WEBVTT NOTE The Fed at Last: Morgan-Controlled Inflation 1 00:00:00.000 --> 00:00:14.000 The Fed at last, Morgan controlled inflation. The new Federal Reserve system had finally brought a central bank to America. The push of the big bankers had at last succeeded. 2 00:00:14.000 --> 00:00:24.000 Following the crucial plank of Post-Peel Act Central Banking, the Fed was given a monopoly of the issue of all bank notes. 3 00:00:24.000 --> 00:00:40.000 National banks as well as state banks could now only issue deposits, and the deposits had to be redeemable in Federal Reserve notes, as well as, at least nominally, in gold. 4 00:00:40.000 --> 00:00:58.000 All national banks were forced to become members of the Federal Reserve system, a coercion they had long eagerly sought, which meant that national bank reserves had to be kept in the form of demand deposits or checking accounts at the Fed. 5 00:00:58.000 --> 00:01:24.000 The Fed was now in place as lender of last resort, and with the prestige, power and resources of the U.S. Treasury solidly behind it, it could inflate more consistently than the Wall Street banks under the national banking system, and above all, it could and did inflate even during recessions in order to bail out the banks. 6 00:01:24.000 --> 00:01:38.000 The Fed could now try to keep the economy from recessions that liquidated the unsound investments of the inflationary boom, and it could try to keep the inflation going indefinitely. 7 00:01:38.000 --> 00:01:43.000 At this point, there was no need for even national banks to hold on to gold. 8 00:01:43.000 --> 00:01:50.000 Bank reserves could be, as the bank apologist proclaimed, economized, that is, there could be and was more and more of these reserves. 9 00:02:13.000 --> 00:02:22.280 More inflationary credit, more bank counterfeiting, pyramided on top of the given gold reserves. 10 00:02:22.280 --> 00:02:30.520 There were now three inverted inflationary pyramids of bank credit in the American economy. 11 00:02:30.520 --> 00:02:38.920 The Fed pyramided its notes and deposits on top of its newly centralized gold supply. 12 00:02:38.920 --> 00:02:45.240 The national banks pyramided bank deposits on top of their reserves of deposits at the 13 00:02:45.240 --> 00:02:51.840 Fed, and those state banks who chose not to exercise their option of joining the Federal 14 00:02:51.840 --> 00:02:58.660 Reserve system could keep their deposit accounts at national banks and pyramid their credit 15 00:02:58.660 --> 00:03:00.440 on top of that. 16 00:03:00.440 --> 00:03:07.100 And at the base of the pyramid, the Fed could coordinate and control the inflation by determining 17 00:03:07.100 --> 00:03:10.740 The amount of reserves in the member banks. 18 00:03:10.740 --> 00:03:17.020 To give an extra philip to monetary inflation, the new Federal Reserve system cut in half 19 00:03:17.020 --> 00:03:24.140 the average legal minimum reserve requirements imposed on the old national banks, whereas 20 00:03:24.140 --> 00:03:29.700 the national banks before the onset of the Fed were required to keep an average minimum 21 00:03:29.700 --> 00:03:36.960 of 20 percent reserves to demand deposits on which they could therefore pyramid inflationary 22 00:03:36.960 --> 00:03:49.960 of 5 to 1, the new Fed halved the minimum reserve requirement on the banks to 10%, doubling the inflationary bank permitting in the country to 10 to 1. 23 00:03:49.960 --> 00:03:56.960 As luck would have it, the new Federal Reserve system coincided with the outbreak of World War I in Europe, 24 00:03:56.960 --> 00:04:03.960 and it is generally agreed that it was only the new system that permitted the US to enter the war 25 00:04:03.960 --> 00:04:20.960 The Federal Reserve entered the war and to finance both its own war effort and massive loans to the Allies. Roughly, the Fed doubled the money supply of the U.S. during the war, and prices doubled in consequence. 26 00:04:20.960 --> 00:04:39.960 For those who believe that U.S. entry into World War I was one of the most disastrous events for the U.S. and for Europe in the 20th century, the facilitating of U.S. entry into the war is scarcely a major point in favor of the Federal Reserve. 27 00:04:39.960 --> 00:04:57.960 In form, as well as in content, the Federal Reserve system is precisely the cozy government-big bank partnership, the government-enforced banking cartel that big bankers had long envisioned. 28 00:04:57.960 --> 00:05:05.960 Many critics of the Fed like to harp on the fact that the private bankers legally own the Federal Reserve system. 29 00:05:05.960 --> 00:05:09.960 But this is an unimportant legalistic fact. 30 00:05:09.960 --> 00:05:17.960 Fed, and therefore possible bank, profits from its operations are taxed away by the Treasury. 31 00:05:17.960 --> 00:05:26.960 The benefits to the bankers from the Fed come not from its legal profits, but from the very essence of its operations, 32 00:05:26.960 --> 00:05:32.960 its task of coordination and backing for bank credit inflation. 33 00:05:32.960 --> 00:05:42.960 These benefits dwarf any possible direct profits from the Fed's banking operations into insignificance. 34 00:05:42.960 --> 00:05:48.960 From the beginning, the Fed has been headed by a Federal Reserve Board in Washington, 35 00:05:48.960 --> 00:05:52.960 all appointed by the President with the consent of the Senate. 36 00:05:52.960 --> 00:05:57.960 The Board supervises the 12 decentralized regional Federal Reserve Banks 37 00:05:57.960 --> 00:06:04.440 whose officers are indeed selected by private banks in each region, officers who have to 38 00:06:04.440 --> 00:06:10.760 be approved by the Washington Board. At the outset of the Fed and until the reforms of 39 00:06:10.760 --> 00:06:17.280 the 1930s, the major control of the Fed was not in the hands of the Board, but of the 40 00:06:17.280 --> 00:06:23.600 Governor, now called President, of the Federal Reserve Bank of New York, Wall Street's main 41 00:06:23.600 --> 00:06:31.600 and Man in the Fed System. Because of the peculiarities of banking history, Governor 42 00:06:31.600 --> 00:06:38.160 is considered a far more exalted title than President, a status stemming from the august 43 00:06:38.160 --> 00:06:44.500 title of Governor as head of the original and most prestigious central bank, the Bank 44 00:06:44.500 --> 00:06:50.640 of England. Part of the downgrading of the regional Federal Reserve banks and upgrading 45 00:06:50.640 --> 00:07:12.640 The change of power of the Washington Board in the 1930s was reflected in the change of the title of head of each regional bank from Governor to President, matching by the change of title of the Washington Board from Federal Reserve Board to Board of Governors of the Federal Reserve System. 46 00:07:12.640 --> 00:07:28.640 The major instrument of Fed control of the money and banking system is its open market operations, its buying and selling of U.S. government securities, or indeed any other asset it wished, on the open market. 47 00:07:28.640 --> 00:07:32.640 We will see how this process works below. 48 00:07:32.640 --> 00:07:47.640 Since the U.S. bond market is located in Wall Street, the governor of the New York Fed was originally in almost sole control of the Fed's open market purchases and sales, and hence of the Federal Reserve itself. 49 00:07:47.640 --> 00:08:10.640 Since the 1930s, however, the crucial open market policies of the Fed have been decided by a Federal Open Market Committee, which meets in Washington, and which includes all the seven members of the Board of Governors, plus a rotating five of the twelve largely banker-selected Presidents of the regional Feds. 50 00:08:10.640 --> 00:08:18.640 There are two critical steps in the establishment and functioning of any cartel-like government regulation. 51 00:08:18.640 --> 00:08:21.640 We cannot afford to ignore either step. 52 00:08:21.640 --> 00:08:26.640 Step one is passing the bill and establishing the structure. 53 00:08:26.640 --> 00:08:31.640 The second step is selecting the proper personnel to run the structure. 54 00:08:31.640 --> 00:08:36.640 There is no point to big bankers setting up a cartel, for example, 55 00:08:36.640 --> 00:08:41.640 and then see the personnel fall into the wrong hands. 56 00:08:41.640 --> 00:08:48.640 And yet conventional historians not geared to power elite or ruling elite analysis 57 00:08:48.640 --> 00:08:57.640 usually fall down on this crucial second task of seeing precisely who the new rulers of the system would be. 58 00:08:57.640 --> 00:09:01.640 It is all too clear on examining the origin and early years of the Fed 59 00:09:01.640 --> 00:09:14.640 The Fed that both in its personnel and chosen monetary and financial policies, the Morgan Empire was in almost supreme control of the Fed. 60 00:09:14.640 --> 00:09:21.640 This Morgan dominance was not wholly reflected in the makeup of the first Federal Reserve Board. 61 00:09:21.640 --> 00:09:28.260 Of the seven board members, at the time two members were automatically an ex officio, 62 00:09:28.260 --> 00:09:34.080 the Secretary of the Treasury and the Comptroller of the Currency, the regulator of the national 63 00:09:34.080 --> 00:09:38.160 banks who is an official in the Treasury Department. 64 00:09:38.160 --> 00:09:45.240 The Secretary of Treasury in the Wilson administration was his son-in-law, William Gibbs McAdoo, who 65 00:09:45.240 --> 00:09:50.800 McAdoo, as a failing businessman and railroad magnate in New York City, had been personally 66 00:09:50.800 --> 00:09:57.400 befriended and bailed out by J.P. Morgan and his close associates. 67 00:09:57.400 --> 00:10:02.720 McAdoo spent the rest of his financial and political life in the Morgan ambit. 68 00:10:02.720 --> 00:10:09.760 The Comptroller of the Currency was a long-time associate of McAdoo's, John Skelton Williams. 69 00:10:09.760 --> 00:10:15.560 Mises was a Virginia banker who had been a director of McAdoo's Morgan-controlled Hudson 70 00:10:15.560 --> 00:10:22.800 and Manhattan Railroad and president of the Morgan-oriented Seaboard Airline Railway. 71 00:10:22.800 --> 00:10:27.960 These Treasury officials on the Board were reliable Morgan men, but they were members 72 00:10:27.960 --> 00:10:35.480 only ex officio. Governor, now Chairman, of the original Board was Charles S. Hamlin, 73 00:10:35.480 --> 00:10:40.920 who McAdoo had appointed as Assistant Secretary of Treasury along with Williams. 74 00:10:40.920 --> 00:10:47.080 Hamlin was a Boston attorney who had married into the wealthy Prune family of Albany, a 75 00:10:47.080 --> 00:10:52.920 family long connected with the Morgan-dominated New York Central Railroad. 76 00:10:52.920 --> 00:10:58.200 Another member of the Federal Reserve Board and a man who succeeded Hamlin as governor 77 00:10:58.200 --> 00:11:06.920 was William P.G. Harding, a protege of Alabama Senator Oscar W. Underwood, whose father-in-law, 78 00:11:06.920 --> 00:11:13.040 Joseph H. Woodward, was Vice President of Harding's First National Bank of Birmingham, 79 00:11:13.040 --> 00:11:19.200 Alabama, and head of the Woodward Iron Company, whose board included representatives of both 80 00:11:19.200 --> 00:11:22.840 Morgan and Rockefeller interest. 81 00:11:22.840 --> 00:11:29.500 The other three board members were Paul M. Warburg, Frederick A. Delano, uncle of Franklin 82 00:11:29.500 --> 00:11:37.840 D. Roosevelt and president of the Rockefeller-controlled Wabash Railway, and Berkeley economics professor 83 00:11:37.840 --> 00:11:44.080 Adolph C. Miller, who had married into the wealthy Morgan-connected Sprague family of 84 00:11:44.080 --> 00:11:51.400 Chicago. Miller's father-in-law, Otto S. A. Sprague, had served as a director of the 85 00:11:51.400 --> 00:11:58.160 and Morgan-dominated Pullman Company, while Otto's brother, Albert Aisbreg, was a director 86 00:11:58.160 --> 00:12:05.160 of the Chicago Telephone Company, a subsidiary of the mighty Morgan-controlled Monopoly American 87 00:12:05.160 --> 00:12:08.000 Telephone and Telegraph Company. 88 00:12:08.000 --> 00:12:13.920 It should be noted that while the Oyster Bay, Manhattan branch of the Roosevelt family, 89 00:12:13.920 --> 00:12:19.940 including President Theodore Roosevelt, had long been in the Morgan ambit, the Hyde Park 90 00:12:19.940 --> 00:12:31.940 The Rock Branch, which of course included FDR, was long affiliated with their wealthy and influential Hudson Valley neighbors, the Astors and the Herrimans. 91 00:12:31.940 --> 00:12:41.940 Thus, if we ignore the two Morgan ex officios, the Federal Reserve Board in Washington began its existence with one reliable Morgan man, 92 00:12:41.940 --> 00:12:58.940 two Rockefeller associates, Delano and a leader of close Rockefeller ally, Kuhn Loeb, and two men of uncertain affiliation, a prominent Alabama banker and an economist with vague family connections to Morgan interest. 93 00:12:58.940 --> 00:13:15.940 While the makeup of the Board more or less mirrored the financial power structure that had been present at the Fed's critical founding meeting at Jekyll Island, it could scarcely guarantee unswerving Morgan control of the nation's banking system. 94 00:13:15.940 --> 00:13:26.940 That control was guaranteed instead by the identity of the man who was selected to the critical post of Governor of the New York Fed, 95 00:13:26.940 --> 00:13:49.940 A man, furthermore, who was by temperament very well equipped to seize in fact the power that the structure of the Fed could offer him, that man who ruled the Federal Reserve system with an iron hand from its inception until his death in 1928 was one Benjamin Strong. 96 00:13:49.940 --> 00:13:57.940 Benjamin Strong's entire life had been a virtual preparation for his assumption of power at the Federal Reserve. 97 00:13:57.940 --> 00:14:02.940 Strong was a long-time protege of the immensely powerful Henry P. Davison, 98 00:14:02.940 --> 00:14:07.940 number two partner of the Morgan Bank, just under J. P. Morgan himself, 99 00:14:07.940 --> 00:14:13.940 and effective operating head of the Morgan World Empire. 100 00:14:13.940 --> 00:14:34.940 Strong was a neighbor of Davison's in the then posh suburb of New York, Englewood, New Jersey, where his three closest friends in the world became, in addition to Davison, two other Morgan partners, Dwight Morrow and Davison's main protégé as Morgan partner Thomas W. Lamont. 101 00:14:34.940 --> 00:14:54.940 When the Morgans created the Banker's Trust Company in 1903 to compete in the rising new trust business, Davison named Strong as its secretary, and by 1914 Strong had married the firm's president's daughter and himself risen to president of Banker's Trust. 102 00:14:54.940 --> 00:15:01.940 In addition, the Davisons raised Strong's children for a time after the death of Strong's first wife. 103 00:15:01.940 --> 00:15:07.940 Moreover, Strong served J.P. Morgan as his personal auditor during the panic of 1907. 104 00:15:07.940 --> 00:15:19.940 Strong had long been a voluble advocate of the original Aldrich Plan and had participated in a lengthy August 1911 meeting on the Plan 105 00:15:19.940 --> 00:15:27.260 and with the Senator Davison, Vanderlip and a few other bankers on Aldrich's yacht. 106 00:15:27.260 --> 00:15:32.180 But Strong was bitterly disappointed at the final structure of the Fed since he wanted 107 00:15:32.180 --> 00:15:38.860 a real central bank run from New York by a board of directors on the ground. 108 00:15:38.860 --> 00:15:46.060 That is a central bank openly and candidly run from New York and dominated by Wall Street. 109 00:15:46.060 --> 00:15:51.700 Their weekend in the country, however, Davison and Warburg persuaded Strong to change his 110 00:15:51.700 --> 00:15:58.460 mind and accept the proffered appointment as Governor of the New York Fed. Presumably, 111 00:15:58.460 --> 00:16:04.460 Davison and Warburg convinced him that Strong, as effective head of the Fed, could achieve 112 00:16:04.460 --> 00:16:11.700 the Wall Street run banking cartel of his dreams, if not as candidly as he would have 113 00:16:11.700 --> 00:16:22.700 As at Jekyll Island, Warburg persuaded his fellow cartilages to bow to the political realities and adopt the cloak of decentralization. 114 00:16:22.700 --> 00:16:33.700 After Strong assumed the post of governor of the New York Fed in October 1914, he lost no time in seizing power over the Federal Reserve system. 115 00:16:33.700 --> 00:16:40.700 At the organizing meeting of the system, an extra-legal council of regional Fed governors was formed. 116 00:16:40.700 --> 00:16:48.700 At its first meeting, Strong grabbed control of the Council, becoming both its Chairman and the Chairman of its Executive Committee. 117 00:16:48.700 --> 00:16:57.700 Even after W.P.G. Harding became Governor of the Federal Reserve Board two years later and dissolved the Council, 118 00:16:57.700 --> 00:17:09.700 Strong continued as the dominant force in the Fed by virtue of being named sole agent for the open market operations of all the regional Federal Reserve Banks. 119 00:17:09.700 --> 00:17:15.700 Strong's power was further entrenched by U.S. entry into World War I. 120 00:17:15.700 --> 00:17:33.700 Before then, the Secretary of the Treasury had continued the legally mandated practice, since Jacksonian times, of depositing all government funds in its own sub-treasury branch vaults, and in making all disbursements from those branches. 121 00:17:33.700 --> 00:17:45.700 Under spur of wartime, however, McAdoo fulfilled Strong's longstanding ambition, becoming the sole fiscal agent for the U.S. Treasury. 122 00:17:45.700 --> 00:17:52.700 From that point on, the Treasury deposited its funds with the Federal Reserve. 123 00:17:52.700 --> 00:18:01.700 Not only that, wartime measures accelerated the permanent nationalizing of the gold stock of Americans, 124 00:18:01.700 --> 00:18:06.700 The centralization of gold into the hands of the Federal Reserve. 125 00:18:06.700 --> 00:18:09.700 This centralization had a two-fold effect. 126 00:18:09.700 --> 00:18:17.700 It mobilized more bank reserves to spur greater and nationally coordinated inflation of bank credit. 127 00:18:17.700 --> 00:18:23.700 And it weaned the average American from the habit of using gold in his daily life 128 00:18:23.700 --> 00:18:28.700 and got him used to substituting paper or checking accounts instead. 129 00:18:28.700 --> 00:18:38.700 In the first place, the Federal Reserve law was changed in 1917 to permit the Fed to issue Federal Reserve notes in exchange for gold. 130 00:18:38.700 --> 00:18:43.700 Before that, it could only exchange its notes for short-term commercial bills. 131 00:18:43.700 --> 00:18:57.700 And second, from September 1917 until June 1919, the United States was de facto off the gold standard, at least for gold redemption of dollars to foreigners. 132 00:18:57.700 --> 00:19:04.140 to Foreigners, gold exports were prohibited and foreign exchange transactions were controlled 133 00:19:04.140 --> 00:19:05.860 by the government. 134 00:19:05.860 --> 00:19:11.220 As a result of both measures, the gold reserves of the Federal Reserve, which had constituted 135 00:19:11.220 --> 00:19:18.100 28 percent of the nation's gold stock on U.S. entry into the war, had tripled by the 136 00:19:18.100 --> 00:19:24.460 end of the war to 74 percent of the country's gold. 137 00:19:24.460 --> 00:19:31.020 The content of Benjamin Strong's monetary policies was what one might expect from someone 138 00:19:31.020 --> 00:19:35.800 from the highest strata of Morgan power. 139 00:19:35.800 --> 00:19:41.220 As soon as war broke out in Europe, Henry P. Davison sailed to England and was quickly 140 00:19:41.220 --> 00:19:48.000 able to use long-standing close Morgan ties with England to get the House of Morgan, named 141 00:19:48.000 --> 00:20:18.000 Morgan became the third to sole purchasing agent in the United States for the duration of the war, for war material for Britain and France. Furthermore, the Morgans also became the sole underwriter for all the British and French bonds to be floated in the U.S. to pay for the immense import of arms and other goods from the United States. J.P. Morgan and company now had an enormous stake in the victory of Britain and France. 142 00:20:18.000 --> 00:20:25.080 of France, and the Morgans played a major and perhaps decisive role in maneuvering the 143 00:20:25.080 --> 00:20:31.460 supposedly neutral United States into the war on the British side. 144 00:20:31.460 --> 00:20:37.560 The Morgans' ascendancy during World War I was matched by the relative decline of the 145 00:20:37.560 --> 00:20:43.720 Kuhn-Lobes. The Kuhn-Lobes, along with other prominent German-Jewish investment bankers 146 00:20:43.720 --> 00:20:50.320 on Wall Street, supported the German side in the war and certainly opposed American intervention 147 00:20:50.320 --> 00:20:56.520 on the Anglo-French side. As a result, Paul Warburg was ousted from the Federal Reserve 148 00:20:56.520 --> 00:21:03.400 Board, the very institution he had done so much to create. And of all the leading Anglo 149 00:21:03.400 --> 00:21:09.880 financial interests, the Rockefellers, ally of the Kuhn lobes and a bitter rival of the 150 00:21:09.880 --> 00:21:24.880 was one of the very few who remained unenthusiastic about America's entry into the war. 151 00:21:24.880 --> 00:21:32.880 During World War I, Strong promptly used his dominance over the banking system to create a doubled money supply 152 00:21:32.880 --> 00:21:38.880 so as to finance the U.S. war effort and to ensure an Anglo-French victory. 153 00:21:38.880 --> 00:21:46.880 All of this was only prelude for Morgan installed monetary and financial policy throughout the 1920s. 154 00:21:46.880 --> 00:21:53.880 During the decade of the 20s, Strong collaborated closely with the Governor of the Bank of England, Montague Norman, 155 00:21:53.880 --> 00:22:03.880 to inflate American money and credit so as to support the return of Britain to a leading role in a new form of boldlerized gold standard, 156 00:22:03.880 --> 00:22:10.520 Standard, with Britain and other European countries fixing their currencies at a highly 157 00:22:10.520 --> 00:22:15.320 overvalued par in relation to the dollar or to gold. 158 00:22:15.320 --> 00:22:20.480 The result was a chronic export depression in Britain, and a tendency for Britain to 159 00:22:20.480 --> 00:22:26.480 lose gold, a tendency that the United States felt forced to combat by inflating dollars 160 00:22:26.480 --> 00:22:31.840 in order to stop the hemorrhaging of gold from Great Britain to the U.S.