“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”—Former Federal Reserve Chairman Alan Greenspan in a speech to the Economic Club of New York, 1988

by Ellen Brown
for HUSTLER Magazine – July 2010

IF YOU’VE NEVER REALLY UNDERSTOOD THE FEDERAL RESERVE but were too embarrassed to ask, don’t worry. Hardly anybody understands it, and the Federal Reserve (or “Fed”) likes it that way. “Fed speak” is a term coined to describe its incomprehensible utterances. Why is the Fed so obscure? To conceal the fact that America’s banking system is largely sleight of hand. If you could see what was really going on, you might be reluctant to play the game. The Federal Reserve is not actually “federal,” and today it keeps nothing in “reserve” except government bonds, which are basically IOUs from our Treasury. The Fed’s Web site says it is a “public-private hybrid,” but not one share of its stock is owned by the public. Each of the 12 Federal Reserve branches is owned by its member banks, which get a guaranteed annual 6% dividend on their stock. The Fed is authorized under the Federal Reserve Act to print and lend its own Federal Reserve Notes (dollar bills) to the government in return for government bonds. Federal Reserve Notes are backed by nothing but “the full faith and credit of the United States.”

And that is where the sleight of hand comes in: The Fed is printing our money and lending it back to us. Acting as our government’s bank, the Federal Reserve gives us cash in exchange for government bonds. That means our money is backed by nothing but our own national debt!

A private bank deceptively called “the Federal Reserve” has been awarded the ultimate franchise: the ability to create our crucial medium of exchange, the oil that turns the wheels of production and allows goods to flow in trade. The ability to create also means the ability to restrict and control.

Congressman Charles Lindbergh Sr. (father of famed aviator Charles Lindbergh Jr.) opposed passage of the Federal Reserve Act in1913. He warned Congress: “[The Federal Reserve Board] can cause the pendulum of a rising and falling market to swing gently back and forth by slight changes in the discount rate, or cause violent fluctuations by greater rate variation, and in either case it will possess inside information as to financial conditions and advance knowledge of the coming change, either up or down. This is the strangest, most dangerous advantage ever placed in the hands of a special privilege class by any Government that ever existed. … The financial system has been turned over to…a purely profiteering group. The system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people’s money.”

Except for coins, which make up only about one ten-thousandth of the money supply, the entire U.S. money supply is now created as a debt to the private Federal Reserve and the private banks it backstops. The Fed, our government’s banker, plays the same game private retail banks play with us. The banks create money out of thin air, then say we owe it back to them with interest.

Modern banking is basically a shell game, in which “debt” is called “money.” The money is then moved from shell to shell. The Federal Reserve was instituted in 1913 to keep the shell game going by moving the elusive peas to whichever shells needed them at any one time. The shell game dates back to the 17th century, when goldsmiths started giving out paper receipts for the gold entrusted to them for safekeeping. Other customers wanted to borrow gold, but most customers preferred the paper receipts to the gold itself because they were easier and safer to carry around. The goldsmiths soon discovered that only about 10% of the customers would demand actual gold at any one time. That meant the goldsmiths-turned-bankers could safely lend up to ten times as many paper notes as they had gold.

Although nine of the ten notes were actually counterfeit, this dubious practice was sanctioned as “fractional reserve lending” and became the means by which money has been created by banks ever since.

The system was formalized in 1694, when a privately owned banking corporation called the Bank of England was allowed to lend its banknotes to the Crown. The bank was chartered by King William III, who never had to pay these loans off. He just paid the interest on them. Whenever he needed more money, the bank printed more cash, and the game continued. (This is how ballooning deficits are still created.) King William III and his successors got a ready source of money and a national money supply out of the deal, but it was at the cost of inextricable debt to a private banking cartel, which gained the power to manipulate and control the money supply for its own purposes.

Why would the king give the bankers so much power? Because they were the ones who made him king in the first place! Meanwhile, back in the American colonies, a competing paper money system was devised, in which paper notes called “scrip” were issued by local governments. These notes, too, were basically receipts. But rather than representing private gold, they were receipts for the labor of soldiers and civil servants and for goods delivered to the government. The receipts traded in the community as money.

The most efficient of these systems was in Benjamin Franklin’s colony of Pennsylvania. The provincial government owned a bank, which made loans to farmers at 5% interest. The government also spent some money directly into the economy. This money came back to the government as principal and interest and was recycled into more loans. During the quarter-century that this system was in place, the citizens paid no taxes(because the revenue that came back to the government loan office provided adequate funds), they had no government debt, and price inflation did not occur. If more money supply was needed to keep servicing the debt, the bank printed it.

But there were 13 different systems in the 13 colonies, and some of these paper currencies were inflated from overprinting. When British merchants complained that they were getting paid in money that wasn’t holding its value, the king issued an edict stating that the colonists could no longer issue their own money. They had to pay their taxes in the king’s money—gold, or Bank of England notes backed by gold. Since the colonists did not have this form of money, they had to borrow it from the British bankers, putting them heavily in debt. The farmers started losing their farms, the economy sank into a severe depression, and the colonists finally rebelled and set up their own nation.

But their paper scrip was so heavily counterfeited during the Revolutionary War that it lost its value, and the Founding Fathers became disillusioned with it. Rather than blaming the British, who had done the counterfeiting, they blamed paper money itself. They could not agree whether to give the new government the power to issue its own paper money, so they just left that key feature out of the Constitution.

For the next century, bankers largely funded from abroad tried to impose on the country a private central bank modeled on the Bank of England. It would have the power to issue its own banknotes and lend them to the government at interest. But astute politicians kept seeing through the ruse.

Thomas Jefferson, campaigning against Alexander Hamilton’s privately owned Festus. Bank, helped keep its charter from being renewed. President Jackson railed against the Second U.S. Bank and blocked renewal of the charter. President Lincoln defied the bankers who wanted 24% to 36% interest on loans to fund the Civil War and reverted to the government-created paper money of the American colonists, which allowed him to win the war. During the second half of the 19thcentury, Greenbackers, Populists and other money reformers fought vigorously for the people’s control over the money supply.

William Jennings Bryan, the Populist candidate for President in 1896 and 1900, said in his famous “cross of gold” speech: “We say in our platform that we believe that the right to coin money and issue money is a function of government. … Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson…and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business.”

Bryan lost his bid for the Presidency, but he continued to campaign in Congress for government-issued money. In 1907 a particularly bad bank panic convinced a gullible public that the country needed a central bank to stop future panics. Bank runs had occurred regularly during the 19th century, when people—realizing that there was not enough gold to back their notes—all rushed to claim their gold at the same time. Robert Owens, a coauthor of the Federal Reserve Act, later testified before Congress that the banking industry had conspired to create a series of financial panics in order to create a popular demand for “reforms” that served the interests of the financiers.

The bankers’ bill for a central bank had to overcome stiff opposition in Congress, led by William Jennings Bryan. He said he would not support any bill that resulted in private money issued by private banks. He insisted that Federal Reserve Notes must be Treasury currency, issued and guaranteed by the government. To get their bill passed, the Wall Street faction changed its name from the Aldrich Bill to the Federal Reserve Act and brought it three days before Christmas, when Congress was preoccupied with departure for the holidays.

In a spirit of apparent compromise, the legislators made a show of acquiescing to Bryan’s demands. The bill was so obscurely worded that no one really understood its provisions. Bryan bought it, saying happily, “The right of the government to issue money is not surrendered to the banks; the control over the money so issued is not relinquished by the government.” That was what Bryan thought, but while the national money supply would be printed by the U.S. Bureau of Engraving and Printing, it would be issued as an obligation or debt of the government, a debt owed back to the private Federal Reserve with interest. And while Congress and the President would have some input in appointing the Federal Reserve Board, the board would work behind closed doors with the regional bankers, without Congressional oversight or control.

The Wall Street faction succeeded the same year in passing the 16th Amendment, authorizing a federal income tax. The tax was to be paid directly to the Federal Reserve to cover the massive interest bill that would soon be incurred by the government for borrowing its own money, in the form of credit, from the privately owned Fed.

All in all, it was a huge coup for the bankers and their colleagues in Europe. In 1934, amid the throes of the Great Depression, House Banking and Currency Committee Chairman Louis McFadden charged on the Congressional Record: “Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory moneylenders. … These 12 private credit monopolies were deceitfully and disloyally foisted upon this Country by the bankers who came here from Europe and repaid us our hospitality by undermining our American institutions.”

If the purpose of the Fed was to backstop bankruns, it did not work very well, since the largest bankrun in history occurred in 1933. But that did not prompt Congress to disband this privately owned banking club with a monopoly on the right to create money. Instead, the dollar was taken off the gold standard, which had required that real gold be handed over to people demanding it. From then on, the Fed had the power to inflate its way out of bank crises just by printing the money its member banks needed to cover shortfalls at the teller’s window.

And inflate the Fed did. Since banks created the principal but not the interest needed to pay back their loans, debtors had to continually be found to take out new loans that the banks could charge interest on. It was the only way to keep the game going.

The banking scheme became not only a shell game but a pyramid scheme, which spread around the world until it ran out of creditworthy borrowers. It reached its mathematical limits in 2007, with the collapse of a housing bubble created by the Fed when it drastically lowered interest rates in 2001.The bubble burst when the Fed progressively raised rates after 2004. The Fed and the taxpayers have bailed out the Wall Street bankers, who are now extracting some of their biggest bonuses ever from market speculation. But Wall Street has largely shutoff the credit spigots to Main Street, forcing businesses to close and driving millions of homeowners into foreclosure and bankruptcy.

The banking scheme is a confidence game, and today confidence is wearing thin. Surveys show that75% to 80% of Americans are in favor of passing H.R. 1207 and S604, the House and Senate bills to audit and investigate the Fed. The jig is up. It’s time for a new game with new rules.

Ellen Brown is an attorney in Los Angeles and the author of 11 books. In Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free she shows how a private banking cartel has usurped the power to create money from the people themselves, and how We the People can get it back. Her Web site is WebOfDebt.com.

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A LAWMAKER DEMANDS AN AUDIT OF THE FEDERAL RESERVE BANK, BUT OBAMA AND HIS BRAIN TRUST REFUSE TO MAKE THE FINANCIAL INDUSTRY “NERVOUS.”

by Robert Scheer
From HUSTLER MAGAZINE March 2010

You don’t have to salute every time Ron Paul raises the libertarian flag, and personally I don’t like leaving education, health and Social Security to the tender mercies of the inevitably rapacious capitalist markets. But the Republican congressman from Texas is on target with his bill demanding a full public audit of the Federal Reserve, the government monster that has a power over the economy that many dictators would envy and operates under a cloak of secrecy that even the CIA rarely attains.

It was the Federal Reserve, under the leadership of the once exuberantly honored but now disgraced Alan Greenspan, that got us into this banking mess. The Fed looked the other way while the finaglers of Wall Street packaged and sold those mysterious Collateralized Debt Obligations and Credit Default Swaps that brought the economy to near death when they exploded with a destructive force and then were covered by trillions of taxpayer dollars.

The Federal Reserve—more than any other institution, public or private— deserves blame for shoving the world economy into the huge financial hole it now inhabits. The Fed, most definitely including the New York Federal Reserve Bank—headed for the five years prior to the Wall Street meltdown by Timothy Geithner until Obama named him Treasury secretary—miserably failed in its regulatory obligations while the bankers looted the banks. But where the libertarians and Ron Paul are wrong is to resist any meaningful regulation, and where Obama is equally wrong is his belief that we can get it from the Fed.

Despite Obama’s sorry record of enabling Wall Street greed, choosing Geithner to run the Treasury Department may be his biggest mistake. And it is not only Geithner but also every other major appointment of those who formulate economic policy—notably deferring to the Fed—that demonstrates the President’s fawning response to the financial hustlers.

Take key White House economic adviser Lawrence Summers, who during his tenure as Clinton’s Treasury secretary pushed through the deregulation of mortgages and other derivatives that made the housing collapse inevitable. After the collapse it was the Federal Reserve that orchestrated a bailout package under George W. Bush and continued under Obama to save—indeed reward— the “too big to fail bankers” whose destructive greed the Fed had promoted.

Paul is right with his legislation, which as of this writing had the support of hundreds of lawmakers but had already been gutted by Democrats on the key House Banking Committee in response to signals from the White House. Not only was the administration opposed to transparency for the Federal Reserve to check its unbridled power, but Obama also compounded the error by advocating an even larger role for the Fed in new legislation designed ostensibly to prevent another banking meltdown.

When Chris Dodd (D-Connecticut), chairman of the Senate Banking Committee, proposed to take major banking oversight power away from the Fed and put it in the hands of a new agency to regulate all federally chartered financial institutions, the Obama Administration treated it as a dangerously subversive proposal. In the words of White House economic adviser Austan Goolsbee, it would cause financial industry “nervousness.”

Isn’t that what we ordinary folk want? Shouldn’t the banking bandits with their proven record of chicanery be made just the least bit nervous when they cook up their next series of scams? Not so, in the view of Neal Wolin, Obama’s choice as deputy Treasury secretary. Despite massive evidence to the contrary,Wolin insisted that the Federal Reserve “is the agency best equipped for the task of supervising the largest, most complex firms.”

Consider the source: Wolin, as the Treasury’s top lawyer during the Clinton years, drafted the language of the infamous Gramm-Leach-Bliley Act, which allowed the merger of investment and commercial banks with insurance companies to create the toolarge- to-fail monstrosities like Citigroup, with which the taxpayers are now saddled.

Between his government stints under Clinton and now Obama, Wolin benefited from those breakthrough mergers. He served as general counsel at The Hartford insurance company, which—thanks to the deregulatory legislation Wolin had helped draft—was allowed to buy up troubled banks and qualify for federal TARP funds.

Even the conservative Washington Times voiced skepticism in an editorial on Wolin: “Revolving doors between industry and the administration and fat-cat political contributors getting bailed out at taxpayer expense sound like business as usual. This certainly isn’t change we can believe in.” Painful as it is to admit, the Right got that right.

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Before serving 30 years as a columnist for the Los Angeles Times, Robert Scheer spent the late 1960s as Vietnam correspondent, managing editor and editor in chief of Ramparts magazine. Now editor of TruthDig.com, Scheer has written such hard-hitting books as The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America and his latest, The Great American Stick-Up: Greedy Bankers and the Politicians Who Love Them.

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