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.
Following the crucial plank of Post-Peel Act Central Banking, the Fed was given a monopoly of the issue of all bank notes.
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.
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.
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.
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.
At this point, there was no need for even national banks to hold on to gold.
Bank reserves could be, as the bank apologist proclaimed, economized, that is, there could be and was more and more of these reserves.
More inflationary credit, more bank counterfeiting, pyramided on top of the given gold reserves.
There were now three inverted inflationary pyramids of bank credit in the American economy.
The Fed pyramided its notes and deposits on top of its newly centralized gold supply.
The national banks pyramided bank deposits on top of their reserves of deposits at the
Fed, and those state banks who chose not to exercise their option of joining the Federal
Reserve system could keep their deposit accounts at national banks and pyramid their credit
on top of that.
And at the base of the pyramid, the Fed could coordinate and control the inflation by determining
The amount of reserves in the member banks.
To give an extra philip to monetary inflation, the new Federal Reserve system cut in half
the average legal minimum reserve requirements imposed on the old national banks, whereas
the national banks before the onset of the Fed were required to keep an average minimum
of 20 percent reserves to demand deposits on which they could therefore pyramid inflationary
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.
As luck would have it, the new Federal Reserve system coincided with the outbreak of World War I in Europe,
and it is generally agreed that it was only the new system that permitted the US to enter the war
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.
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.
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.
Many critics of the Fed like to harp on the fact that the private bankers legally own the Federal Reserve system.
But this is an unimportant legalistic fact.
Fed, and therefore possible bank, profits from its operations are taxed away by the Treasury.
The benefits to the bankers from the Fed come not from its legal profits, but from the very essence of its operations,
its task of coordination and backing for bank credit inflation.
These benefits dwarf any possible direct profits from the Fed's banking operations into insignificance.
From the beginning, the Fed has been headed by a Federal Reserve Board in Washington,
all appointed by the President with the consent of the Senate.
The Board supervises the 12 decentralized regional Federal Reserve Banks
whose officers are indeed selected by private banks in each region, officers who have to
be approved by the Washington Board. At the outset of the Fed and until the reforms of
the 1930s, the major control of the Fed was not in the hands of the Board, but of the
Governor, now called President, of the Federal Reserve Bank of New York, Wall Street's main
and Man in the Fed System. Because of the peculiarities of banking history, Governor
is considered a far more exalted title than President, a status stemming from the august
title of Governor as head of the original and most prestigious central bank, the Bank
of England. Part of the downgrading of the regional Federal Reserve banks and upgrading
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.
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.
We will see how this process works below.
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.
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.
There are two critical steps in the establishment and functioning of any cartel-like government regulation.
We cannot afford to ignore either step.
Step one is passing the bill and establishing the structure.
The second step is selecting the proper personnel to run the structure.
There is no point to big bankers setting up a cartel, for example,
and then see the personnel fall into the wrong hands.
And yet conventional historians not geared to power elite or ruling elite analysis
usually fall down on this crucial second task of seeing precisely who the new rulers of the system would be.
It is all too clear on examining the origin and early years of the Fed
The Fed that both in its personnel and chosen monetary and financial policies, the Morgan Empire was in almost supreme control of the Fed.
This Morgan dominance was not wholly reflected in the makeup of the first Federal Reserve Board.
Of the seven board members, at the time two members were automatically an ex officio,
the Secretary of the Treasury and the Comptroller of the Currency, the regulator of the national
banks who is an official in the Treasury Department.
The Secretary of Treasury in the Wilson administration was his son-in-law, William Gibbs McAdoo, who
McAdoo, as a failing businessman and railroad magnate in New York City, had been personally
befriended and bailed out by J.P. Morgan and his close associates.
McAdoo spent the rest of his financial and political life in the Morgan ambit.
The Comptroller of the Currency was a long-time associate of McAdoo's, John Skelton Williams.
Mises was a Virginia banker who had been a director of McAdoo's Morgan-controlled Hudson
and Manhattan Railroad and president of the Morgan-oriented Seaboard Airline Railway.
These Treasury officials on the Board were reliable Morgan men, but they were members
only ex officio. Governor, now Chairman, of the original Board was Charles S. Hamlin,
who McAdoo had appointed as Assistant Secretary of Treasury along with Williams.
Hamlin was a Boston attorney who had married into the wealthy Prune family of Albany, a
family long connected with the Morgan-dominated New York Central Railroad.
Another member of the Federal Reserve Board and a man who succeeded Hamlin as governor
was William P.G. Harding, a protege of Alabama Senator Oscar W. Underwood, whose father-in-law,
Joseph H. Woodward, was Vice President of Harding's First National Bank of Birmingham,
Alabama, and head of the Woodward Iron Company, whose board included representatives of both
Morgan and Rockefeller interest.
The other three board members were Paul M. Warburg, Frederick A. Delano, uncle of Franklin
D. Roosevelt and president of the Rockefeller-controlled Wabash Railway, and Berkeley economics professor
Adolph C. Miller, who had married into the wealthy Morgan-connected Sprague family of
Chicago. Miller's father-in-law, Otto S. A. Sprague, had served as a director of the
and Morgan-dominated Pullman Company, while Otto's brother, Albert Aisbreg, was a director
of the Chicago Telephone Company, a subsidiary of the mighty Morgan-controlled Monopoly American
Telephone and Telegraph Company.
It should be noted that while the Oyster Bay, Manhattan branch of the Roosevelt family,
including President Theodore Roosevelt, had long been in the Morgan ambit, the Hyde Park
The Rock Branch, which of course included FDR, was long affiliated with their wealthy and influential Hudson Valley neighbors, the Astors and the Herrimans.
Thus, if we ignore the two Morgan ex officios, the Federal Reserve Board in Washington began its existence with one reliable Morgan man,
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.
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.
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,
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.
Benjamin Strong's entire life had been a virtual preparation for his assumption of power at the Federal Reserve.
Strong was a long-time protege of the immensely powerful Henry P. Davison,
number two partner of the Morgan Bank, just under J. P. Morgan himself,
and effective operating head of the Morgan World Empire.
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.
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.
In addition, the Davisons raised Strong's children for a time after the death of Strong's first wife.
Moreover, Strong served J.P. Morgan as his personal auditor during the panic of 1907.
Strong had long been a voluble advocate of the original Aldrich Plan and had participated in a lengthy August 1911 meeting on the Plan
and with the Senator Davison, Vanderlip and a few other bankers on Aldrich's yacht.
But Strong was bitterly disappointed at the final structure of the Fed since he wanted
a real central bank run from New York by a board of directors on the ground.
That is a central bank openly and candidly run from New York and dominated by Wall Street.
Their weekend in the country, however, Davison and Warburg persuaded Strong to change his
mind and accept the proffered appointment as Governor of the New York Fed. Presumably,
Davison and Warburg convinced him that Strong, as effective head of the Fed, could achieve
the Wall Street run banking cartel of his dreams, if not as candidly as he would have
As at Jekyll Island, Warburg persuaded his fellow cartilages to bow to the political realities and adopt the cloak of decentralization.
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.
At the organizing meeting of the system, an extra-legal council of regional Fed governors was formed.
At its first meeting, Strong grabbed control of the Council, becoming both its Chairman and the Chairman of its Executive Committee.
Even after W.P.G. Harding became Governor of the Federal Reserve Board two years later and dissolved the Council,
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.
Strong's power was further entrenched by U.S. entry into World War I.
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.
Under spur of wartime, however, McAdoo fulfilled Strong's longstanding ambition, becoming the sole fiscal agent for the U.S. Treasury.
From that point on, the Treasury deposited its funds with the Federal Reserve.
Not only that, wartime measures accelerated the permanent nationalizing of the gold stock of Americans,
The centralization of gold into the hands of the Federal Reserve.
This centralization had a two-fold effect.
It mobilized more bank reserves to spur greater and nationally coordinated inflation of bank credit.
And it weaned the average American from the habit of using gold in his daily life
and got him used to substituting paper or checking accounts instead.
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.
Before that, it could only exchange its notes for short-term commercial bills.
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.
to Foreigners, gold exports were prohibited and foreign exchange transactions were controlled
by the government.
As a result of both measures, the gold reserves of the Federal Reserve, which had constituted
28 percent of the nation's gold stock on U.S. entry into the war, had tripled by the
end of the war to 74 percent of the country's gold.
The content of Benjamin Strong's monetary policies was what one might expect from someone
from the highest strata of Morgan power.
As soon as war broke out in Europe, Henry P. Davison sailed to England and was quickly
able to use long-standing close Morgan ties with England to get the House of Morgan, named
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.
of France, and the Morgans played a major and perhaps decisive role in maneuvering the
supposedly neutral United States into the war on the British side.
The Morgans' ascendancy during World War I was matched by the relative decline of the
Kuhn-Lobes. The Kuhn-Lobes, along with other prominent German-Jewish investment bankers
on Wall Street, supported the German side in the war and certainly opposed American intervention
on the Anglo-French side. As a result, Paul Warburg was ousted from the Federal Reserve
Board, the very institution he had done so much to create. And of all the leading Anglo
financial interests, the Rockefellers, ally of the Kuhn lobes and a bitter rival of the
was one of the very few who remained unenthusiastic about America's entry into the war.
During World War I, Strong promptly used his dominance over the banking system to create a doubled money supply
so as to finance the U.S. war effort and to ensure an Anglo-French victory.
All of this was only prelude for Morgan installed monetary and financial policy throughout the 1920s.
During the decade of the 20s, Strong collaborated closely with the Governor of the Bank of England, Montague Norman,
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,
Standard, with Britain and other European countries fixing their currencies at a highly
overvalued par in relation to the dollar or to gold.
The result was a chronic export depression in Britain, and a tendency for Britain to
lose gold, a tendency that the United States felt forced to combat by inflating dollars
in order to stop the hemorrhaging of gold from Great Britain to the U.S.