This is Part One of a two-part series.

#651-1 Banana Cartel vs. Economic Stabilizer

G. Edward Griffin, the author of “The Creature from Jekyll Island,” notes that the Federal Reserve isn’t part of the federal government, and describes it as a “banana or oil cartel.” He discusses the six men representing the largest financial institutions who met in secret to protect the elite from public finance reform, hammering out what Congress would pass as the Federal Reserve Act in 1913. Griffin believes that the power to create money out of nothing went far beyond the originators’ wildest dreams because they never thought the American people or their leaders would be so stupid as to allow this complete, unrestricted expansion of the money supply. Scott Minerd, Chief Investment Officer of Guggenheim Partners, is also a member of the Federal Reserve Bank of New York’s Investor Advisory Committee on Financial Markets. Minerd states that the Federal Reserve Act was started by individuals to design a central bank for people of the U.S. to mitigate risks of financial collapses that occurred in the early 1900s. He explains that every major power had central banking for a long time, and that a major industrial economy not having such a system was unusual. Minerd points to Progressives viewing acts of Wall Street as a concentration of power beyond the scope of what should be available to a handful of financial people.

#651-2 Real Life “Monopoly” or Lender of Last Resort

Minerd describes the Federal Reserve as a novel concept in being a marginal provider of liquidity in times of crisis, such as the 1907 financial panic of skyrocketing interest rates. He credits the Federal Reserve’s original guidelines to print money, purchase gold, or purchase short-term, self-liquidating bills of trade until the 1930s when it was granted emergency powers to purchase U.S. Treasury securities as a result of the Great Depression. Minerd states that today, Treasury securities are the number one holding of the Federal Reserve, and a temporary solution has become a permanent fix. Griffin considers the fiat money, with no precious metals to back it, an insidious tax on the public. His complaint is that to moderate to deflation/inflation cycles, Congress took the wrong approach by allowing the states to print more fiat money with no reserves to back it up. Minerd explains that by creating additional credit to allow the U.S. government to finance World War I, inflation spiked at an unacceptable high by 1920. The Federal Reserve then started processing disinflation for the next decade, and Minerd posits that was arguably and ultimately the part of the issue that created the Great Depression.

#651-3 Interest on Nothing & Virtual Financing

Griffin charges that it benefits banks to endorse worthless fiat money because banks make money on charging interest. He states that when money was backed by gold or silver, banks couldn’t loan more than they had, but with a monetary system based on printing fiat money, their ability to make a profit isn’t limited. Griffin states that people don’t realize that Congress gave up the power to issue its own money, essentially handing it back over to the banks (the cartel), when the Federal Reserve Act was passed. He points out that the words Treasury Certificate are no longer on paper bills. They have been replaced with Federal Reserve Note, United States of America, rather than “redeemable in specific ounces of gold or silver.” Minerd observes that the history of hard currency is checkered, and the history of paper currency is abysmal. He states that there’s never been a time when the use of paper currency hasn’t led to high levels of inflation, and ultimately have either been reversed or gone off into hyper-inflation. He describes Quantitative Easing (QE), a program designed to provide stimulus to the economy once interest rates reach what is called “zero-bound.” Minerd states that QE is the process by which the Federal Reserve directly intervenes in the market, purchasing securities in an attempt to push interest rates down, essentially creating more money. He expresses concern about this money that is not borrowed or printed but created through electronic bits, questioning what will happen when the time comes to reverse the process, and calling some sort of monetary error likely.

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