On
November 22, 1910, a group of men including Senator Nelson Aldrich,
bankers Henry Davison, Paul Warburg, and Frank Vanderlip, and Assistant
Secretary of the Treasury A. Piatt Andrew gathered at the Jekyll Island Club, a coastal Georgia resort co-owned by banker J.P. Morgan, one of
the wealthiest men of the day. Aldrich was a powerful Progressive
Republican Senator who had been dubbed "General Manager of the Nation"
because of his central position on the Senate Finance Committee from
which he dominated American economic policy in the early twentieth
century. His daughter Abigail had been married to John David Rockefeller, Jr., the sole son and heir of oil magnate John D. Rockefeller, since 1901, essentially making Aldrich unofficial American
royalty. Davison was a Senior Partner at J.P. Morgan & Company, the
powerful commercial and investment banking institution which had
financed such mighty corporations as the United States Steel Corporation. Warburg, a German immigrant, was a partner in Kuhn, Loeb & Company, one of the most influential investment banks in the late
nineteenth and early twentieth centuries. Vanderlip was president of
the National City Bank of New York. Andrew was Assistant Secretary of
the Treasury and had previously served as Director of the Mint and as
an editor of publications of the National Monetary Commission, a
government think tank that studied European central banks and sought to
create such an entity in the United States. During the week long
meeting, these powerful men, who represented an estimated one quarter of
all the world's wealth, hammered out the plan for what would come to
be the Federal Reserve. This plan was put into motion through the
Federal Reserve Act, enacted on December 29, 1913. Through single votes
in the Congress, where it passed in the Senate by a vote of 43 to 25
in the Senate and by a vote of 298 to 60 in the House of
Representatives, the Act passed and was signed by President Woodrow Wilson.
What
precisely is the Federal Reserve? Given its name, most Americans
likely assume that it is a government entity. However, nothing could be
further from the truth. Although it claims to not be owned by anybody
and claims it is "not a private, profit-making institution" but is
instead an independent entity within the government with both "public
purposes and private aspects," this is simply not true. In fact, the
Federal Reserve is owned by its member institutions, which are all
private banks. Its powers continue to increase, and it is more
clandestine in many ways than even the CIA, with not even a
Congressional audit currently permitted for transparency and
accountability. What does the Federal Reserve do? In the Federal
Reserve Act, which established the entity, Congress said that the
Federal Reserve was created "to furnish an elastic currency, to afford
the means of discounting commercial paper, to establish a more effective
supervision of banking in the United States, and for other purposes."
"A more effective supervision of banking" was sought to deal with
banking panics such as the one in 1907 which nearly crippled the nation
financially. However, this was clearly just an excuse, as such a
powerful entity is not needed to supervise banking. Creating something
like the Federal Reserve for that would be akin to using a nuclear bomb
to swat a fly. The more important thing to contemplate is the notion of
"an elastic currency." What is an elastic currency? It is ultimately
"funny money," fiat currency which is backed by nothing and is subject
to manipulation which inflates it over time, destroying its value and
leaving Americans poorer with each passing year due to the inflation.
It is currency which can be effectively created out of thin air through
such complex practices as open-market operations, the changing of
reserve ratios, and manipulating interest rates. It was these kinds of
machinations by which the Federal Reserve caused the Great Depression
and the current economic crisis.
The pattern is always essentially the same. Thomas Woods, Jr. describes this pattern in a clear fashion in his book Meltdown:
"When
the Federal Reserve pushes down interest rates by increasing the money
supply, it encourages a boom in the production of longer-term projects:
raw materials, construction, and capital goods in general. The boom in
construction and real estate this past decade, made possible by these
low interst rates, is a good example. Unlike the production that
genuine consumer demand stimulates, though, the Fed's artificial
stimulus is not in line with real consumer demand, and it encourages
more and different kinds of projects to be undertaken than the economy
can sustain. The necessary resources to complete all these projects
profitably do not exist. Neither the saved resources to complete them,
nor the consumer base to purchase the finished products, exist in
sufficient volume."
During
the 1920's the amount of money increased fifty-five percent due to
inflationary policies pursued by the Federal Reserve during the decade.
This increase took the form of additional loans to businesses. This
pumped up "bubble" created by these inflationary policies, famously
burst when the stock market collapsed in 1929. If the government
reacted to this prudently by allowing the markets to correct, what
became known as the Great Depression would likely have been avoided as
such a depression had been avoided at the beginning of the decade.
During and after World War I, the Federal Reserve had been inflating the
money supply and when it eventually raised the rate at which it lends
to banks, it caused the economy to slow drastically. Instead of
meddling with the market in a totalitarian manner as Hoover and
Roosevelt did a decade later, President Harding simply allowed the
markets to correct. As a result, nearly nobody has ever heard of the
Depression of 1920.
Similar
machinations caused the current financial crisis. The Federal Reserve
increased the money supply by lowering key interest rates to historic
lows. This caused people to purchase things like half million dollar
homes that they could not afford. For the very same reasons as with the
Great Depression, the bubble that the Federal Reserve artificially
inflated with its machinations burst, causing financial difficulties to
spread throughout the economy.
Whether
the Federal Reserve is a menace that causes the boom/bust economic
cycle as Austrian economists such as Hayek and von Mises claim or is a
necessary and benevolent force such as economist Milton Friedman
believed is immaterial at the end of the day. The important issue is
whether the Federal Reserve is constitutional. Only if it is
constitutional must we even debate the merits of the institution.
Article I, Section 8 of the Constitution gives the Congress, among its other
enumerated powers, the power "To coin Money, regulate the Value thereof,
and of foreign Coin, and fix the Standard of Weights and Measures." In
effect, through its control of the interest rates, it is the Federal
Reserve that is now regulating the value of American currency. It is
also effectively coining money by inflating the amount of currency in
circulation. The Constitution gives Congress no authority to delegate
its enumerated powers to other government entities, let alone to
delegate them to private banks.
So
how did this happen? How did a clandestine consortium of private
bankers gain the power to control the economy, control interest rates,
and in effect control our currency? To find the answer, we need to go
back to 1819 and the infamous case McCulloch v. Maryland,
a black eye for the Supreme Court and the death knell for limited
government and liberty. The case involved the State of Maryland's
practice of taxing any bank within the state which operated without
state authority. This included the Baltimore branch of the Second Bank of the United States, a much weaker ancestor of the Federal Reserve. In
addressing the question of whether Congress has the power to charter a
bank, the majority opinion, authored by Chief Justice Marshall, himself
no lover of limited government and no friend of freedom, begins by
acknowledging that the United States federal government is one of
enumerated powers and that among its enumerated powers cannot be found
the powers to establish a bank or to create a corporation. So far, so
good. But then the Court employs a strategy of beating liberty over the
head with missing adverbs in the Constitution and with infelicitous
linguistic analysis. The Court examines the Tenth Amendment, which
unambiguously states "The powers not delegated to the United States by
the Constitution, nor prohibited by it to the States, are reserved to
the States respectively, or to the people." The Court points out that
the Constitution omits the word 'expressly' in the text of the Tenth
Amendment and claims that this leaves "the question whether the
particular power which may become the subject of contest has been
delegated to the one government, or prohibited to the other, to depend
on a fair construction of the whole instrument."
What?
Somehow the fact that the drafters of the Tenth Amendment did not use
superfluous adverbs like some Romantic novelist creates ambiguity where
clearly none exists? What could be more clear? First, the Court itself
admits that the powers to charter a bank and to create a corporation
are not among the enumerated powers of the federal government. Second,
nowhere in the Constitution does it prohibit the powers to charter banks
and create corporations to the states. Therefore, these powers are
"reserved to the States respectively, or to the people." Where in the
world is the ambiguity here?
The
Court next appeals to the Necessary and Proper clause of Article I, Section 8 of the Constitution. This clause, among the enumerated powers
of Congress, states that Congress has the power "To make all Laws which
shall be necessary and proper for carrying into Execution the foregoing
Powers and all other Powers vested by this Constitution in the
Government of the United States or in any Department or Officer
thereof." The Court finds within the enumerated powers of Article I,
Section 8 "the great powers to lay and collect taxes; to borrow money;
to regulate commerce; to declare and conduct a war; and to raise and
support armies and navies." It concludes that a central bank is
necessary for the exercise of these enumerated powers.
However,
Marshall recognizes that more work is needed in order to justify the
power of Congress to charter a bank. It is clear that further argument
is needed because something far more modest than a full fledged banking
corporation could do the job of allowing Congress to exercise the
aforementioned enumerated powers. Something as modest as a warehouse to
store government monies would likely do the trick. Although itself
constitutionally dubious from the point of view of originalism (due to
it being an illicit delegation of Congressional power to the executive
branch), by 1819, the Department of the Treasury already existed. It is
completely unclear why this body could not have done what the Court
thought "necessary" to allow exercise of the enumerated powers in
question. Among the basic functions of the Department of the Treasury
(which can presently be found spelled out on their official website)
are:
- Managing Federal finances;
- Collecting taxes, duties and monies paid to and due to the U.S. and paying all bills of the U.S.;
- Currency and coinage;
- Managing Government accounts and the public debt;
- Supervising national banks and thrift institutions;
- Advising on domestic and international financial, monetary, economic, trade and tax policy;
- Enforcing Federal finance and tax laws;
- Investigating and prosecuting tax evaders, counterfeiters, and forgers.
Clearly, using these functions, the Department of the Treasury could have done what the Court deemed necessary.
Precisely
what is necessary in order to exercise the enumerated powers of
Congress that Marshall specifically names that the Department of the
Treasury cannot do? Why was the Second Bank of the United States
necessary in 1819 and why is the Federal Reserve necessary now? The
Court attempts to sidestep this issue by putting a strange gloss on the
Necessary and Proper clause. Marshall claims that the word 'necessary'
"frequently imports no more than that one thing is convenient, useful,
or essential to another." He then claims that "a thing may be
necessary, very necessary, absolutely necessary, or indispensably
necessary. To no mind would the same idea be conveyed, by these several
phrases." It is difficult to determine what sort of fictional lexicon
that Marshall employed in coming up with this strange interpretation.
'Necessary' means being essential, indispensable, or requisite. In no
sense does it mean merely being useful or convenient. 'Useful' and
'convenient' convey those ideas, 'necessary' does not. In no way is the
chartering of a powerful banking corporation necessary to enable
Congress to execute its enumerated powers.
Even
if it were, for the sake of argument, the Court completely ignores the
"proper" part of the Necessary and Proper clause. 'Proper' means
"suitable,' but it also means "conforming to established standards."
The "established standards" here would be the Constitution. Even if
something is necessary, it is not proper if it violates something else
explicitly stated in the Constitution. What it violates is the Coinage
clause of Article I, Section 8, which states that Congress has the power
"to coin money" and to "regulate the value thereof." In effect the
Court's interpretation in its majority opinion completely ignores this
clause and instead allows the enumerated power to be granted to an
external corporation. Thus, it is perfectly clear that Congress (and
the rest of the federal government) does not have the enumerated power
to charter a bank, that this power is not necessary and proper for
exercise of its enumerated powers, and therefore, the federal government
simply cannot do it.
Therefore,
the Federal Reserve is patently unconstitutional. If its proponents
wish to make it constitutional, they simply need to amend the
Constitution. But why in the world would we want to amend the
Constitution to allow such a monstrous beast to be constitutional? The
Federal Reserve creates economic crises such as the Great Depression and
the current economic collapse. The Federal Reserve also debases the
currency over time, impoverishing all Americans through the "inflation
tax." As Texas Congressman Dr. Ron Paul has noted, the Federal Reserve,
through its shenanigans, has reduced the purchasing power of the
American dollar ninety-five percent over the last century, essentially
stealing $.95 of each dollar. More alarmingly, the Federal Reserve
allows the federal government to almost clandestinely fund its freedom
stealing welfare/warfare state. Without the machinations of the Federal
Reserve, such things as the Patriot Act and the overseas American
Empire with its unconstitutional wars of aggression would need to be
funded by increasing income taxes. However, the Federal Reserve allows
it to be funded by simply "printing money." But worst of all, this
printing of money by the Federal Reserve is only pushing the day of
reckoning forward. One day it will no longer have another economic
bubble to create ,and all the low interest rates in the world will not
be able to prevent the nation from collapsing under its $16 trillion
dollar (and growing) debt. What is left of the value of the dollar will
disappear, and the republic will be in ruins. The American people must
recognize this unconstitutional demon for what it is, and exorcise it
before it is too late.
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