By Anita Clinton
EARLY BEGINNINGS
The Federal Reserve System (the Fed) was established in 1913 to bring a sense of stability, organization and security to American’s banking system. Up until 1863, the banking system was comprised of the First Bank (1791-1811), the Second Bank (1816-1836), state chartered banks, and private banks. Each bank operated independently and due to lack of federal regulations, there was no uniformity amongst them. In fact, only the First and Second Banks were allowed to issue official, federal US-backed currency. The other banks issued their own individual banknotes and the redeemable face value varied from bank to bank. This presented problems as the population grew and more people began to travel the country. Often times, they would encounter challenges when trying to redeem their banknotes for full value at other banks. In addition, the banks would issue more notes than they had funds to secure, resulting in depreciation of the notes’ value. In an attempt to remedy the problems with the banking system, Congress enacted the National Banking Act of 1863 (with revisions in 1864 and 1865). The Act initiated operational standards for the banks, established the minimum amounts of capital each bank must hold, and defined how the banks were to make and administer loans. In addition, a ten percent tax levy was imposed on all state issued banknotes, thus eliminating them and giving the national banks a monopoly on the banknotes in circulation.
Although the Act of 1863 improved the overall banking system, as the economy and population continued to grow, the signs of the failing system increased. Up until this point in time, society had opposed the creation of a centralized banking system that had been adopted by other countries. The bank panic of 1907 revealed the urgent need for a revised banking system. This prompted Congress to create the National Monetary Commission, headed by Senator Nelson W. Aldrich, to research and compose a plan to reform the failing banking system. Initially, Aldrich was opposed to a centralized banking system. However, after his research he begin to change his mind. A plan was devised and presented as the “Aldrich Bill,” which called for the creation of the National Reserve Association. Because of Aldrich’s reputation and association with wealthy private bankers, the billed flopped. However, a slightly revised and renamed version supported by President Woodrow Wilson, eventually passed as the Federal Reserve Act in 1913.
THE FEDERAL RESERVE SYSTEM
Today, the Federal Reserve System (Fed) is the central banking system of the United States. According to MSN Encarta, it “serves as the banker to both the banking community and the government; it issues the national currency, conducts monetary policy, and plays a major role in the supervision and regulation of banks and bank holding companies.” The system is comprised of The Board of Governors, The Federal Open Market Committee, The Federal Reserve Banks, Member Banks, and Advisory Committees.
The Board of Governors
The Board of Governors consists of seven members who are appointed by the President and confirmed by the Senate. They each serve fourteen year terms and are only allowed to serve one term. They are responsible for supervising the Federal Reserve Banks and its members. In addition, they have control over mergers, bank holding companies, US offices of international banks, and the reserves of all depository institutions. The current Chairman of the Board of Governors is Ben Bernanke.
The Federal Open Market Committee
The Federal Open Market Committee consists of the seven members of the Board of Governors and five representatives designated from the Federal Reserve Banks. The representative from the New York district is a permanent member and the other positions are rotated amongst the other banks. These members direct and regulate the Fed’s open-market operations, which involves the purchase and sale of government securities that help balance the amount of money in circulation.
The Federal Reserve Banks
The Federal Reserves Banks consist of twelve banks located in twelve defined districts that are each supervised by a nine member Board of Directors. (see Figure 1) Some of the directors are elected by member banks and others are appointed by the Board of Governors. They are responsible for managing the member banks and implementing the decisions made by the Board of Governors. They also set the discount rate, under the approval of the Board of Governors, which is the rate of interest charged to the members for funds borrowed on collateralized loans.
Member Banks
The Member Banks consist of all national and federally chartered banks. Unlike those banks, state chartered banks are not required to become members. Their memberships are optional; however, if they elect to become members the same rules and regulations apply. Each member is required to purchase stock in their district bank in the amount of six percent of their capital. Unlike other stock purchases, there is no ownership or financial interest conveyed. It cannot be sold, traded, pledged for collateral, and dividends are limited to six percent per year.
Advisory Committees
Advisory Committees are also used to help carry out the functions of the Federal Reserve System. There is the Federal Advisory Council, the Consumer Advisory Council, and Thrift Institutions Advisory Council, just to name a few. Advisory Committees are also used by the Federal Reserve Banks.
Functions of the Fed
According to the official publication distributed by the Fed, the functions of the Fed fall under the following general areas:
• Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
• Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.
• Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
• Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system.
Monetary Policies
The Federal Reserve implements monetary policies through its control over the federal funds rate – the rate at which depository institutions trade balances at the Federal Reserve. It exercises this control by influencing the demand for and supply of these balances through the following means:
• Open Market Operations – the purchase or sale of securities, primarily U.S. Treasury securities, in the open market to influence the level of balances that depository institutions hold at the Federal Reserve Banks.
• Reserve Requirements – requirements regarding the percentage of certain deposits that depository institutions must hold in reserve in the form of cash or in an account at a Federal Reserve Bank.
• Contractual Clearing Balances – an amount that a depository institution agrees to hold at its Federal Reserve Bank in addition to any required reserve balance.
• Discount Window Lending – extensions of credit to depository institutions made through the primary, secondary, or seasonal lending programs.
CONSPIRACY THEORIES
There are several conspiracy theories that are linked to the Federal Reserve System, starting with the creation of it. Since its inception in 1913, rumors have been floating around about its ties to wealthy bankers, wars, assassinations, and most importantly CONTROL. Thomas Jefferson wrote “if the American people ever allowed the banks to control the issuance of their currency, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied.”
Theory #1
The Fed is said to have been created by some of the most powerful banking executives of that time at a private meeting held on Jekyll Island, Georgia in 1910. In attendance was Nelson Aldrich – Senator, Paul Warburg – Rothschild Banker, Benjamin Strong – Morgan Trust, Abraham Piatt Andrews – US Treasurer, Frank Vanderlip - Citibank President, Charles Norton – First National Bank President, and JP Morgan Chase – Tycoon. These men represented more than 1/6th of the entire world’s wealth and it is said that together they comprised the preliminary components of the Federal Reserve Act. Some say that the Fed was designed to service the international banking community and not the American banking community. In fact, the original stockholders of the Federal Reserve Banks in 1913 were the Rockefellers, J.P. Morgan, Rothschilds, Lazard Freres, Schoellkopf, Kuhn-Loeb, Warburgs, Lehman Brothers and Goldman Sachs.
Theory #2
Another theory states that the Fed, or those who run the Fed, was responsible for three of the biggest tragedies of the 20th Century: World War I, World War II, and the Great Depression. William Still, the author of On the Horns of the Beast, states “war is the most profitable thing an international banker can be involved in.” During both wars, international bankers were backing both sides. They were selling guns to one side, while making loans to other side. Many people believe that all the wars of this century happened for reasons that benefitted the wealthy financial groups like the Rothschilds, Rockefellers, Bilderbergs, Trilateral Commission, etc. All of them are wealthy, elite individuals /groups that have profound impacts on the financial community. In addition, it is said that Alan Greenspan, the former Chairman of the Board of Governors, was one of the founding members of the Trilateral Commission.
As far as the Great Depression is concerned, in the early 1900s the Fed was sold to society as a solution for bringing stability to the American economy. Nobel Prize winning economist, Milton Freedman, believed that the Fed caused the depression by deliberately reducing the amount of money in circulation. “Depositors all over the country were frightened about the safety of their funds and rushed to banks to withdraw. All the time the Federal Reserve System stood idly by when it had the power, duty and responsibility to provide the cash that would’ve enabled the banks to meet the demands of their depositors without closing their doors.” In addition, it is rumored that before the stock market crashed, a memo about the upcoming crash was circulated. All the big guys got out of market four years before. So when the crash occurred, they were all cash heavy and they were able to purchase all the major corporations for pennies on the dollars. The perfect example would be Joseph Kennedy, Sr., the father of President John F. Kennedy. It is reported that his net worth increased from 4 million in 1929 to over 100 million four years later.
Theory #3
The Fed has also been linked with the assassination of many powerful individuals, including three United States Presidents: Presidents Lincoln, Garfield, Kennedy. Some believe their assassinations were rooted in their opposition to aspects of the Fed. Lincoln needed money to finance the Civil War and was offered high interest rate loans from the European bankers. Instead of accepting these loans, Lincoln created “Greenbacks” which were government issued/backed, non-interest-bearing notes contrary to Federal Reserve Notes. President Garfield had reportedly made a pronouncement on currency problems just before he was assassinated. And before President Kennedy’s assassination he had introduced interest-free government created money which was backed by the silver reserve. Shortly after his death, the money was removed from circulation. This theory rests on the fact that all of these actions could have potentially put the international bankers out of business and that wasn’t an option.
CONCLUSION
The Federal Reserve System was created to combat the need for a safer, more flexible and stable monetary and financial system. It introduced rules and regulations to govern banking functions in the US. Over the years, the system has undergone multiple revisions and updates. Of the changes, the most important to note is the transition from a monetary system backed by gold and silver to one that is based on the confidence in the US government. In addition, conspiracy theories have been presented about the Fed links to the economic crisis of 1921, 1929, 1989, the Great Depression, recessions, Black Monday, Wars, assassinations, etc. The questions I pose are, “Who’s really in control” and “Will the full truth ever be revealed?”
Anita Clinton is Vice President of the Wealth Redemption, Inc, which specializes in helping people obtain wealth through real estate. She is a licensed loan originator/real estate broker and can be reached at 708-491-7394.
