an idea, here's a quote here on the role of the Fed and what the people at the time thought the role of the Fed was going to be.

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Oh, just another point, the theory propounded before the public was, and the public again is not going to fall for this very well,

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so the theory propounded before the public was we need the Fed, one, to catch up with the world, because everybody else, all other major countries have a central bank,

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Therefore, we should have it, and secondly, in order to stop wildcat banks from inflating too much, we need a central bank in order to impose stability and make sure to limit any inflationary potential of the private banks.

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It's very similar to saying the ICC, we need an interstate commerce commission to control the railroads, they won't mook the public by higher freight rates.

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The real reason was they wanted to raise private freight rates, railroad freight rates through the ICC and not to lower them.

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Similarly here, the propaganda is that we need the Fed in order to control the individual private banks and make sure they don't expand credit too much.

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The real reason was they need the Fed to expand credit and maintain the expanded credit so the banks wouldn't go under.

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We need a lender of last resort.

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But to use the phrase in the very common of that period, the money supply needs to be more elastic.

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That was the big phrase. We need a Fed because we need the money supply to be more elastic.

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In other words, the money supply is too rigid. We need to expand it more.

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Especially during recessions and bank panics, we need a Fed to expand money and credit.

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And so this is what they meant. Eosticity was a sort of euphemism for inflation.

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At any rate, to quote, which is just one area here to show the criterion of the whole system,

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Edward N. Hurley, when the Federal Trade Commission was established, about the same time the Federal

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Reserve was established, the vice chairman, de facto head of the Federal Trade Commission

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was Edward N. Hurley, who was the president of the Illinois Manufacturers Association when

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when he was appointed, and whose actions and appointment was hailed and subsequent actions were hailed throughout the business community.

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He addressed the Association of National Advertisers in December 1915, a couple of years after the Federal Reserve and the Federal Trade Commission were put through about the same time.

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He exalted, quote, that through a period of years the government has been gradually extending its machinery of helpfulness to different classes and groups upon whose prosperity depends in a large degree the prosperity of a country.

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And then he says, the railroads and the shippers had the ICC, they had their ICC, Interstate Commerce Commission,

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the farmers had the agriculture department, and the bankers now have the Federal Reserve Board.

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He concluded, quote, that to do for general business that which these other agencies do for the groups to which I have referred

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was the thought behind the creation of the Federal Trade Commission.

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Okay, what does the Federal Reserve do for the nation's bankers? That then becomes the question.

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Okay, the idea of central banking, before the Federal Reserve comes in, the first thought was the Treasury would do it.

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Instead of creating a Federal Reserve, maybe the Treasury Department could act as a central bank on its own.

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And then, for example, in 1900, Secretary of Treasury Lyman Gage called for the establishment

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of regional central banks, and in 1906, Secretary of Treasury Leslie Shaw suggested in his annual

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report that he be given total power to regulate the nation's banks.

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It didn't work.

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But this was the...

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and they tried to intervene, they tried to, both of them tried to expand treasury bills and so forth during recessions.

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They didn't work.

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And the question then is, who are these people? Who are Gage and Shaw? Do they do this?

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Do they either call for central banks or try to impose an act as a central bank on their own hook?

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Are they isolated bureaucrats where power went to their head?

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And in order to analyze that, we have to realize that most historians, unfortunately, when they deal with government action, they just deal with the Secretary or Treasury or the Federal Reserve Chairman or whatever, at the time he exists, in other words, it's as if somebody dropped from heaven, becomes Secretary of the Treasury for four years or eight years or something, and then disappears. And his life then is sort of like a self-contained hermetically sealed vacuum, and he does various things, and then he disappears. And if, however, you examine

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What he did before he was Secretary of Treasury and what he did after he had a very different perspective I don't mean just on these people, I mean all the top bureaucrats.

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If you examine what their life was before and after they were in office, the whole viewpoint about them against the shift, they turned out to be isolated bureaucrats but part of a whole financial network of power elite.

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For example, Gage, the first Secretary of Treasury under McKinley, who tried to do this.

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Before he was appointed Secretary of Treasury, he was the head of the powerful First National Bank of Chicago,

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one of the major banks in those days in the Rockefeller orbit.

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And now we have to say that there were two big financial orbits at this point,

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the Morgans and the Rockefellers, both of whom were in favor of central banking by this point.

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He was also president of the American Bankers Association, after he left the Treasury Department, after a couple of years, he becomes president of the U.S. Trust Company, which was Rockefeller controlled, and his handpicked assistant of the Treasury, Frank Vanderlip, one of the major figures in creating the Federal Reserve system, goes on to become a top executive of the Rockefeller flagship bank of that period, the National City Bank of New York. He was appointed at the Treasury, not because his name was plucked out of a hat,

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But because Mark Hanna, his close friend and political mastermind and financial backer of President McKinley,

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chairman of the Ohio Republican Party and then the National Republican Party,

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co-magnate and iron manufacturer, Hanna, was also a close business associate of an old friend and high school classmate of John D. Rockefeller Sr.

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So when you begin to realize that, you begin to realize it's not an accident. These things are not something Hanna somehow has a theory.

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or, you know, the thing just works somehow by a random selection of people.

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Okay, Leslie Shaw, who was the next Secretary-Treasurer I mentioned, who was under Theodore Roosevelt,

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was a small-town Iowa banker who became governor of his state. He continued as president of a bank

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while he was governor. In those days, there was none of this nonsense about blind trust or

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or worry about conflict of interest, and he was a friend and ally of the so-called Des Moines Regency, which was running the Iowa Republican Party for many years.

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And the head of the Iowa Regency, Senator Allison, was in turn tied closely to Charles Perkins, who was the close Morgan ally and president of the Morgan-controlled Chicago Burlington and Quincy Railroad.

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Okay, after the failure of these two attempts by Gage and Shor to use the treasury as a

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fulcrum of the central bank, comes the panic of 1907.

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It was at that point when the large bankers decided we needed, no more fooling around

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follows, we need a central bank.

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But even before the panic of 1907, the drive for a central bank was launched officially

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by Jacob Schiff, who was head of the powerful investment banking firm of Kuhn-Lohenberg

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Committee, who urged the New York Chamber of Commerce to advocate fundamental banking

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reforms.

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This was January 1906.

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Okay.

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And the New York Commerce immediately established a special committee to investigate the problem.

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The prize of leaders in commercial investment banking, including Israel Strauss of R.H.

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Mises, who was a close friend of Schiff, and Frank Vanderlip, I've already mentioned,

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whose name appears, pops up constantly, of the National City Bank, marched the special

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committee unsurprisingly.

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The Special Committee reports, yes, yes, we need a central bank, and as they put it, we need a strong central bank, quote, similar to the Bank of Germany, unquote, which was the role model for them.

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Well, the New York Chamber was kind of reluctant. This is kind of radical for them. They didn't endorse it.

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But the big bankers took up the cry. In mid-1906, the American Bankers Association named the Commission of Inquiry of Leading Bankers to study the question.

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And the report, again, calls for radical changes and more or less of a central bank.

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By that time, after the panic of 1907, as I say, then they realized, boy, we really need a central bank.

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Bank, we have to start to get going on this. And one of the things that were passed during

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this panic of 1907 was the Old Rich Reland Act, which provided for issuance of so-called

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emergency currency by groups of bankers, clustered in national currency associations. There was

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a regional cartel scheme for each region, but it was supposed to be a stopgap for the

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emergency, but the emergency was seven years, which is a hell of a long emergency period.

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during which they could issue these notes. However, Old Rich Veeleon really wasn't used, it was only used once.

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The main thing that came out of the Old Rich Veeleon Act of 1908 was the setting up of a National Monetary Commission by the Old Rich Veeleon Act

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to study the American and foreign banking systems and emerge with a plan for reform.

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Form

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The commission consisted of nine senators and nine representatives, the usual kind of

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government commission, and the standard bureaucratic procedure.

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The chairman was Senator Aldrich, who passed the act, and the vice-chairman was Representative

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Rieland, who was the other co-sponsor.

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Rieland is unimportant.

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He was a Buffalo banker, and we need say no more about him.

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Aldrich is a person of a different stamp.

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Extremely powerful senator from Rhode Island, Republican senator, who made millions during

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his long service in the U.S. Senate.

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It's not quite known exactly how he did it, he started off as a fairly humble grocer and winds up after 30 years in the Senate as a multi-millionaire, which in those days meant multi-multi-million, I mean million meant a lot then.

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Old Rich, again it's not an accident, he was one of the prime movers in the creation of the Federal Reserve System, he was also the father-in-law of John D. Rockefeller Jr.

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and maybe fairly said, I think, to be Rockefeller's person, his man in the U.S. Senate.

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It was from Nelson Oldridge, our beloved governor of New York.

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I come from New York.

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Nelson Oldridge Rockefeller took his first two names.

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Okay, from the inception of this National Monetary Commission

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until the Oldridge Plan was presented to the Congress four years later,

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that was 1909, 1913,

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Oldridge and the Commission were a vital key in the drive for a central bank.

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Particularly influential in the deliberations of the Commission were two men who were not official members.

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This often happens, of course. Most of the senators and congressmen barely, rarely showed up at the sessions.

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Oldrich asked J.P. Morgan to recommend a banking expert. Who else? Who better than Morgan to recommend an expert?

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And he recommended very happily with, happily responded with Henry P. Davison, a Morgan partner,

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and George Reynolds, who was president of the American Bankers Association.

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You have to realize the way the Morgans worked in that period, investment banks are partnership,

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Partnerships are not corporations, I think it's still true, and the Morgan firm assigned several partners to be their political arms, so to speak, they're people in politics, and Henry Davison was one of them, another was George W. Perkins, who winds up as head of the Progressive Party of America, and a bunch of others, Thomas W. Lamont, et cetera, et cetera. So that was one big focus, the old rich Rockefeller connection,

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Morgan, coming in with a Morgan partner as a key person here.

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Another prime foco for the drive for central bank was Paul Moritz Warburg, who was a scion

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of the great international banking family, a German banking firm, M.M. Warburg and Company

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of Homburg, who emigrates to the United States in 1902 to become a partner in the influential

378
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banking house of Kuhn-Lohabend Company.

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What you have to realize about Warburg is he spent all of his time, apparently his full

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not an investment banking but in pushing the idea of a central bank in print and

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lectures and all that sort of stuff he was being paid I think about six hundred

382
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thousand a year which you know meant about I don't know whether it is now six

383
00:37:03.860 --> 00:37:07.940
million or something like that more than that just for the purpose of

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propagandizing for central bank the he was he was sensitive to the to the idea

385
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to the view, to the idea that the public didn't like central banks, didn't like central control,

386
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was suspicious of Wall Street and so forth.

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And you then had a certain amount of jockeying for power influence on the part of, or specifics

388
00:37:35.660 --> 00:37:37.100
on the part of the various pro-central bankers.

389
00:37:37.100 --> 00:37:40.220
They had to work out a whole bunch of things here.

390
00:37:40.220 --> 00:37:44.380
And they had to work out the provisions, they had to work out the general situation.

391
00:37:44.380 --> 00:37:48.780
Interestingly enough, Aldrich, the politician, wanted a straight central bank.

392
00:37:48.780 --> 00:37:49.780
That's it.

393
00:37:49.780 --> 00:38:14.780
and Warburg, the banker, said no, no, the American public won't accept this. We needed phony decentralization. We needed the idea of regional banks or the Federal Reserve Board, which would only supervise it, because the public won't accept the straight outright centralization. We needed the content of centralization with a form of decentralization, which of course is the thing that eventually happens.

394
00:38:14.780 --> 00:38:44.780
In order to finally iron out their differences in November I think 1910 I think it was, the top pro-central banking people met in a famous secret meeting, a clandestine meeting, it's famous now, at Jekyll Island, Georgia, the Jekyll Island club of Jekyll Island, Georgia, which was a duck-shooting retreat, and there was a big secrecy involved because the press was all interested in the activities of all these people and they told the press

395
00:38:44.780 --> 00:38:49.780
We're taking a special railroad, chartering a special railroad car, going down to Georgia for duck shooting.

396
00:38:49.780 --> 00:38:54.780
We're not going to talk about anything specific, anything economic.

397
00:38:54.780 --> 00:39:00.780
And they all travel under assumed names in this railroad car, like the old rich chartered,

398
00:39:00.780 --> 00:39:04.780
and somehow they manage to talk the press out of publicizing this.

399
00:39:04.780 --> 00:39:08.780
And they don't investigate this to, I don't know how they did it.

400
00:39:08.780 --> 00:39:13.780
Transactions occurred, gentle persuasion occurred, and nothing was mentioned at the time.

401
00:39:13.780 --> 00:39:22.780
Okay, so they met for about a week at Jekyll Island. The people who met symbolized the power elite involved in the pushing for the Federal Reserve system.

402
00:39:22.780 --> 00:39:34.780
Senator Aldrich was there, of course, he had chartered the car. It's not really known who got them in there because none of these guys were club members of the Jekyll Island club and somebody had to reserve the space for them.

403
00:39:34.780 --> 00:39:41.780
It was probably J.P. Morgan who was a member of the Jekyll Island club. These other guys weren't big shoddy enough to be members.

404
00:39:41.780 --> 00:39:45.980
So, Senator Aldrich was there, Henry Davison, the Morgan partner, was there, I've already mentioned,

405
00:39:45.980 --> 00:39:51.580
Paul Warburg, the Kuhn-Lower partner, was there, Frank Vanderlip, Vice President of Rockefeller's National City Bank,

406
00:39:51.580 --> 00:39:55.080
Charles Norton, who was President of Morgan's first national bank in New York,

407
00:39:55.080 --> 00:39:58.280
and Apeyit Andrew, who was the economist, he was a Harvard economist.

408
00:39:58.280 --> 00:40:03.580
You have to have some technician to work out the specifics, who was staff assistant to Aldrich.

409
00:40:03.580 --> 00:40:09.080
And, again, this symbolizes the unity of business, government, and economics, or economists.

410
00:40:11.780 --> 00:40:21.780
Okay, so it's a living embodiment, as I say, of the Rockefeller, Kuhn, Lowell, Morgan interests allied in this great struggle aided by economic technicians.

411
00:40:21.780 --> 00:40:29.780
Okay, they draft the bill for the central bank. They draft what was later to become the Federal Reserve Act, almost word for word, except for tiny details.

412
00:40:29.780 --> 00:40:36.780
The draft was essentially written by Warburg with a decentralized soupçon added from others.

413
00:40:36.780 --> 00:40:46.780
The final writing, the actual writing was contributed by Vander Lipp, and as I say, the main disagreement was that Oldridge wanted a straight central bank at Warburg saying, no, no, we have to have a phony facade of decentralization.

414
00:40:46.780 --> 00:41:04.780
And then Oldridge finally, they make the agreement, Oldridge presents the draft of the National Monetary Commission in January 1911, and slightly revised, it was introduced as a commission report or commission bill, as the Oldridge bill, a year later, which in turn became the Federal Final Reserve Act.

415
00:41:04.780 --> 00:41:14.780
Now the interesting thing is the Old Rich and the Monetary Commission, they were ready for the report by January 1911, as I said. They delayed it for a whole year.

416
00:41:14.780 --> 00:41:21.780
Why did they delay it? Because by this time, in the elections of 1910, the Democrats won the Congress.

417
00:41:21.780 --> 00:41:30.780
And so, at this point, they realized they had to do some more spade work. They had to convert the Democrats, and they also had to convert the rest of the public.

418
00:41:30.780 --> 00:41:38.780
So we needed a year of propaganda and agitation before they actually presented the Federal

419
00:41:38.780 --> 00:41:40.680
Reserve bill.

420
00:41:40.680 --> 00:41:46.640
So at the beginning of February 1911, this educational campaign starts, 22 top bankers

421
00:41:46.640 --> 00:41:51.900
from 12 cities meet in Atlantic City and consider the Aldrich Plan.

422
00:41:51.900 --> 00:41:59.120
They warmly endorse it, of course, and James Forgan, who was president of the First National

423
00:41:59.120 --> 00:42:04.920
of Bank of Chicago, which was Rockefeller control, as he put it, the real purpose of

424
00:42:04.920 --> 00:42:08.640
this conference is to discuss winning the banking community over to government control

425
00:42:08.640 --> 00:42:10.480
directed by the bankers for their own ends.

426
00:42:10.480 --> 00:42:11.480
I'm going to repeat that.

427
00:42:11.480 --> 00:42:15.600
The real purpose of this conference is to discuss winning the banking community over

428
00:42:15.600 --> 00:42:20.080
to government control directed by the bankers for their own ends.

429
00:42:20.080 --> 00:42:25.200
Educating the bankers, this isn't really, this is not the kind of government intervention

430
00:42:25.200 --> 00:42:37.200
It was generally appreciated by the conference that this would increase the power of the big national banks to compete with the rapidly growing state banks,

431
00:42:37.200 --> 00:42:45.200
help bring those state banks under control and strengthen the position of the national banks in foreign banking activities.

432
00:42:45.200 --> 00:42:49.360
Okay, by November 1911, Aldrich, combined with the big bankers, wins the support of

433
00:42:49.360 --> 00:42:53.560
the American Bankers Association, the big trade association of bankers.

434
00:42:53.560 --> 00:43:00.040
And Aldrich addresses the association in a speech and he says, the organization proposed

435
00:43:00.040 --> 00:43:05.680
is not a bank but a cooperative union of all the banks of the country for definite purposes.

436
00:43:05.680 --> 00:43:09.520
For the lay public, Aldrich and his colleagues created an organization in the spring of

437
00:43:09.520 --> 00:43:15.520
1911 called this National Citizens League for the creation of the sound banking system.

438
00:43:15.520 --> 00:43:18.160
The League grew out of a resolution which Paul Warburg had pushed through a meeting

439
00:43:18.160 --> 00:43:23.360
of the National Board of Trade in January 1910, setting aside January 18th of 1911 to

440
00:43:23.360 --> 00:43:28.920
be Monetary Day devoted to a quote, businessman's monetary conference.

441
00:43:28.920 --> 00:43:33.360
At that January 1911 meeting, the conference appointed a committee of seven headed by Warburg

442
00:43:33.360 --> 00:43:38.320
to organize the Businessman's Monetary Reform League, a group of leading Chicago businessmen

443
00:43:38.320 --> 00:43:45.320
were then organized and the idea was they should establish the Citizens League, not in New York, which is suspect, but in Chicago, the heartland of America.

444
00:43:45.320 --> 00:43:48.320
So it looks like a grassrootsy organization.

445
00:43:48.320 --> 00:43:52.320
And James Lawrence Laughlin, the economist, was the operating head of it, admitted that later, you know, later years.

446
00:43:52.320 --> 00:43:56.320
Yeah, yeah, this whole thing was a banker's front, which he, of course, was in favor of.

447
00:43:56.320 --> 00:44:09.320
So, the stated purpose of the League, for example, was to advance the cause of cooperation with dominant centralization of oil banks by an evolution out of our clearinghouse experience.

448
00:44:09.320 --> 00:44:23.320
And then there was various splits in their personality conflicts, et cetera, around the fact that the Democrats, and Laughlin was a Democrat, wanted to get rid of the evil name Aldrich, because Aldrich was a big shot Republican, from the bill.

449
00:44:23.320 --> 00:44:49.200
At the annual meeting of the American Bankers Association in August 1913, A. Barton Hepburn

450
00:44:49.200 --> 00:44:53.880
of the Chase National Bank exalted about a successful effort to get the bankers to endorse

451
00:44:53.880 --> 00:44:54.880
the Glass Bill.

452
00:44:54.880 --> 00:44:58.440
Quote, the measure recognizes and adopts the principles of a central bank.

453
00:44:58.440 --> 00:45:02.080
Indeed, if it works out as the sponsors of the law of hope, it will make all incorporated

454
00:45:02.080 --> 00:45:05.920
banks together joint owners of a central dominating power.

455
00:45:05.920 --> 00:45:12.440
Okay, so the Federal Reserve System was then enacted in December 1913 and opened its doors

456
00:45:12.440 --> 00:45:19.160
the following November, 19, November 14, and won at the same time a cartelizing and inflationary

457
00:45:19.160 --> 00:45:27.080
Organization. Okay, the bank structure was such that the banks themselves were

458
00:45:27.080 --> 00:45:30.680
very powerful in selecting Federal Reserve officials. There's a whole

459
00:45:30.680 --> 00:45:36.520
different structure, different regional structure and all that. The chief

460
00:45:36.520 --> 00:45:39.720
executive officer of each bank, which in those days was called the governor, now

461
00:45:39.720 --> 00:45:43.040
called the president, was selected by the bank directors themselves, in other words

462
00:45:43.040 --> 00:45:51.320
in other words, the regional bank directors and mostly bankers, and then we have of course

463
00:45:51.320 --> 00:45:55.920
the Federal Reserve Board and the Governor of the Federal Reserve Bank of New York which

464
00:45:55.920 --> 00:46:02.720
in those days ran the system until 1929, the next step then is to analyze who these guys

465
00:46:02.720 --> 00:46:07.800
were, and that of course becomes important, another thing that happened by the way is

466
00:46:07.800 --> 00:46:11.040
the reserves was centralized in the Federal Reserve system, the Federal Reserve banks

467
00:46:11.040 --> 00:46:14.680
banks become the monopolists of all paper money, not just national bank for now, only

468
00:46:14.680 --> 00:46:19.600
the Federal Reserve can print paper money, and the reserve requirements were cut in half,

469
00:46:19.600 --> 00:46:22.920
thereby running a great inflationary potential for the whole system.

470
00:46:22.920 --> 00:46:29.840
Reserve requirements before that were about 20% and now go down about 10%.

471
00:46:29.840 --> 00:46:32.880
The bankers all hail the enactment of the Federal Reserve system, this is great stuff,

472
00:46:32.880 --> 00:46:36.560
and now they say we have to see who's going to run it, and the next step is who the personnel

473
00:46:36.560 --> 00:46:37.560
are.

474
00:46:37.560 --> 00:46:44.240
Okay, there were seven members of the Federal Reserve Board in that period, of whom two

475
00:46:44.240 --> 00:46:48.920
were ex officio in those days, the Secretary of the Treasury and the Control of the Currency.

476
00:46:48.920 --> 00:46:53.360
So who were they? Well, Secretary of the Treasury and the Control of the Currency, before they

477
00:46:53.360 --> 00:46:58.200
assumed their post, again, who were they before they became big shots in the Wilson administration?

478
00:46:58.200 --> 00:47:02.760
They were close associates, business and financial associates themselves. Secretary of the Treasury

479
00:47:02.760 --> 00:47:08.040
William Gibbs McAdoo had been a failing businessman in New York City. He was a loser. He set

480
00:47:08.040 --> 00:47:14.640
up several enterprises in his life and they all collapsed. For some reason, he was befriended.

481
00:47:14.640 --> 00:47:17.920
He was taken a personal liking to by J.P. Morgan, which is something you want to have

482
00:47:17.920 --> 00:47:25.480
happen to you in that period. And Morgan decided to bail McAdoo out. And he set McAdoo up as

483
00:47:25.480 --> 00:47:30.560
president of New York's Hudson and Manhattan Railroad, which ran the tubes under the Hudson

484
00:47:30.560 --> 00:47:36.000
in the River, which he was before he became Secretary of Treasury.

485
00:47:36.000 --> 00:47:41.640
He spent his entire life, the rest of his life on the Morgan financial embit.

486
00:47:41.640 --> 00:47:44.880
His fellow board members and officers of the Hudson Manhattan Trans, they were all Morgan

487
00:47:44.880 --> 00:47:45.880
people.

488
00:47:45.880 --> 00:47:52.080
They were president of Morgan companies, they were presidents of Morgan cartel, Morgan merge

489
00:47:52.080 --> 00:47:56.480
companies in industry like International Harvester and U.S. Steel, which were originally, by

490
00:47:56.480 --> 00:47:57.480
the way, monopolies.

491
00:47:57.480 --> 00:48:06.240
The whole thing was a flop-a-roo from that perspective.

492
00:48:06.240 --> 00:48:09.480
So all these guys were on his board, and then when he, after he becomes Secretary of the

493
00:48:09.480 --> 00:48:13.520
Treasury, Wilson cements, I mean, McAdoo cements his political stature by marrying the daughter

494
00:48:13.520 --> 00:48:16.920
of President Wilson, which is the second best thing for you to do if you're a Wilson's

495
00:48:16.920 --> 00:48:17.920
president.

496
00:48:17.920 --> 00:48:23.840
One is you become a pal of Morgan, and two you become the son-in-law of Wilson.

497
00:48:23.840 --> 00:48:38.840
The ruler of the currency was a longtime associate of McAdoo's. He was a Virginia banker and president of the Richmond Trust Safe Deposit Company, John Skelton Williams, had been a director of McAdoo's Putzen Manhattan Railroad and president of the Morgan-oriented Seaboard Airline Railway.

498
00:48:38.840 --> 00:48:46.840
Okay, so that's those two guys. Who were the other five appointees? Who were the other five people whom Wilson appointed to the Federal Reserve Board?

499
00:48:46.840 --> 00:49:01.840
There was Charles Hamlin who was another close associate of McAdoo. He was a Boston attorney who had married into the wealthy Prine family of Albany, a family long connected with the New York Central Railroad which had been run by the Morgans for about four decades by this point.

500
00:49:01.840 --> 00:49:07.840
The other three, the other four appointees were Paul Warburg we've already talked about.

501
00:49:07.840 --> 00:49:11.260
Frederic Delano was the uncle of Franklin D. Roosevelt, president of the Rockefeller

502
00:49:11.260 --> 00:49:18.520
Control Wabash Railway, known as Uncle Fred, I think, in the New Deal period.

503
00:49:18.520 --> 00:49:23.560
William P.G. Harding was president of the First National Bank of Birmingham, Alabama,

504
00:49:23.560 --> 00:49:26.920
and son-in-law of Joseph Woodward, who was head of the Woodward Iron Company, which had

505
00:49:26.920 --> 00:49:31.600
several prominent Morgan and Rockefeller people on the board of directors.

506
00:49:31.600 --> 00:49:35.840
And finally, an economist, Professor Adolph C. Miller of the University of Chicago, and

507
00:49:35.840 --> 00:49:38.760
for Land Economic Technician Prestige.

508
00:49:38.760 --> 00:49:40.920
However, he wasn't just an ordinary economist.

509
00:49:40.920 --> 00:49:42.600
He was also, he had married into the wealthy

510
00:49:42.600 --> 00:49:44.920
Morgan-connected Sprague family of Chicago.

511
00:49:45.980 --> 00:49:48.000
His father-in-law Otto Sprague had been a prominent

512
00:49:48.000 --> 00:49:50.400
businessman and served as the director of the Morgan

513
00:49:50.400 --> 00:49:53.240
dominated Pullman Company and his wife's uncle,

514
00:49:53.240 --> 00:49:56.560
Albert Sprague was director of the Chicago Telephone Company,

515
00:49:56.560 --> 00:49:58.560
subsidiary of the American Tele-and-Tele,

516
00:49:58.560 --> 00:50:01.640
which essentially was a Morgan controlled monopoly.

517
00:50:01.640 --> 00:50:05.720
So then we have, in other words, the Federal Reserve Board

518
00:50:05.720 --> 00:50:16.720
The Federal Reserve began its existence with three Morgan men, one Rockefeller type, and a Kuhn-Loeb, an ally of the Rockefellers, a prominent Alabama banker and an economist with vague Morgan family connections.

519
00:50:16.720 --> 00:50:21.720
That's the disinterested public interest at work.

520
00:50:21.720 --> 00:50:31.720
Okay, the guy who controlled the Federal Reserve System with an iron hand from the beginning until he died in 1928 was Governor of the Federal Reserve Bank of New York, Benjamin Strong.

521
00:50:31.720 --> 00:50:35.720
He ran the system, much to the dislike of the Federal Reserve Board in Washington.

522
00:50:35.720 --> 00:50:41.720
And after he died, the law was changed to ensure the Federal Reserve Board was running things and not the Governor of the Federal Reserve Bank of New York.

523
00:50:41.720 --> 00:50:47.720
Who was Benjamin Strong? His policies were inflationary throughout and all that.

524
00:50:47.720 --> 00:50:53.720
Who was he? Where did he come from? Again, he didn't drop out of the sky by divine edict.

525
00:50:53.720 --> 00:51:00.720
He had spent before this virtually his entire business and personal life in the circle of top aides of J.P. Morgan.

526
00:51:00.720 --> 00:51:09.720
He was secretary of several trust companies in New York City and he lived in a suburb in New York, Englewood, New Jersey, which in those days was a very wealthy suburb.

527
00:51:09.720 --> 00:51:12.720
It's come down a bit since then.

528
00:51:12.720 --> 00:51:17.400
And Engelwood, he became close friends of three top Morgan partners,

529
00:51:17.400 --> 00:51:19.280
which is the next best thing if you're not a friend of Morgan,

530
00:51:19.280 --> 00:51:21.760
you'd be a friend of three top Morgan partners.

531
00:51:21.760 --> 00:51:26.960
Henry P. Davison, we mentioned already, Thomas W. Lamont and Dwight Morrow.

532
00:51:26.960 --> 00:51:31.400
Davison became Strong's mentor and offered him the post of secretary

533
00:51:31.400 --> 00:51:33.280
of the new Morgan-Created Bankers Trust Company.

534
00:51:33.280 --> 00:51:36.000
What was happening was the trust companies were popping up in that period,

535
00:51:36.000 --> 00:51:38.960
the banks wanted to get a piece of the action,

536
00:51:38.960 --> 00:51:42.560
and so Morgan created Bankers Trust for that purpose.

537
00:51:42.560 --> 00:51:49.560
Soon after that, strong against cemented his alliances by marrying the daughter of the wealthy Edmund Converse, president of the Bankers Trust,

538
00:51:49.560 --> 00:51:57.560
and he soon succeeded Thomas LeMans as vice president. So you marry the daughter of the president, your pal of three Morgan partners.

539
00:51:57.560 --> 00:52:09.560
And not long after, when Converse was getting old, he becomes the vice president and virtual president.

540
00:52:09.560 --> 00:52:25.560
Okay, the Strong had favored central banking at least since 1907, and in August 1911, he participated with Nelson Aldrich in a lengthy meeting on the Aldrich Plan, with Davison, Vanderlip, and a few other big shots on Aldrich's yacht.

541
00:52:25.560 --> 00:52:37.560
When the Federal Reserve System was established, Warburg was also a close friend of Strong, offered the post to the governor of the New York Fed to Strong.

542
00:52:37.560 --> 00:52:41.560
No, he refuses, he doesn't like the Fed because it's not enough of a central bank.

543
00:52:41.560 --> 00:52:47.560
He wants it run from New York, as he said, by board of directors on the ground, Wall Street.

544
00:52:47.560 --> 00:52:50.560
After a week in the country, Davison and Warburg persuaded Strong,

545
00:52:50.560 --> 00:52:54.560
don't worry about it, this will be a central bank and you'll be running it.

546
00:52:54.560 --> 00:52:59.560
And at that point he accepted the job and became governor of the New York Fed.

547
00:52:59.560 --> 00:53:03.560
He proceeded to assume absolute power.

548
00:53:03.560 --> 00:53:08.560
Okay, that's essentially the story of the founding of the Fed, as he put it, as Strong put it in the,

549
00:53:10.560 --> 00:53:16.560
he put it, for example, that when he was worried that the state banks refused to join the system,

550
00:53:16.560 --> 00:53:19.560
you know, state banks have the option of either joining the Fed or not,

551
00:53:19.560 --> 00:53:25.560
and he was worried about it, and he said, he said in a letter in October 1916,

552
00:53:25.560 --> 00:53:29.520
2016, frankly our bankers are more or less an unorganized mob until they are educated

553
00:53:29.520 --> 00:53:33.540
by experience of the advantages of cooperation through the reserve system, I believe is unsafe

554
00:53:33.540 --> 00:53:36.400
for life on reserves contributed by their voluntary action, in other words force them

555
00:53:36.400 --> 00:53:38.680
into the system.

556
00:53:38.680 --> 00:53:42.760
And that way every cartelist has always complained about individual businessmen who kick over

557
00:53:42.760 --> 00:53:53.120
the traces and don't accept the collective discipline of the cartel.

558
00:53:53.120 --> 00:53:57.820
Senator Carter Glass said when he drew up the Glass Bill, the final Federal Reserve

559
00:53:57.820 --> 00:54:01.240
Bill, and he said afterward, he looked back on his handiwork and he said that he thought

560
00:54:01.240 --> 00:54:05.000
it was great stuff about two years later, and he said, the proponents of the Federal

561
00:54:05.000 --> 00:54:08.880
Reserve Act had no idea of impairing the rightful prestige of New York as the financial metropolis

562
00:54:08.880 --> 00:54:10.480
of this hemisphere.

563
00:54:10.480 --> 00:54:15.120
They rather expected to confirm its distinction and even hoped to assist powerfully in wresting

564
00:54:15.120 --> 00:54:19.600
this scepter from London and eventually making New York the financial center of the world.

565
00:54:19.600 --> 00:54:22.600
Indeed, momentarily this has come to pass.

566
00:54:22.600 --> 00:54:26.920
And we may point out, Carter Glass goes on, to the amazing contrast between New York under

567
00:54:26.920 --> 00:54:31.960
the old system in 1907, shaken to its very foundations because of two bank failures,

568
00:54:31.960 --> 00:54:35.760
and New York at the present time, under the new system, serenely secure in its domestic

569
00:54:35.760 --> 00:54:40.760
banking operations and confidently financing the great enterprises of European nations

570
00:54:40.760 --> 00:54:41.760
at war.

571
00:54:41.760 --> 00:54:42.760
Okay?

572
00:54:42.760 --> 00:54:43.760
It concludes my talk.

573
00:54:44.760 --> 00:55:01.400
Murray, thank you very much. Again, a most informative and detailed and interesting discussion.

574
00:55:01.400 --> 00:55:06.120
I think we can piece some things together from what we've seen thus far. Professor

575
00:55:06.120 --> 00:55:11.800
Peden was up here telling us about government and inflation and how the government inflates.

576
00:55:11.800 --> 00:55:16.400
And one of the major messages I think we found in what Murray said is that when government

577
00:55:16.400 --> 00:55:23.280
becomes partner with the banking community, then that inflation becomes even more inevitable

578
00:55:23.280 --> 00:55:28.720
and the incentive system becomes one where it's in everybody's incentive who controls

579
00:55:28.720 --> 00:55:31.760
money and credit for even more inflation.

580
00:55:31.760 --> 00:55:35.760
I've been saving this question up for a long time and I haven't had a chance to ask it

581
00:55:35.760 --> 00:55:40.720
to you and it's related to money but not necessarily the history of the Federal Reserve.

582
00:55:40.720 --> 00:56:10.720
Right now, there's a lot of banks or have been over the last few years failing and then the FDIC comes in and bails them out and I haven't figured out what the effect of that is on the economy when money is taken out of the system because of the failure of the bank and then the FDIC comes back and puts some new money back in with T-bills or whatever it does to prop it up. I know it has something to do with the business cycle but I'm confused about exactly, I mean, this is monetary inflation but you're not necessarily saying a whole bunch

583
00:56:10.720 --> 00:56:15.720
and a bunch of price inflation and one of the things I think I'm confused about is

584
00:56:15.720 --> 00:56:19.720
which causes the business cycle? What causes distortions in the economy?

585
00:56:19.720 --> 00:56:25.720
I guess there's a lot of questions and all rocked up into that, but what is the effect of banks failing today with the existing system

586
00:56:25.720 --> 00:56:31.720
where the FDIC comes back in and props it up? What is it going to do to the economy? What can we expect from here on out?

587
00:56:31.720 --> 00:56:36.720
Deflation of prices, inflation of prices or what kind of distortions?

588
00:56:36.720 --> 00:56:48.720
Well, I think what's happened since, see something, a sea chain happened in 1933, namely the Fed had always been hampered in its inflationary potential and saving out the banks by the fact they had a gold standard to worry about.

589
00:56:48.720 --> 00:56:56.720
The Fed couldn't inflate too much, they had to pay in gold also, and so there were literally thousands of bank failures during the early 30s.

590
00:56:56.720 --> 00:57:06.720
With the going off the gold standard and with the FDIC, the Fed now has unlimited power to expand on a flight.

591
00:57:06.720 --> 00:57:11.720
And when the FDIC bailed out, for example, the Continental Illinois National Bank,

592
00:57:11.720 --> 00:57:16.720
they only had to bail out the people with deposits of $100,000 and under.

593
00:57:16.720 --> 00:57:18.720
They decided to bail out everybody.

594
00:57:18.720 --> 00:57:23.720
So they've already expanded now the FDIC as universal deposit insurance.

595
00:57:23.720 --> 00:57:25.720
The use of insurance, of course, is a euphemism.

596
00:57:25.720 --> 00:57:29.720
It means the government prints money and bails out the banks.

597
00:57:29.720 --> 00:57:32.720
The key thing is the Federal Reserve has the unlimited power to print money.

598
00:57:32.720 --> 00:57:35.720
That's the key. Create, manufacture money.

599
00:57:35.720 --> 00:57:40.720
Instead of money being minted in gold or whatever and dug out of mines and painfully minted,

600
00:57:40.720 --> 00:57:46.720
making it therefore very scarce, which preserves the soundness of the money unit,

601
00:57:46.720 --> 00:57:50.720
instead of that the government, the Federal Reserve, has the unlimited power to print whatever it wants.

602
00:57:50.720 --> 00:57:56.000
So what it does is it pends $8 billion, $30 billion, whatever, and bails out banks, buys assets or whatever.

603
00:57:56.000 --> 00:58:05.920
The technical, they do it to the tune of a lot of crises, a lot of jetting back and forth across the world to save the third world nations.

604
00:58:05.920 --> 00:58:10.800
But basically what it means is it's very simple. Basically, the Fed prints dollars and hands it out.

605
00:58:10.800 --> 00:58:17.000
So this is monetary inflation. It's expanding the supply of dollars. That's the distortion that creates the business cycle.

606
00:58:17.000 --> 00:58:24.880
And in order to try to eliminate recessions, which are the cause of, which is the result of inflation, they try to inflate more.

607
00:58:24.880 --> 00:58:28.840
So it's a sort of a spiral operation.

608
00:58:28.840 --> 00:58:38.000
And I don't, I've been in a constant argument with my hard-money colleagues now for at least 10 years about whether deflation or inflation is on the horizon.

609
00:58:38.000 --> 00:58:45.240
And one of the, they sort of, in a sense they have proclaimed victory recently because they redefined deflation.

610
00:58:45.240 --> 00:58:51.380
Deflation now means any inflation of less than 10% a year.

611
00:58:51.380 --> 00:58:55.620
Talking about changing linguistics.

612
00:58:55.620 --> 00:59:01.400
I take the old-fashioned view that deflation means a substantial fall in the cost of living.

613
00:59:01.400 --> 00:59:04.760
Not the fall in zinc prices or something like that, the fall in cost of living.

614
00:59:04.760 --> 00:59:07.360
And that, of course, hasn't happened and won't happen.

615
00:59:07.360 --> 00:59:10.400
And it won't happen as long as the Federal Reserve has the

616
00:59:10.400 --> 00:59:14.120
infinite power to create money, which they have.

617
00:59:14.120 --> 00:59:17.320
And so if you have the power to create money, the power to print money, you'll do it.

618
00:59:17.320 --> 00:59:19.320
It's one of Rothbard's laws. I have my own laws.

619
00:59:19.320 --> 00:59:22.620
One is, if you have the power to print money, you'll do it, okay?

620
00:59:22.620 --> 00:59:26.520
Regardless of any ideology or statements that you should limit your counterfeit operations

621
00:59:26.520 --> 00:59:28.920
the 3% of the years the Freemenites want to do.

622
00:59:28.920 --> 00:59:31.620
Basically, you'll print it. You'll find various reasons for it.

623
00:59:31.620 --> 00:59:36.020
You'll save banks, you'll save people, you'll save the people of Argentina, whatever.

624
00:59:36.020 --> 00:59:38.620
There's lots of reasons for creating more money.

625
00:59:38.620 --> 00:59:40.820
And that's really the problem.

626
00:59:40.820 --> 00:59:47.220
Well, the Federal Reserve has the power to print money, but they don't really print very much money, they print credit.

627
00:59:47.220 --> 00:59:50.500
And that's very different from money because it draws interest.

628
00:59:50.500 --> 00:59:58.260
And it looked like a good deal going in, but the interest becomes such a weight burden at some point, they can't expand credit.

629
00:59:58.260 --> 00:59:59.140
Then what happens?

630
00:59:59.140 --> 01:00:02.020
Well, they can expand credit. They print money and they create...

631
01:00:02.020 --> 01:00:07.380
Usually the money goes out in the form of buying assets of one sort or another.

632
01:00:07.380 --> 01:00:14.980
So, if they buy government bonds, for example, this means the government bond dealer gets

633
01:00:14.980 --> 01:00:18.780
whatever, the money for, say, a million, say the Federal buys a, writes out a check for

634
01:00:18.780 --> 01:00:22.380
a million dollars of government bonds, the bond dealer gets the million dollar check,

635
01:00:22.380 --> 01:00:26.420
which means the Federal says the Federal Reserve system promises to pay to the bearer a million

636
01:00:26.420 --> 01:00:27.420
dollars.

637
01:00:27.420 --> 01:00:31.220
He can't do it because only banks can have deposit accounts with the Federal Reserve

638
01:00:31.220 --> 01:00:32.220
banks.

639
01:00:32.220 --> 01:00:35.460
He deposits in his bank, or else he tears it up, which he won't do.

640
01:00:35.460 --> 01:00:42.460
If you deposit in Chase or Citibank or whatever, they get a reserve increase of a million dollars, they pyramid credit 10 to 1 on top of it, this is basically what happens.

641
01:00:42.460 --> 01:00:47.460
In other words, it's a creation of money through the fact that the Federal Reserve has the power to print.

642
01:00:47.460 --> 01:00:52.460
If anybody asks the Fed to redeem your deposits in dollars, they'll print the dollars and redeem it.

643
01:00:52.460 --> 01:00:57.460
So the power to actually print the money is the basis for the whole inflationary system.

644
01:00:57.460 --> 01:01:01.460
It doesn't mean they actually print the money and spend it, that's what the Treasury used to do in the Civil War.

645
01:01:01.460 --> 01:01:12.460
There's a more sophisticated way of doing it. They write out checks out of thin air, buy bonds with it and then the checks or deposits on the Fed then go out into the system, circulate in the system.

646
01:01:12.460 --> 01:01:18.460
And say if anybody wants to redeem their deposit in cash, the Fed will print the cash to pay it back, pay it off.

647
01:01:18.460 --> 01:01:27.460
So that's the process. It's less honest but equivalent to the old idea that the Treasury prints money and spends it on missiles or whatever.

648
01:01:27.460 --> 01:01:31.460
But that can't go on forever, because of the interest burden.

649
01:01:31.460 --> 01:01:33.460
Well, the interest burden can be, yeah, the interest burden is increased.

650
01:01:33.460 --> 01:01:39.460
The interest burden can always be alleviated, so to speak, by inflation.

651
01:01:39.460 --> 01:01:42.460
In other words, the more you inflate, the lower the interest burden becomes.

652
01:01:42.460 --> 01:01:44.460
Not if you inflate with credit. They're inflating with credit.

653
01:01:44.460 --> 01:01:46.460
They're not inflating with money.

654
01:01:46.460 --> 01:01:50.460
The result of credit is money, dollars.

655
01:01:50.460 --> 01:01:55.460
I call money dollars. And dollars is what pays for goods and services.

656
01:01:55.460 --> 01:02:00.340
Well, the amount of dollars in circulation are very small compared to the amount of credit.

657
01:02:00.340 --> 01:02:02.940
Well, I mean, I don't know how you pay for stuff.

658
01:02:02.940 --> 01:02:05.980
I pay for stuff by writing out a check, and that's dollars.

659
01:02:05.980 --> 01:02:11.580
And this check is accepted by my people I spend money on.

660
01:02:11.580 --> 01:02:12.860
I call that money.

661
01:02:12.860 --> 01:02:13.740
Most people call it money.

662
01:02:13.740 --> 01:02:17.140
Murray's point is that this credit can easily be converted into money.

663
01:02:17.140 --> 01:02:20.420
That's the whole idea behind this.

664
01:02:20.420 --> 01:02:23.460
I used to scold bankers for being part of this inflation problem.

665
01:02:23.460 --> 01:02:33.460
argued that when they made these loans out of, they fabricated them on the books that contributed to inflation because it would expand the money supply.

666
01:02:33.460 --> 01:02:38.460
Their argument was, no, that doesn't expand the money supply because the loans will be paid off.

667
01:02:38.460 --> 01:02:46.460
They argued back, no, they don't ever pay them off, they just substitute collateral by more and more money, which is what we've done up to a point.

668
01:02:46.460 --> 01:02:49.460
But there comes a point where people can't service the debt any longer.

669
01:02:49.460 --> 01:02:54.460
And then the banks, they like to get some of that money back that they loaned out.

670
01:02:54.460 --> 01:02:58.460
And it looks like there's a limitation on how much credit you can extend in the system.

671
01:02:58.460 --> 01:03:01.460
And we're somewhere near that.

672
01:03:01.460 --> 01:03:04.460
The credit can continue to expand somewhat.

673
01:03:04.460 --> 01:03:09.460
But under the present system, we don't have the capacity to inflate substantially, not like we've done in the past.

674
01:03:09.460 --> 01:03:11.460
I mean, we're somewhere near that.

675
01:03:11.460 --> 01:03:15.460
I just don't understand your statement. Israel now has a 900% inflation rate per annum.

676
01:03:15.460 --> 01:03:18.460
Yeah, but they don't do it with credit. They do it with money. They're printing money.

677
01:03:18.460 --> 01:03:22.460
and Money. You can have unlimited inflation as long as you're running currency.

678
01:03:22.460 --> 01:03:24.460
I'm sorry, I think the difference comes in.

679
01:03:24.460 --> 01:03:27.460
The Bank of Israel buys government bonds, pay the deficit.

680
01:03:27.460 --> 01:03:32.460
You do have problems and we see some domestic banks experiencing them now

681
01:03:32.460 --> 01:03:37.460
when they've granted large loans or increased their loans outstanding over the years

682
01:03:37.460 --> 01:03:44.460
in the anticipation that inflation will keep rising to make the debtors able to service the loan debt.

683
01:04:14.460 --> 01:04:20.000
War II. And this is what Murray and Professor Peden were talking about this morning. The inflation so

684
01:04:20.000 --> 01:04:26.700
racks the society and the controls put on not to get the root cause of it, but to try and make it

685
01:04:26.700 --> 01:04:32.860
politicians palatable for the citizens to live with, ultimately brings down the society as a

686
01:04:32.860 --> 01:04:38.380
major factor. That is kind of the limit I think you're referring to as well. I think we all hope

687
01:04:38.380 --> 01:04:43.540
and pray that we don't get to that position in the United States with good dialogue like we've had

688
01:04:43.540 --> 01:04:52.540
We've had here today in very informative presentations, perhaps we can strengthen the message we need to send so that those events won't occur.